Chauncey, a friend of your father, asked for your help in preparing his 2019 tax return. His wife died in 2018 and he has not remarried. He has three daughters, ages 3, 5, and 8 at December 31, 2019.

He provided the following information:

1. He was employed as a salesman for the entire year by James Inc., a Canadian-controlled private corporation. He received a salary of $60,000 plus commissions totalling $6,000, based on sales he generated.

2. His employer withheld the following amounts from his pay cheques:

Income tax $23,905

CPP and EI 3,452

RPP contributions 2,000

The RPP is a money-purchase plan. The employer matched the contributions made by Chauncey, resulting in a 2019 pension adjustment of $4,000.

3. Chauncey received the following additional amounts in 2019:

(a) $139,700 — Proceeds from the sale of 1,000 qualified small business corporation shares of James Inc. in October 2019, net of $300 of selling costs.

(b) Each of Chauncey's three daughters received a $100 dividend cheque. The dividends were paid on shares of Nats Ltd., a taxable Canadian public corporation. Chauncey had given the shares of Nats Ltd. to his daughters as birthday presents in 2018.

4. Chauncey made the following disbursements in 2019:

(a) Car expenses (including HST where applicable):

Purchase price, January 2, 2019 $32,200

Gasoline 2,800

Maintenance 700

Licence renewal 90

Insurance 600

Parking (all incurred in carrying out his duties of employment) 300

Chauncey is required to use his car in the performance of his duties of employment. Previously, he leased a car. In 2019, Chauncey drove his car 24,000 kilometres, of which 18,000 kilometres were driven in carrying out his duties of employment. The remainder of the kilometres driven were personal.

(b) Chauncey is provided with a nice office at James Inc. and spends most of his time there. However, there are times when his job takes him away from the metropolitan area in which James Inc. is located for two to three days at a time. The following are travel costs incurred in 2019 while away for such periods:

Meals $ 450

Accommodation 1,000

(c) Supplies of $320 were consumed in carrying out his duties of employment.

(d) $250 per week for 47 weeks to a babysitter to look after his three daughters while he worked; plus $1,500 for the three of them to go to summer camp for one week in July. Chauncey took vacation for the remaining four weeks and paid his cousin $400 to help him watch the children at the family cottage.

(e) Purchased 2,000 shares of James Inc. from treasury for $50 each on April 15, 2019. At that time, the shares were worth $57 each. In 2016, when the shares were worth $48 each, James Inc. had granted Chauncey options to purchase 4,000 shares at $50 per share at any time in the nine-year period of 2016 to 2024. This was the first time Chauncey had exercised any of the options.

(f) House expenses:

Monthly mortgage payments on his home totalling $12,000 for the year ($10,000 of interest and $2,000 of principal).

Property taxes $3,000

Insurance 210

Repairs 1,000

Telephone:

monthly charge × 12 months 96

long distance calls for James Inc. 200

long distance calls for Chauncey's Supplies (see below) 800

long distance calls, personal 300

(g) RRSP contributions made during the period Mar./18 – Dec./18 $8,000

RRSP administrative fee 130

Chauncey made a further RRSP contribution of $12,000 in February 2019.

5. Chauncey borrowed $200,000 from James Inc. on June 15, 2018, to enable him to purchase a home in Waterloo, Ontario, when he moved at his employer's request, from the Quebec City office of James Inc. to the Waterloo office. James Inc. charges Chauncey interest of 2% per annum on this loan which is repayable in full the day he ceases to be employed by James. Inc. Interest of $2,000 on the house loan for the period January 1, 2019 through June 30, 2019 was paid by Chauncey on August 15, 2019. $2,000 of interest for the period July 1, 2019 through December 31, 2019 was paid February 15, 2020.

6. Chauncey has $10,000 invested in a bond which will pay interest at maturity at a rate of 7% compounded annually. The bond was issued November 1, 2018 and matures October 31, 2020. No interest was received in 2019.

7. Chauncey uses 10% of the space in his home to operate a small business, "Chauncey's Supplies", which he started a few years ago. The following information relates to the fiscal year ended December 31, 2019:

Sales $36,000

Advertising 200

Accounting and bookkeeping fees 250

Interest and bank charges 125

Salaries 12,000

The expenses are net of HST as Chauncey's Supplies is an HST registrant.

8. The following additional information was obtained by reviewing Chauncey's 2018 tax return:

• Chauncey's earned income for 2018 was $72,000 and his 2018 pension adjustment was $3,000.

• Chauncey's unused RRSP deduction room at the end of 2018 was nil.

• The UCC balances of the assets of Chauncey's Supplies at December 31, 2018 were as follows:

  • Class 8 $3,000

  • Class 10 4,000

• Chauncey claimed a GST rebate in 2018 of $214 relating to employment expenses he deducted.

Required:

Determine Chauncey's taxable income for 2019 on the assumption that he wishes to pay the least amount of tax possible. Show all your calculations. Briefly explain why you omitted any of the above information from your calculations. Assume James Inc. has properly completed and certified form T2200 with respect to the expenses paid by Chauncey. Ignore the effects of a leap year in your answer.

Assume the prescribed rates of interest have been as follows:

2018, all four quarters 4%

2019, 1st quarter 4%

2019, 2nd quarter 4%

2019, 3rd quarter 5%

2019, 4th quarter 5%

Answer rating: 100% (QA)

D eter mine Ch aun ce y s taxable income for 2019 on the assumption that he wishes to pay the least ... View the full answer