Solution to problem 7

Details of tax return preparation

Ken (the taxpayer):
- Mark marital status on Dec. 31 as common-law.
- On the Taxprep ID form, under Coupling, check this box.
- Note that the province of residence on December 31, 2013 is Ontario, so both spouses are
subject to Ontario tax (not Alberta tax). An individual pays tax in the province where he
or she is resident on Dec. 31, even if he or she lived most of the year in another province.
- The contribution to the TFSA has no tax consequences. However, on the Taxprep ID
form, on the 3rd line under Other information, indicate that Ken has a TFSA.
- Enter the information about the children on FAM. This is necessary to calculate the child
care expenses.
- Enter the T4 and the T4RSP slip information. Box 24 is checked by the bank to indicate
that this RRSP has been subject to a spousal contribution (a contribution by Mary, his
common-law partner). Note that box 24 on the Taxprep T4RSP form is cryptically
labelled as contributor spouse or common-law partner.
- To complete the entering of the information on the RRSP withdrawal that is documented
on the T4RSP form, complete form T2205. This form should be part of Kens return
because the questions asked assume that the person filling out the form is annuitant of the
RRSP from which the withdrawal was made. The result is that Mary is taxable on the
lesser of the withdrawal ($10,000) and her contributions to his RRSP for 2011-13
($2,000). The rest is taxable to Ken.
- The child care expense (line 214) must be entered on the return of the lower-income
person since there are no special weeks for which the higher-income spouse could deduct
the expenses (e.g., the lower-income person is in jail). Double-clicking on line 214 will
bring up the form with jump code 778. On this form, double-click on Child care expense
data form to open form CARE. On this form, enter the $12,000 expense for the nanny,
Pierre LaFlamme, selecting either child as the child for whom the expenses are for (both
are 16 or younger, so both are eligible children for the child care expense deduction).
Then click New to create a new form for the camp. Enter the $1,200, noting that Peter
is the child being cared for and that the camp lasts two weeks. Taxprep will then do the
calculations for the child care expense deduction and the resulting $11,000 deduction will
be shown on the form with jump code 778 and on the jacket at line 214.
- The CRA allows the moving expense deduction to be taken on either Ken or Marys
return, since both have income at the new work location. So, the issue is which of these
alternatives produces the greatest tax savings. A simple rule of thumb is to claim the
deduction on the return of the higher-income person (Mary). A more precise way to
measure this is to see which of the two people has the higher marginal tax rate. Using
jump code MARGINAL, and remembering to click Calculate at the top of the form, it
can be seen that Kens MTR (combined marginal tax rate of the family on ordinary
income) is 29.1% whereas Marys is 35.15%. So, put it on Marys return.

Mary (the spouse)

- For Marys RRSP contribution, go to line 208 and enter the $30,000 (not a spousal
contribution). Then, further down that form, enter the 2013 RRSP deduction limit of
$22,450 (by double-clicking on the greyed-out box to open form T1028, where the limit
can be entered).
- To enter Marys self-employment income: go to line 162 (business income) and doubleclick. This opens up form T2125. In part 1, at the top, under sales and commissions, enter
$105,000. [This is unrealistic, as she would be expected to have some expenses. Later
problems will deal with this in more detail.]
- For the moving expense deduction, go to line 219a and double-click to open the moving
expense form.
- First, enter the distance from the old home to the new job (4,598 kilometres the distance
from Edmonton to Toronto) and the distance from the new home to the new job (20 km).
The key is that the difference between these two numbers is at least 40 kilometres, ie., the
one-way commute is at least 40 kilometres shorter,
- Enter the income Mary earned at the new work location of $102,644 (all $105,000 of the
business income, since she moved at the very start of the year, less required CPP
contributions of $2,356 reported on line 222). Since this is bigger than $15,910, all of the
moving expenses are deductible in 2013. If this had not been the case, there would have
been a carryforward to be deducted on the 2014 return.
Question 2(a)
Ken
Income from employment (T4)
Income from business (T2125)
RRSP inclusion (T4RSP)

$20,000
$105,000
8,000

2,000

RRSP deduction (slip from bank; no standard form)

Child care expense deduction (T778)

(22,450)
11,000

Moving expense deduction (line 219, receipts for all but meals,
T1-M on Marys return): T1-M, with receipts

(15,910)

CPP contributions required on self-employment

Income (line 222, no tax slip, Schedule 8 (automatic))
Net Income
+++++++++++++++++++++++

Mary

(2,356)
$17,000

$66,284

Balance owing

1,035

18,000

Question 2(b)
Mary had an RRSP deduction limit of $22,450, but she contributed more than that ($30,000), for
an excess of $7,550. See form RRSP for details of the implications of this. The first $2,000
above the limit will not cause any immediate problems, and can be probably be deducted next
year. However, the additional $5,550 (the cumulative excess amount) is subject to a penalty tax
of 1% per month for any month it stays in the plan. Form RRSP MAX shows that the RRSP
deduction limit for 2014 is $11,350, so this would be deductible for the 2014 tax year. Hence, the
penalty tax will have stopped on January 1, 2014. Your advice to her could be that she should be
more careful in watching the RRSP deduction limit; perhaps you might suggest she could check
with you, as her tax advisor, if she is in doubt in the future. Also, you should tell her that the 1%
tax needs to be paid within the first 90 days of 2014, or otherwise further interest will be added.
Also, for the 2014 return a form T1-OVP will have to be filed.

Solution to problem 8
Question 1
Details of preparation of the tax returns
Bernice is the taxpayer, and Paul is the spouse. The reason is that we consider the first person
mentioned in the problem to be the taxpayer (there is no financial effect).
Bernice (the taxpayer, so the forms are blue on Taxprep):
- On the Taxprep ID form, under Coupling, check this box. Taxprep will then ask you if
you want a new return or a current-year return. Choose new return. Choose
current-year return only in the situation where a return for the spouse has already been
created; if you make that choice, Taxprep will ask you which existing return to connect
to.
- Mark marital status on Dec. 31 as married.
- Province of residence is Ontario (and thus for Paul also).
- Using jump code FAM, bring up the family profile and enter the information on the 5
children. This is needed for child care expense calculations. It doesnt matter whether this
form is attached to her return or Pauls.
- Enter the restaurant T4. Then, to bring up another T4 to use for the construction company,
click New.
- Union dues may be part of the T4 or may instead be from a receipt issued from the union
(no special format). The latter applies in this case. Such dues go on line 212, open form
J212 (not a CRA form), enter the name of the union and, under non-taxable (this refers
to GST/HST), enter $400.
- For the tips, go to line 104, open form J104, and type in the amount of tips on the first
line (under tips and gratuities).
- The lottery winnings are non-taxable (General Income Tax and Benefit Guide, p. 11). So
just discard this information.
- In this case, child care expenses should not be entered on Bernices return they go on
Pauls return instead. See the explanation below.
Paul (the spouse, so the forms are green on Taxprep):
- On the ID form, under Other information, re the question on whether he has foreign
property with a cost of over $100,000, mark yes. Thus, the T1135must be filled out It is
jump code 1135 the first letter is omitted, as it is on many forms (e.g., Schedule 1 is
jump code 1. Under category of specified foreign property, choose foreign funds held
outside Canada, and then enter $420,000 ($400,00 initial balance plus $20,000 interest)
as the maximum cost during the year and the cost at year end. Use the dropdown menu to
enter the country code for Switzerland. Mark down the income from this property as
being $20,000.
- RRSP contributions go on line 208. Double-click, which opens the Taxprep form entitled
RRSP Deduction Worksheet. At the top of the page, fill in on separate lines the regular
RRSP contribution for $8,000 and the spousal contribution of $4,000. [This information
is in the problem just above the Required section.] For the latter, check the box

indicating that it is a spousal contribution. Farther down on the form, fill in the 2013
deduction limit.
The $50,000 paid in tax instalments is entered at line 476. Double-click the amount on
this line, and jump code INST will open up. Enter the instalment payments on the top line
of this form.
The business income is taxable and is entered at line 162. Double-click on that line, and it
opens the form with jump code BUS PROF. Double-click on gross income amount and
form T2125 opens up. Enter the $150,000 on the Sales and Commissions line (at the
top of part 1 of the form).
There is no tax slip for the Swiss bank interest income because the money is invested in
bank outside Canada. Go to line 121 and open up Schedule 4 (a CRA form), go to Part II,
and enter the $20,000 on the first line.
The interest expense earned within an RRSP is non-taxable only withdrawals are
taxable, and no money has been withdrawn. So just discard this information.
The child care expenses (line 214) must be entered on Pauls return. He is the spouse with
the higher net income and he is attempting to claim part of the deduction (for the period
Bernice is in jail).
On the T778, go to the area under the heading Are you the person with the higher net
income? Below that locate the line e) the other person was confined to a prison, and
check the box to the left of that. Just above that line, enter 20 as the number of weeks
that situations b to f existed. Then, double-click on child care expense data form (jump
code CARE) to enter the amounts paid. For the nanny expense, make Nanny the issuer,
and enter the $15,300 amount; this has to be attached to a particular child, but any of the
children aged 16 or younger in the year is suitable for this (e.g., Samantha). Note that
Audrey and Jordon are over 16, and thus do not create any eligibility for a child care
deduction. Click Add to create a second issuer (Peters summer camp). Enter Peters
expenses, including the box showing that it is a summer camp lasting 8 weeks. Similarly,
create a third issuer for Samuels summer camp. It is important to keep each issuer
separate in order that your work can be easily checked by supervisors in the accounting
firm where you work.
Bernices appointments to her parole officer do not affect the number of eligible weeks
for which Paul can deduct child care expenses; only the time period when she was in
prison constitutes eligible weeks
The $6,000 babysitting payment to their neighbour so the parents can visit nightclubs is
not an child care expense since it is not for the purposes of earning employment income
or self-employment income or for going to school.

Question 2(a)
The income and deduction amounts for Bernice and Paul are as follows:

Bernice
Employment income (line 101,
T4 tax slip, no CRA form)

38,450

Paul

Other employment income

(line 104, no tax slip, no CRA
form)

1,000

Interest income (line 121, no

tax slip, Schedule 4)

20,000

Business income (line 135, no

tax slip, form T2125)

150,000

RRSP contribution (line 208

(note: Pauls return for both
contributions), receipt, no CRA
form)*

(12,000)

Union dues (line 212, receipt,

no CRA form)
(400)
Child care expenses (line 214,
receipt, form T778 on Pauls
return)
(8,100)

(9,000)

CPP for self-employed (line

222, no tax slip, Schedule 8
(automatic))

(2,356)

Net income
+++++++++++++
Balance owing

30,950
4,199

146,644
1,144

*Contributions deductible on the 2013 return include both those made in the year 2013 and those
made in the first 60 days of 2014.
Question 2(b)
No. The T1135 must be submitted, but it is part of the tax return.
Question 3
From the Taxprep form RRSP MAX, the RRSP deduction limit for 2014 is $52,090
Question 4

No. There are 4 problems, any one of which would invalidate the receipt: (1) an individual who
is a child care provider (as opposed to a day care centre) must provide his or her Social Insurance
Number on the slip; (2) such an individual must also sign the slip; and (3) the child care provider
and the person paying for the child care are the same person (Jane Doe) you cannot claim a
child care expense deduction for amounts that you have paid yourself. (4) The receipt is for the
year 2012 instead of 2013.

Solution to Problem 9
Details of tax return preparation.
There is one person paying tax (Ben), and two that are non-taxable (i.e., do not pay tax because
the basic personal tax credit wipes out their tax liability). So, the task is to enter the various
amounts in order than Ben follows the law but pays the least amount of tax. This means that we
try to put as many credits as possible on Bens return (rather than on Mays return or Peters
return).
Ben Parkers return (the taxpayer)
(a) Income and Expenses
-

Enter Mays (the spouse) name etc, on the ID form. Check the box labeled coupled.

Under Identification spouse, check the box for the disability amount, since May is
confined to a wheelchair.

Enter Peter on the FAM form. Check the box add a dependants return since Peter has
income during the year. The box relating to whether Peter qualifies for the disability
amount will be automatically checked by Taxprep when you indicate on Peters ID form
that he is eligible for this credit (see below in the discussion of Peters return).

Enter Bens T5 slip (the interest income) and tax instalments.

The dividend from IKEA is foreign income, for which there would be no tax slip. He paid
foreign tax, so this is more complicated than the situation of Pauls Swiss bank account in
problem 8. Before you can enter any foreign income, you must go to Taxpreps Foreign
Income Summary (jump code FOREIGN) and, at the top of the form, enter the countries
from which foreign income has been earned. Sweden is the only such country. Choose
Sweden from the drop-down menu as the country; for tax return line, choose S4
(schedule 4, section II, interest and other foreign investment income). Enter the income
and foreign taxes paid in Swedish kroner, and the amounts will automatically be
converted into Canadian dollars and will then automatically appear on Schedule 4. In the
line below, enter IKEA as the issuer. Note that this causes the foreign tax credit to appear
on Schedule 1 at line 405. Note also that the supporting calculations for this credit are on
form T2209 (jump code 2209), which is automatically filled in.

Ben does not have to fill in the foreign income verification form since the amount
invested in foreign assets ($75,000) is less than $100,000.

(b) Tax credits: go to Schedule 1 and start looking for credits to enter.

Re Bens student credits, the pottery class does not qualify since it is neither a postsecondary course nor an HRDC-approved occupational course. (HRDC stands for Human
Resources Development Canada, which is a federal government department.)

Mays charitable donations can be entered either on her return or Bens return; Taxprep
will transfer them to the spouse who derives the greatest tax benefit, which in this case is
Ben. (This is one of the effects of checking the box for coupled on the ID form.) In the
solution they are entered on Mays return. In either case, go to charitable tax credits: line
349, double-click, and enter the $5,000 donation to the church made by May (the spouse).

Mays medical expenses can be entered on either his return or her return. (If they are
entered on Mays return, Taxprep will transfer them to Ben, since he will derive the most
benefit. Taxprep will do this because coupled has been checked on the ID form.) In the
solution, they are entered on Bens return. Go to the form MED and enter the $35,000
amount for her operation. Note that the amount does not go on the lines for medical
services not available where the taxpayer lives, since the service would be available in
Ontario if she were to wait for it.

Ben can also claim medical expenses for Peter on line 331of Schedule 1 on Bens return
(note: do not put them on Peters return; Taxprep is not smart enough to transfer the
credit). Form RC064, the CRA form for medical expenses, says that the prescription drug
(arthritis) is an eligible expense. The part-time attendant is also an eligible expense since
Peter qualifies for the disability tax credit; note that the amount claimed is below
$10,000, so there is no problem with claiming this expense for the medical credit and also
claiming the disability credit for him. However, the non-prescription drug (cough syrup)
and the cosmetic surgery are not eligible expenses.

Mays return (the spouse)

-

Enter the T4A and T4A(P) slips.

Peters return (the son)

-

On the ID form, under Identification taxpayer, check the box for disability amount
(for his mental disability autism). This will give him a disability credit on line 316a of
Schedule 1. Since Peter does not have enough income to use it (see below), it will be
transferred by Taxprep to the parent (Ben).

Enter Peters income (the T5 and the T4). Although Peter does not have any tax to pay,
his income amount affects the amounts of credits which can be transferred to Ben.

From the form manager, go to Schedule 1 and start looking for credits to enter. Focus on
credits that are based on a particular expenditure (which Taxprep has to be told about)
rather than those based on a family relationship (e.g., the credit for children).
(a) Re the student credits, double-click on line 323. This opens Schedule 11. Doubleclick on the line for tuition fees, and the program will enter form 2202. On this form,
enter the information needed to calculate student credits ($3,000 tuition fees and 6
months of full-time studies). Note that Peter qualifies for the student credits because
the courses are post-secondary. Also, check the box indicating that the student wishes
to transfer to the parent the maximum amount of federal student creditsthis is
specified in the problem. (The alternative is to carry that amount forward for Peter to
use in the future, when she had sufficient income to pay tax).
(b) On line 319, double-click on credit for student loan interest. Then enter the amount.
(c) Similarly, on line 364 (higher up on Schedule 1), double-click on the public transit
amount and enter the amount spent on this. Neither this credit nor the one above this
(student loan interest) can be transferred to a parent.

Question 1
There are 4 reasons to create a tax return for Peter:
- The contribution limit for 2013 is computed using several factors, one of which is 18% of
earned income for 2012. Earned income generally includes all types of income which could be
expected to cease when the person retires; employment income is one example. Thus, filing a
return and showing $1,000 of employment income will increase the 2013 contribution limit by
$180. This RRSP room may be carried forward indefinitely, so it is useful even though it may be
many years before Peter earns enough income to pay tax.
- Peter needs to file a return to receive the GST credit. Notice that the box to ask for this credit
has been automatically checked by Taxprep.
- The amount of Peters net income is needed to determine the amount of medical tax credit
which Ben can claim for Peter as a dependant. One way to calculate this income is to open a tax
return for Peter.
- Creating a separate return makes it simpler to claim credits in respect of that person, some of
which can be carried forward to other years, even if they cant be used in the current year (e.g., a
credit for student loan interest).

Question 2
Federal
Basic personal amount, line 300 (Taxprep automatic)
Spousal amount, line 303 (Taxprep automatic)
Caregiver amount (Peter), line 315 (Taxprep automatic)
Disability amount from dependant, line 318
Tuition, education and textbook amounts
Tuition, educ. and text. amounts transferred from Peter
Amount of transfers from spouse, line 326
+ 7,697 disability: Taxprep automatic)
Medical amount for self and spouse (net), line 330
Medical amount for other dependants (net), line 331

11,038
8,078 (i.e., 11,038 2,040)
6,530
7,697
1,360
5,000
15,351 (i.e., 6,854 age + 800 pension

Total of amounts above times 15% (line 338)

14,223

32,848 (i.e., 35,000 less threshold)

8,275 (i.e., 4,500+ 4,000 threshold)

Other credits:
Donation credit, line 349

1,422 (based on donation of 5,000)

Foreign tax credit (from the Swedish dividend), line 405

16

Question 4
Peter can only transfer the disability amount and the tuition, education and textbook amounts.
Even then, there is a cap. So, Schedule 11 shows that there is $1,580 carryforward of these
amounts to the next taxation year.
The public transit amount cannot be transferred or carried forward, so it has no effect on the tax
payable of anyone in this example.
The amount re student loan interest cannot be transferred, but it can be carried forward to use in
a future year when Peter is paying tax.