You are a CPA working for Susan Partner, a partner in the tax department of a CPA firm in Kitchener, Ontario.

Yesterday, Susan had her second meeting with Jim and Cathy Bowman, a married couple who are new clients of the firm. When Susan first met with the Bowmans, they indicated they would like the firm to prepare their 2015 personal income tax returns. They have prepared their returns themselves in the past but think they have been missing tax savings opportunities. Jim and Cathy have two children, Sarah and Drew, and the firm will be preparing their returns as well. They would like an estimate of their 2015 taxes now so that they can be prepared for what they may owe come April. Yesterday they provided Susan with information on their 2015 income and expenses, which is included in Susan’s notes which are attached. The Bowmans indicated that 2014 income and expenses were similar.

Jim is age 70 and Cathy is 61; they had their birthdays in January and February respectively. Both are Canadian citizens and have always lived in Canada. However, they have decided they have had enough of the “frozen north” and bought a home in Fort Myers, Florida in 2015. They have decided to move there, now that Sarah has moved out on her own. Sarah moved out in February, 2016. Their plans are detailed in Susan’s meeting notes. Susan’s initial reaction is that the Bowmans might become non-residents of Canada in 2017, but she would like you to analyze this for her looking at the arguments for both becoming non-resident and remaining Canadian resident. Also, Susan would like you to identify any planning issues and considerations. Susan also asked them to provide details of their assets so you could look at the Canadian tax implications to them of becoming non-resident both in the year of the move and thereafter. Those details are attached.

Jim and Cathy each own 25 shares of a company, Bowman Manufacturing Inc (“BMI”). The other 50 shares are owned by GB Inc (“GBI”) a holding company 100% owned by Jim’s sister Gail, who is single. Susan has determined that BMI is a qualified small business corporation. The CPA firm will be preparing Gail’s tax return and the financial statements for both BMI and GBI. Both companies have a December 31 year end for tax purposes.

Sarah is age 20, single and goes to university (she is currently finishing her first year of a four year program which she started in September, 2015). Because of a car accident in January 2015, she has been certified by her doctor as having a disability since that date. Until February. 2016, Sarah lived with her parents. Her parents support her financially and will continue to do so for the foreseeable future. Jim and Cathy want to know if there is anything in the March 22, 2016 federal budget that will affect Sarah’s taxes in the future.

Drew is age 30 and is single. He does not live with his parents. After Drew graduated from university he started a corporation, Drewco, which he owns 100%. This company has been very successful. Drew has recently been approached by a potential buyer. This buyer would only consider an asset, not a share, sale.

Jim and Cathy also support Cathy’s 95 year old father, Doug, who is a widower. Doug is in a nursing home. Jim and Cathy pay for all Doug’s medical expenses, including the nursing home. Doug has been certified as disabled by his doctor.

Susan would like you to prepare a memorandum to her and the Bowmans to address the relevant tax issues and related planning. Susan reminded you to indicate any additional information required. The memorandum should be organized under the same headings as Susan has used in her attached notes.

1. Jim and Cathy Bowman Income and Expenses (provided by the Bowmans)

Jim’s 2015 Income:

Salary from BMI                                                                                 $175,000

Old Age Security Pension                                                                  $ 6,000

CPP Pension                                                                                      $  5,000

RRIF annuity income                                                                          $ 10,000

Non-eligible dividends from BMI (cash amount)                                $ 10,000

Capital dividend from BMI                                                                  $ 15,000

Eligible dividends on public company shares (cash amount) $ 10,000 

Rental income – Florida home (1 month)                                           $ 3,000[1]

Cathy’s 2015 Income:

Salary from BMI                                                                                 $ 20,000

Non-eligible dividends from BMI (cash amount)                                $ 10,000

Capital dividend from BMI                                                                  $ 15,000

Jim and Cathy – Outlays and Expenses:

The only expenses we have that we think we can claim on our taxes are medical expenses and donations. We have receipts for all of these.

                                                                                           Jim           Cathy

Dentist                                                                               $1,000       $  1,000

Prescriptions                                                                     $ 500       $  2,500

Charitable donations                                                         $2,000       $  1,700

Sarah’s 2015 Income:

Scholarships and bursaries                                                                 $ 5,000

Sarah – Outlays and Expenses:

Tuition (4 months part-time)                                                               $ 3,000

Prescriptions                                                                                       $ 6,000

Attendant to help her while recovering from accident[2]                      $ 12,000

Drew’s 2015 Income:

Salary from Drewco                                                                           $175,000

Drew – Outlays and Expenses:

Dentist (Jim thinks some of this was for tooth whitening)                  $   5,000

Doug’s 2015 Income:

Old Age Security Pension                                                                  $ 6,000

CPP Pension                                                                                      $ 5,000

Doug – Outlays and Expenses:

Nursing home                                                                                     $ 25,000

Part-time attendant                                                                             $ 15,000

Prescriptions                                                                                       $ 1,000

 

1. Proposed Move to Florida

The Bowmans plan to move permanently to their Florida home on January 31, 2017. They bought the Florida home in October, 2015 for $500,000 Cdn. They have rented it to tenants from December, 2015 to November 30, 2016. Jim used the money he had in a US dollar bank account. He inherited money in US dollars from his aunt in the summer of 2015 which he put in the US dollar account. It was worth $480,000 Cdn when he put it in the account and was worth $500,000 Cdn when he used it to buy the Florida home.

The Bowmans own a home in Kitchener. They will list it for sale sometime this year aiming for a January 2017 closing date for the dale. If it is not sold by then, Drew will temporarily live in the house rent-free until it is sold so that it is not vacant for insurance purposes. They also own a condo in Toronto which they do not plan to sell (see 3. Below).

Jim is a golfer and has joined a golf club in Florida. He is also a member of a golf club in the Kitchener area. It has a special category of membership for people who are not regularly near the club and use it only a few weeks a year. Jim will convert his membership to this special category.

The Bowmans are giving their car to Drew when they move and will buy a new car when they move to Florida. Jim and Cathy are both going to get a Florida driver’s licence. The Bowmans will move all their personal property to Florida other than the furniture at the Toronto condo.

Jim and Cathy have applied for medical insurance in Florida and will be giving up their OHIP coverage. It is going to be expensive because of their age. They have opened bank accounts in Florida but will keep one in Canada so they can easily pay for the Toronto condo expenses. Jim will transfer his portfolio of Canadian public company shares from his Canadian stockbroker to an account with a broker in Florida. He isn’t sure what he and Cathy should do, if anything, with their RRSPs and TFSAs.

Jim has summarized the fair market value and cost of his and Cathy’s assets as indicated below. The fair market values for the real estate, BMI shares and personal effects are estimates. He said he would get valuations, if needed. The fair market value of the publicly traded shares came out of yesterday’s newspaper. They are not shares of real estate or resource companies. The cost of the BMI shares is the value at the date of Jim’s father’s death as he and Cathy inherited the shares from his father. Neither Jim nor Cathy has used any of their capital gain exemption on qualified small business corporation shares.

List of Assets                                                                                      FMV                 Cost

Kitchener house – Jim (purchased 2005)                               $1,000,000             $450,000

Toronto condo (purchased 2010)                                            $1,000,000             $600,000

Personal effects including car and house furniture - both       $ 90,000             $150,000

Toronto condo furniture - Jim                                                  $ 30,000             $ 50,000

Canadian public company shares - Jim                                  $ 250,000             $150,000

RRIF - Jim                                                                               $1,000,000              N/A

RRSP – Jim                                                                             $1,500,000              N/A

RRSP – Cathy                                                                         $ 500,000              N/A

TFSA – Jim (cost represents contributions)                            $ 50,000             $ 41,000

TFSA – Jim (cost represents contributions)                            $ 50,000             $ 41,000

BMI shares – Jim                                                                     $1,000,000             $200,000

BMI shares – Cathy                                                                 $1,000,000             $200,000

1. Toronto Condo

They purchased the Toronto condo in 2010. At that time, Drew was attending York University and he lived in the condo until he graduated in 2011.. They had thought Sarah would do the same but ended up attending the University of Waterloo. However, Jim and Cathy regularly use the condo as they come to Toronto to shop and attend sporting events and the theatre. The condo has never been rented. The Bowmans have no plans to sell the condo when they move to Florida. They may move back to Canada full-time when Jim is in his 80’s and US health care costs become prohibitive. They think the condo is a good investment in any event because of the steep increases in Toronto real estate values. They think the condo may be worth $1,500,000 - $2,000,000 by that time. They do not anticipate much, if any, increase in value in the Florida home. They plan to rent the condo for $1,500 per month furnished (net of expenses) once they move to Florida. They plan to come back to Canada a few weeks each year to visit Sarah, Drew and Doug although they don’t anticipate Doug will live much longer. If the condo is rented when they visit, they will find other accommodations.

1. Bowman Manufacturing Inc Shares

The Bowmans have estimated the value of their shares in BMI to be $2,000,000 (see their list of assets), or $1,000,000 each. Once they move to Florida, they will no longer be active in the business. As a result they would like to be bought out. Gail has agreed. Jim, Cathy and Gail are considering two options. The first option is to have BMI redeem the shares owned by Cathy and Jim. The second option is to have GBI (Gail’s holding company) buy the shares from Jim and Cathy as it already owns the rest of BMI. As noted under the list of assets, Jim and Cathy each has an ACB of $200,000. The paid-up capital of the shares is $1 per share. Jim and Cathy would like to know the tax consequences of each of these two options. They would like to know if they should dispose of the shares while they are still in Canada or wait until they are living in Florida.

Even though the fair market value of the shares is $2,000,000, they have agreed that they should be bought out at $1,800,000 because of the $200,000 shareholder loan that that Jim owes to BMI. The loan was made in 2015. Jim used the loan proceeds to furnish the Florida home and pay for some other personal expenses.

1. Drewco

As noted above, Drew has been approached by a potential purchaser for the business of Drewco. The purchaser is only interested in buying assets and will not consider buying shares. The sale could take place in 2016 or 2017. The only asset of any value in Drewco is goodwill which the purchaser has indicated he considers to have a value of $3,000,000. The goodwill has no tax cost. Drew has heard that that are changes that affect the sale of goodwill and would like an analysis to understand how he and his company could be affected by the changes. He would like to see an analysis of the taxation of the goodwill proceeds under both the old and new rules, using 2016 tax rates. The analysis should look at the after tax proceeds through to the personal level

$5,000 monthly rent minus $3,000 monthly expenses = $3,000

$10 per hour x 200 hours per month x 6 months (February to July)

Answer rating: 100% (QA)

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