Emily and John formed a tax consulting partnership on February 1, 2016. Each partner contributed $50,000 in return for an equal share of the profits from the partnership. On January 1, 2020, John sold his interest to Julie for $150,000.

The following is the income statement of the partnership:

Income Statement

For the year ended December 31, 2019

Gross revenue                                                                                                                 $526,000

Expenses:                                                                                                                          

            Office expenses                                                         $89,000

            Rent                                                                            63,400

            Office salaries                                                            84,650

            Charitable donations                                                  17,600

            Amortization (Note 1)                                               24,600

Meals and entertainment                                             25,000                 304,250

                                                                                       221,750

Other income:

            Gain on sale of shares (Note 2)                                 $92,400

            Dividends from Canadian-resident public corporations 48,000

            Capital dividends                                                       24,000     164,400                                                                                              

Net income                                                                                $386,150

Notes:

CCA for 2019 was $57,000.
The capital gain for tax purposes is the same as the financial accounting gain.
In 2019, each partner drew $140,000.

Prior year financial statements of the partnership provided the following information for the following years ended December 31:

                                                             2016                  2017         2018

            Business income (loss)        $(70,000)            $127,300            $159,100

            Taxable capital gains                     Nil                12,800                        Nil

            Charitable donations                      Nil                  4,200                    8,400

            Drawings — Emily                  24,000                48,000                  60,000

            Drawings — John                    24,000                48,000                  72,000

 

The following applies to John in 2019:

he personally received cash dividends (eligible) from Canadian-resident public corporations in the amount of $12,600;
he is devoiced and lives with two dependents, 2 and 13 years old; and
he has a net capital loss of $80,000 carried forward from 2014;

Required:
Compute John’s basic federal tax payable for 2019, showing all calculations, including partnership income for the year (22%).
Compute the ACB of John’s partnership interest immediately before the sale and his taxable capital gain related to the disposition of the partnership interest

Answer rating: 100% (QA)

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