INDIVIDUALS: TAX BRACKETS Taxable Income Up to $48,535 In excess of $48,535 In excess of $97,069...

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INDIVIDUALS: TAX BRACKETS Taxable Income Up to $48,535 In excess of $48,535 In excess of $97,069 In excess of $150,473 > $214,368 TAX CREDITS Tax 15% $7,280 plus 20.5% on the next $48,534 $17,230 plus 26% on the next $53,404 $31,115 plus 29% on the next $63,895 $49,645 plus 33% on the remainder BASIC CREDIT = $13,229 x 15% = $1,984 SPOUSE/SPOUSAL EQUIVALENT (ELIGIBLE DEPENDENT) =15% x ($13,229 minus spouse/eligible dependent's net income) =$1,984 MAX Base amount increased by $2,273 (to $15,502) if the spouse/eligible dependent is mentally or physically infirm. CANADA CAREGIVER FOR CHILD <18 = 15% x $2,273 = $341 CANADA CAREGIVER = 15% x ($7,276 minus dependant's net income > $17,085) = $1,091 MAX AGE CREDIT = 15% x ($7,637 - 15% x (net income - $38,508)) = $1,146 MAX PENSION CREDIT= 15% x 1st $2,000 of "pension income"= $300 maximum (not indexed) ADOPTION CREDIT = 15% of 1st $16,563 of eligible adoption expenses = $2,484 MAX CHARITABLE DONATIONS = [(15%) (A)] + [(33%) (B)] + [(29%) (C) ] (not indexed), where A the first $200 B = the lesser of 1) total gifts less $200 and 2) taxable income less $214,368 C = the excess, if any, by which the total donations exceed the sum of $200 plus amount B (eligible donations generally limited to 75% of net income) MEDICAL EXPENSE CREDIT = 15% ((B-C) + D) where B = eligible medical expenses of the taxpayer, spouse or minor dependants C= the lesser of 3% of the taxpayer's net income and $2,397 D=E-F E = eligible medical expenses of the adult dependant F= the lesser of 3% of the adult dependant's net income and $2,397 DISABILITY CREDIT = 15% x $8,576 = $1,286 QUESTION 3 [36 marks] Jack Chang is 41 years old and is employed by a Canadian public company. His annual salary is $112,468, none of which is commissions. Because of his outstanding work during 2020, he has been awarded a $20,000 bonus. Half of this bonus was paid in December 2020, and the other half will be paid in January 2021. For 2020, his employer withheld El premiums of $856 and CPP contributions of $2,898 from his pay. The employer also withheld professional association dues of $3,400 and contributions to the Sick Kids Hospital of $2,500. Also withheld were registered pension plan contributions of $6,800. The employer also made a contribution to the plan of $4,600. Jack's spouse, Margarita Chang, is 44 years old. Her Net Income For Tax Purposes is $7,320. The couple has three children, who all live with them. Information on these children is as follows: Sherry is 17 years old, in good health, and has income from part time jobs of $7,625. Suzette is 19 years old and has serious breathing problems that prevent her from working on a full-time basis. She is infirm and has income from part time jobs of $7,250. Sharon is 23 years old and attends university on a full-time basis for 11 months of the year. Jack pays her tuition fees of $10,300, along with textbook costs of $1,100. She is in good health. She has investment income of $14,800. The investments were purchased with income from part- time jobs during her high school years. Other Information: 1. In 2017, Jack received options to purchase 300 shares of his employer's common stock at a price of $72 per share. At the time the options were granted, the market price of the stock was $70 per share. In April 2020, when the shares are trading at $85 per share, Jack exercises all of the options. He is still holding these shares at the end of the year. 2. During 2020, Jack receives several gifts from his employer: As a reward for winning the company's Top Performer Award, he receives an expense- paid weekend in a luxury hotel in Niagara-on-the-Lake. The regular price for this package was $1,200. As is the case for all of the company's employees, Jack received a $600 Amazon gift certificate for a personal shopping spree. At Winter Holidays, the company provides each employee with a basket of gourmet food. The value of this basket is $450. 3. During 2020, Jack spent $8,400 on employment related meals (non-travel) and entertainment with clients of his employer. His employer reimbursed all but $1,000 of these costs. Name: Student No.: Section: Page 1 of 2 4. During 2020, Jack and Margarita decided to purchase their first family home (they have rented for the last 11 years). After considerable searching, they identify the perfect property 3 blocks from their rented apartment and purchase it for $462,000. As per his employer's policy, Jack is granted an interest-free loan of $200,000 to assist with this purchase. The loan was granted on April 1, 2020. Assume that the prescribed rate is 2 percent throughout 2020. Sherry Suzette Sharon 5. During 2020, both Sherry and Sharon had rhinoplasty surgery. Jack had to pay $2,800 for emergency services after Sherry's nose suffered serious trauma during a Muay Thai class. He also paid $13,500 for rhinoplasty surgery to reduce and reshape Sharon's nose which she believes has greatly improved her appearance. These amounts are included in the following medical expenses of the family, all of which were paid by Jack: Jack and Margarita $2,200 3,100 12,300 16,000 -REQUIRED A) Calculate Mr. Chang's minimum Taxable Income and federal Tax Payable (Refund) for the year ended December 31, 2020. Show all of your work whether or not you feel it is relevant to your final answer. [19 Marks] B) (i) Explain why Mr. Chang qualifies for each tax credit that was claimed in Part A. You can use point form. [14 Marks] (ii) Explain the income tax treatment of the employee stock option in Part A. [3 Marks] POLITICAL DONATION TAX CREDIT (not indexed) = 75% first $400, 50% next $350 and 1/3 next $525... ($650 max credit overall) EDUCATION-RELATED CREDITS (not indexed) (a) TUITION CREDIT = 15% x eligible tuition fees (b) STUDENT LOAN INTEREST = 15% of interest paid on qualifying student loans; 5 year carry forward by student TRANSFER OF UNUSED CREDITS TO SPOUSE AND OTHERS Tuition (to parents and grandparents if no spouse) Age (to spouse only) Pension (to spouse only) Disability (to child, grandchild, parent, grandparent, brother, sister, aunt, uncle, nephew, niece of the taxpayer or the taxpayer's spouse) Dependent must first use personal, EI and CPP credits before being able to use these credits El & CPP s. 118.7 = El & CPP premiums @ 15% (EI & CPP premiums will be given to you) - El Credit 15% x $856 = $128 MAX - CPP Credit 15% x $2,732 = $410 MAX CANADA EMPLOYMENT CREDIT = 15% x lesser of employment income or $1,245 = $187 MAX DIVIDEND TAX CREDIT: - for eligible dividends = 6/11 of 38% gross-up - for other dividends from taxable Canadian corporations = 9/13 of 15% gross-up FIRST TIME HOMEBYER'S TAX CREDIT = 15% X $5,000 of a cost of a qualifying home ($750 MAX) CORPORATE TAXES: Basic corporate rate: Federal abatement: Small business deduction (if applicable): General rate reduction (if applicable): 38% (10%) (19%) (13%) INDIVIDUALS: TAX BRACKETS Taxable Income Up to $48,535 In excess of $48,535 In excess of $97,069 In excess of $150,473 > $214,368 TAX CREDITS Tax 15% $7,280 plus 20.5% on the next $48,534 $17,230 plus 26% on the next $53,404 $31,115 plus 29% on the next $63,895 $49,645 plus 33% on the remainder BASIC CREDIT = $13,229 x 15% = $1,984 SPOUSE/SPOUSAL EQUIVALENT (ELIGIBLE DEPENDENT) =15% x ($13,229 minus spouse/eligible dependent's net income) =$1,984 MAX Base amount increased by $2,273 (to $15,502) if the spouse/eligible dependent is mentally or physically infirm. CANADA CAREGIVER FOR CHILD <18 = 15% x $2,273 = $341 CANADA CAREGIVER = 15% x ($7,276 minus dependant's net income > $17,085) = $1,091 MAX AGE CREDIT = 15% x ($7,637 - 15% x (net income - $38,508)) = $1,146 MAX PENSION CREDIT= 15% x 1st $2,000 of "pension income"= $300 maximum (not indexed) ADOPTION CREDIT = 15% of 1st $16,563 of eligible adoption expenses = $2,484 MAX CHARITABLE DONATIONS = [(15%) (A)] + [(33%) (B)] + [(29%) (C) ] (not indexed), where A the first $200 B = the lesser of 1) total gifts less $200 and 2) taxable income less $214,368 C = the excess, if any, by which the total donations exceed the sum of $200 plus amount B (eligible donations generally limited to 75% of net income) MEDICAL EXPENSE CREDIT = 15% ((B-C) + D) where B = eligible medical expenses of the taxpayer, spouse or minor dependants C= the lesser of 3% of the taxpayer's net income and $2,397 D=E-F E = eligible medical expenses of the adult dependant F= the lesser of 3% of the adult dependant's net income and $2,397 DISABILITY CREDIT = 15% x $8,576 = $1,286 QUESTION 3 [36 marks] Jack Chang is 41 years old and is employed by a Canadian public company. His annual salary is $112,468, none of which is commissions. Because of his outstanding work during 2020, he has been awarded a $20,000 bonus. Half of this bonus was paid in December 2020, and the other half will be paid in January 2021. For 2020, his employer withheld El premiums of $856 and CPP contributions of $2,898 from his pay. The employer also withheld professional association dues of $3,400 and contributions to the Sick Kids Hospital of $2,500. Also withheld were registered pension plan contributions of $6,800. The employer also made a contribution to the plan of $4,600. Jack's spouse, Margarita Chang, is 44 years old. Her Net Income For Tax Purposes is $7,320. The couple has three children, who all live with them. Information on these children is as follows: Sherry is 17 years old, in good health, and has income from part time jobs of $7,625. Suzette is 19 years old and has serious breathing problems that prevent her from working on a full-time basis. She is infirm and has income from part time jobs of $7,250. Sharon is 23 years old and attends university on a full-time basis for 11 months of the year. Jack pays her tuition fees of $10,300, along with textbook costs of $1,100. She is in good health. She has investment income of $14,800. The investments were purchased with income from part- time jobs during her high school years. Other Information: 1. In 2017, Jack received options to purchase 300 shares of his employer's common stock at a price of $72 per share. At the time the options were granted, the market price of the stock was $70 per share. In April 2020, when the shares are trading at $85 per share, Jack exercises all of the options. He is still holding these shares at the end of the year. 2. During 2020, Jack receives several gifts from his employer: As a reward for winning the company's Top Performer Award, he receives an expense- paid weekend in a luxury hotel in Niagara-on-the-Lake. The regular price for this package was $1,200. As is the case for all of the company's employees, Jack received a $600 Amazon gift certificate for a personal shopping spree. At Winter Holidays, the company provides each employee with a basket of gourmet food. The value of this basket is $450. 3. During 2020, Jack spent $8,400 on employment related meals (non-travel) and entertainment with clients of his employer. His employer reimbursed all but $1,000 of these costs. Name: Student No.: Section: Page 1 of 2 4. During 2020, Jack and Margarita decided to purchase their first family home (they have rented for the last 11 years). After considerable searching, they identify the perfect property 3 blocks from their rented apartment and purchase it for $462,000. As per his employer's policy, Jack is granted an interest-free loan of $200,000 to assist with this purchase. The loan was granted on April 1, 2020. Assume that the prescribed rate is 2 percent throughout 2020. Sherry Suzette Sharon 5. During 2020, both Sherry and Sharon had rhinoplasty surgery. Jack had to pay $2,800 for emergency services after Sherry's nose suffered serious trauma during a Muay Thai class. He also paid $13,500 for rhinoplasty surgery to reduce and reshape Sharon's nose which she believes has greatly improved her appearance. These amounts are included in the following medical expenses of the family, all of which were paid by Jack: Jack and Margarita $2,200 3,100 12,300 16,000 -REQUIRED A) Calculate Mr. Chang's minimum Taxable Income and federal Tax Payable (Refund) for the year ended December 31, 2020. Show all of your work whether or not you feel it is relevant to your final answer. [19 Marks] B) (i) Explain why Mr. Chang qualifies for each tax credit that was claimed in Part A. You can use point form. [14 Marks] (ii) Explain the income tax treatment of the employee stock option in Part A. [3 Marks] POLITICAL DONATION TAX CREDIT (not indexed) = 75% first $400, 50% next $350 and 1/3 next $525... ($650 max credit overall) EDUCATION-RELATED CREDITS (not indexed) (a) TUITION CREDIT = 15% x eligible tuition fees (b) STUDENT LOAN INTEREST = 15% of interest paid on qualifying student loans; 5 year carry forward by student TRANSFER OF UNUSED CREDITS TO SPOUSE AND OTHERS Tuition (to parents and grandparents if no spouse) Age (to spouse only) Pension (to spouse only) Disability (to child, grandchild, parent, grandparent, brother, sister, aunt, uncle, nephew, niece of the taxpayer or the taxpayer's spouse) Dependent must first use personal, EI and CPP credits before being able to use these credits El & CPP s. 118.7 = El & CPP premiums @ 15% (EI & CPP premiums will be given to you) - El Credit 15% x $856 = $128 MAX - CPP Credit 15% x $2,732 = $410 MAX CANADA EMPLOYMENT CREDIT = 15% x lesser of employment income or $1,245 = $187 MAX DIVIDEND TAX CREDIT: - for eligible dividends = 6/11 of 38% gross-up - for other dividends from taxable Canadian corporations = 9/13 of 15% gross-up FIRST TIME HOMEBYER'S TAX CREDIT = 15% X $5,000 of a cost of a qualifying home ($750 MAX) CORPORATE TAXES: Basic corporate rate: Federal abatement: Small business deduction (if applicable): General rate reduction (if applicable): 38% (10%) (19%) (13%)