Raymon and Lela were married for 15 years and they have 2 children, Sheila age 10 and Harry age 12. However, they got divorced. After 2 years of being divorced, Raymon got married to Shama. Even though the children are living with Lela, both Raymon and Lela have the same say when it comes to deciding on the children's welfare. Also, Raymon and Lela agree to contribute equally to the children's expenses like education, extracurricular activities, etc. In addition, Raymon pays child support of $500/ mth and spousal support of $600/mth. Lela is very much concerned about savings for the children's education. It is estimated that it would costs $12,000/ year for Sheila and $10,000/year for Harry when they are ready to attend university at age 18. Raymon is 50 years old and is the sole owner of Small Engines Repair Inc. which is a qualified small business corporation. He bought the company from a friend for $150,000. 

He gets a salary of $95,000 a year from the business and taxed at an average rate of 35%. After owning the business for 8 years, his business increased in value to $900,000. The business is doing very well and Raymon expects the business to keep growing at an average annual rate 6% per year. As a qualified small business Raymon is entitled to the Lifetime Capital Gains Exemption which stands at $800.000. Shama is 42 year old and has no children of her own. She is the executive assistant in a large corporation, ABC Exploration Inc. earning $100,000/year and taxed at an average rate 35%. She enjoys several benefits at her company. She has been working with the company for 10 years but only participated in the company's employee ownership plan for the last 4 years. Every year for the past 4 years she has been contributing 4 % of her salary to the employee ownership plan and the company matches it with 2%. The funds are used to purchase shares of the company. Her shares have been growing at an average annual rate of 7% and her market value is $25,000. 

She is also enrolled in the company's defined benefit pension plan and the medical plan. She contributes $800 per month toward her pension plan. All her medical and dental costs are covered by the company. The plan covers 1 times her salary in life insurance and 65% of her income for disability. Shama is entitled to a pension at age 65 at the rate of 1.5% of the average of the last 5 years salary times the number of years of service with the company. She has a taxable benefit of $1,210 annually from her company. After 2 years into the marriage, Raymon and Shama bought their first house at a cost of $500,000. They paid down $200,000 and took out a mortgage for the balance and agrees to a mortgage payment of $2,000 per month. Retirement is not really on their minds. However, Shama is already getting tired of working and would like to retire at age 60. Though not too particular about retiring, Raymon is okay to retire 5 years after his wife. Shama has longevity in her family and so she thinks she may live to age 95. It is just the opposite with Raymon who believes that he won't make it past 80. 

It is safe to assume than the average long term inflation is 2%.when looking at their retirement plans. Every year, Raymon contributes $10,000 to his RRSP but still has an RRSP contribution room $50,000 at the start of the year. He likes taking risk and so he is invested in high risk securities. His CPP payments totaled $2,600 for the year. He gives $50 per month to charity year. Shama contributes $4,000 per year to her RRSP but still has an RRSP room of $40,000 at the beginning of the year. However, unlike Raymon, She does not have a great appetite for risk and so she takes little risk with her money. Her CPP was $2,700 and EI payments $850 for the year. Annually, she gives $400 to charity. Their personal and shared expenses are listed as follow: Raymon's Expenses: Personal Items - $1,500 /year Entertainment: - $1.200/year Sporting activities - $1,000/year Cell phone- $600/year Shama's Expenses: Personal Items -$5,000/year Gym membership - $1.200/year Entertainment - $1.000/year Cell Phone -$700/year Shama's car maintenance - $2500/year Shared Expenses: Dining/Fast Foods: $3,000/year Residential property Taxes/Insurance -$4,500/year Utilities/cable -$4,000/year Groceries - $6,000/year Snow plowing/property maintenance -$3,000/yr. Vacations - $5,000/year Miscellaneous expenses- $3,000/year Following are there liquid assets: Raymon: Checking/Savings: $20,000 RRSPs: $50,000 Shama: Checking/savings; $5,000 RRSPs: $30,000 Company shares: $25,000 Shama does not have a Will nor a power of attorney and Raymon's is yet to update his estate documents since his divorce. At present, Raymon does not have any children with Shama however, he wishes to have all his assets distributed equally amongst Shama, his children and any future children with Shama. Also, he would like to leave his business to his children

 

5. Explain the taxation of $7.200/year spousal payments and child support payments of $6,000/year as they pertain to Raymon and his ex-wife Lela. 

6. How much taxes will Raymon owe if he should sell his business in 10years time? Show all calculations. Please list the value of all your variables (e.g. PV, PMT)

Answer rating: 100% (QA)

5 Taxation of Spousal Payments and Child Support Payments Spousal Payments The spousal support payments of 7200 per year made by Raymon to his exwife ... View the full answer