Homework answers / question archive / Canadian Income Tax Essentials Online for Individuals Cast Study III W2022 Case III: Calculating Taxable Income and Taxes Payable for an Individual   John Smith is 55 years old, married to Kim (age 50 years), and they have two children, Susan (age 19) and David (age 15)

Canadian Income Tax Essentials Online for Individuals Cast Study III W2022 Case III: Calculating Taxable Income and Taxes Payable for an Individual   John Smith is 55 years old, married to Kim (age 50 years), and they have two children, Susan (age 19) and David (age 15)

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Canadian Income Tax Essentials Online for Individuals Cast Study III

W2022 Case III: Calculating Taxable Income and Taxes Payable for an Individual

 

John Smith is 55 years old, married to Kim (age 50 years), and they have two children, Susan (age 19) and David (age 15). Susan is a full-time student, taking post-secondary level courses at a university in Canada, and David is in high school. Kim is a lawyer working for a law firm; her net income in the current year is $98,000.

 

John is also a lawyer but he is self-employed, with his own law practice. John’s net business income from his practice (a sole proprietorship) for the current year was $86,000.

 

John is also a partner in a restaurant business, which incurred a total net business loss of $18,000 in the current year; as a partner in this business, John’s share of this loss is $6,000. The restaurant business also incurred a large business loss in the previous taxation year, which John was not able to fully utilize on his prior year’s tax return; hence, John has a non-capital loss carryover balance of $2,000.

 

John also received foreign business income from Legal Widgets Ltd (an American corporation) in the amount of US $1,000 (Canadian dollars = $1,188) before tax, from which U.S. income tax of US $117 (Canadian dollars = $139) has been deducted.

 

John owns various investments. In the current year, he received interest income of $1,800 from TD Bank (a Canadian bank) and a dividend of $1,500 (actual amount of the dividend) from Canco Ltd., a Canadian public corporation subject to high corporate tax rates.

 

In November of the current year, John disposed of various shares and marketable securities, which resulted in a taxable capital gain of $8,000, and he disposed of land for a capital loss of $10,000. John has a net (allowable) capital loss carry forward (realized five years ago) of $4,000, which John would like to use as soon as possible.

 

John provides you with the following other information:        

 

• His daughter, Susan, was enrolled as a full-time student taking post-secondary level courses at a university in Canada for eight months of the current year. John paid Susan’s university tuition fees of $6,500. Susan’s net income in the current year was $3,000. Susan would like to make the maximum transfer available (for tuition amount) to her father.

 

• John always makes a donation to the United Way, a registered charity, during its annual campaign. In the current year, he made a donation of $1,500 to United Way.

 

• John incurred the following medical expenses during the current year:

 

Expenses	Amount
Orthodontic work for David (braces removed)	$5,475
New prescription eye glasses for Susan	1,250
Prescription medication for Kim	237.50
Prescription medication for John	392.50
Private health care premiums	1,500

 

Answer the following:

 

Part A: In an Excel template provided, calculate the client’s minimum Division B (net) income for tax purposes in accordance with the format of Section 3 of the Income Tax Act for the 2021 taxation year. Show all your calculations.

 

Part B: Calculate your client’s taxable income.

 

Part C: Calculate your client’s federal taxes owing or refundable for 2021.

 

Part D: When finished, upload your Excel workbook into Case Study III in D2L. Obtain solution from the instructor. Grade your answer and explain why you made the errors. Was it a calculation error, misunderstanding of the concept, etc.? Upload graded Excel work with your reflection into Case Study III in D2L to receive reflection marks.

 

 

Hint: since your client is self-employed and has income from business, he must make CPP contributions. Your client is required to pay both an employee and employer portion of CPP premiums. Consider how these contributions affect your client’s net income and federal credits (textbook paragraphs 4-164 to 4-166). Please note that paragraph 4-166 is not updated to 2021 and contains errors. Here is how you treat CPP contributions for self-employed individuals for 2021:

 

• As self-employed individual has no employer making a matching CPP contribution, they are required to make double contributions:
  • Maximum $3,166 as an employee contribution out of which up to $2,876 is used as a base for a CPP credit and remaining $290 (if any) is a deduction in calculating Division B (Net) Income
  • Maximum $3,166 as an employer contribution – the whole amount of the CPP contribution is a deduction in calculating Division B (Net) Income

 

 

Hint: to determine how foreign business income affects your client’s taxes calculation, please review textbook paragraphs 7-150.