James Doode decided to start his own personal business in 2017 after retiring from the Canadian Armed Forces. Upon retirement in 2016, James elected to receive immediate monthly pension payments from his employer's pension plan. James’ business consists of a motorcycle shop known as James’ Specialty Bike Shop, selling and repairing motorcycles (industry code 441220). James proudly specializes in customizing motorcycles such as exotic choppers to very exclusive clients.

James hired you to prepare his personal tax return for the year 2018, as well as for his common-law partner, Susan Bond. James and Susan want to pay the very least tax possible. They will use any election or choice legally available to them to achieve that objective. James' income is mainly from his pension and personal business. Attached is an Appendix showing the relevant financial information pulled from the accounting records for James' business. The amounts shown have not been adjusted for tax purposes. James expects you to identify which items are allowed for tax purposes to comply with the tax laws in Canada.

James and Susan have other income from their investments and rental property. Below is the information needed to prepare their tax returns. Tax forms James and Susan received are included on the Case Study link as separate documents.

Detailed Information:

James was born on November 1, 1968. He is divorced but currently lives with Susan Bond, his common-law partner, at 123 Main Street, Anytown, Ontario, K0H 1H0. Both have been living together for several years now. James’ Social Insurance Number (SIN) is 527-000-145. Susan’s SIN is 130-692-544. Susan was born on December 2, 1968 and has been blind since birth but still manages to work as a bookkeeper. Susan’s main source of income is the salary she received working as a bookkeeper at James’ Specialty Bike Shop during the entire year - see T4 slip issued to Susan for 2018 and financial information from James' business records in the Appendix. She also has income from joint investments with James (see further below).

During 2018, James received bi-weekly pension payments from his former employer's pension plan for a total pension income of $75,000 - see T4A slip issued to James for 2018 (box 16). Federal income tax of $15,000 was withheld at source on that pension income - see box 22 of the T4A slip.

James has spousal support obligations from his previous marriage. He is required to pay $1,000 per month to his former spouse (Mary Doode; SIN: 527- 000-129) in accordance with a court order. During the year 2018, James was only able to pay 7 months worth of support. James and Susan have no children but James' older brother Rick lives with them on a permanent basis since 2014 as he cannot live on his own due to a permanent mental disability. Rick was born on June 10, 1964 and has $9,000 of social assistance income for 2018 under the

   Ontario Disability Support Program. His SIN is 527-000-947. Forms T2201 have  already been filed with CRA in previous years for both Susan and Rick and their condition has not changed since.

During 2018, James received $20,000 of eligible dividends on shares he owns of the Great Bank of Canada, a Canadian public company - see the T5 slip James received from the bank (box 24) for 2018

No income tax was withheld on that dividend. James and Susan also earned interest income for a total of $9,000 during 2018 from a joint investment account - see the T5 slip James and Susan received from the bank (box 13) as co-owners. No income tax was withheld on that income either. During the year 2018, James met with a financial planner to obtain investment advice on how to maximize his investment income. Fees of

$3,000 were paid by James in 2018 to the financial planner. Following the advice obtained, James sold 1,500 shares of the Great Bank (a publicly traded company) that he had acquired over the last 10 years with an average cost of

$35.00 per share. The shares were sold on June 1, 2018 at a price of $68.00 per share, on which a 1% commission was paid to a broker

Rental Activities

James and Susan acquired jointly a rental property during 2018. The property was acquired on February 1, 2018 and immediately leased for a 2-year period. Below is the information relating to that property for 2018, which is shared equally between James and Susan (50% each):

Address: 121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each)

Cost of property purchased: $295,000 of which $45,000 was for the land. Cost of additions made to the building in 2018: $80,000.

Revenues
Gross Rents	$24,000
Expenses
Property taxes	$2,200
Insurance	1,100
Interest on mortgage	5,800
Mortgage principal	1,525
Regular maintenance & repairs	2,000

During 2018, James and Susan sold a cottage they jointly owned (50% each) located at 123 Beach Lane, AnyLake, ON. They had purchased the cottage back in 2008 at a cost of $75,000. They sold the cottage on June 15, 2018 for

$200,000 cash. All transaction costs were borne by the purchaser. James and Susan do not want to designate the cottage as their principal residence because they feel their current home has a much greater accrued gain and want to preserve the principal residence tax exemption for that property instead.

During 2018, James enrolled in a highly specialized mechanics course with a local college. James paid tuition fees of $9,000 for 2018 - see form T2202A sent by the college for 2018. James wants to claim the maximum credit he can this year and carry over any unused balance.

James contributed $15,000 into his own RRSP on September 1, 2018. James wants to deduct the maximum amount this year. His unused RRSP Deduction Room at the end of 2017 was $8,500 and his Earned Income for 2017 (business income) was $50,000. He had no Pension Adjustment for 2017. Susan also contributed $5,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the end of 2017 was $2,500 and her Earned Income for 2017 was $15,000. She had no Pension Adjustment for 2017.

What is the net income for tax purposes and taxable income of Susan and James?

Answer rating: 100% (QA)

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