Chapters 15 & 17

QUESTION ONE

Jennifer Black and Kryan White carry on a security service business through a partnership.
Jennifer and Kryan are both active in the business and share profits equally. In the current year
they each receive a salary of $40,000 from the partnership.
Black & White Partnership
Income Statement
For the year ended December 31, 2023
Income:
Security service fees $200,000
Gain on sale of public company shares 12,000
Eligible dividends 10,000
Interest income 3,000
225,000
Expenses:
Office rent 15,000
Capital cost allowance 8,000
Salaries paid to staff 30,000
Salaries paid to partners 80,000
Donations to registered charities 2,000
135,000
Net income $ 90,000

Compute net income for tax purposes for the partnership.

SOLUTION
The amount of income earned or losses incurred by the partnership is determined as if the
partnership were a separate taxable entity.

Partnership net income for tax purposes:

Business income:

Financial statement income $ 90,000

Add: Salaries paid to partners 80,000
Donations to registered charities 2,000
Subtract: Capital gain (12,000)
Dividend income (10,000)
Interest income (3,000) $147,000

Property income:

Eligible dividends $10,000

Interest income 3,000 13,000

Taxable capital gains ($12,000 x ½) 6,000

Net income for tax purposes $166,000

 Chapter 17
During the current year, an inter vivos trust receives the following income:

Interest $30,000
Eligible dividends 20,000
Capital gains 12,000

One half of the income is paid to a beneficiary of the trust, Gail Booker, a 22-year-old student,
with no other source of income. The remainder of the income is retained by the trust. The trust
designates the source of the income paid to the beneficiary as follows: interest $15,000, eligible
dividends $10,000 and capital gains $6,000.

Determine the net income, taxable income and federal tax payable for both Gail and the trust.

Solution
For tax purposes, the trust is considered to be an individual. Therefore, the eligible dividends
are subject to the 38% gross-up and the dividend tax credit.
Unlike an individual, a trust is permitted to deduct in computing net income, any income paid or
payable to beneficiaries.

Amount Received Allocated to Gail Retained by Trust

50% 50%

Interest $30,000 $15,000 $15,000

Eligible dividends 20,000 10,000 10,000

Capital gains 12,000 6,000 6,000

$62,000 $31,000 $31,000

Net income and taxable income for the trust and for Gail is the same.

Gail Trust

Interest $15,000 $15,000

Eligible dividends ($10,000 x 138%) 13,800 13,800

Taxable capital gain 3,000 3,000

Net Income $31,800 $31,800

Taxable Income $31,800 $31,800

The highest federal personal tax rate (33%) must be applied to the trust’s income. Deductions
for personal tax credits are not permitted to a trust [ITA 122(1.1)].

Federal tax calculation:

Gail Trust

Federal tax @ 15% $4,770

@ 33% $10,494

Basic personal tax credit ($13,808 x 15%) (2,071) NA

Dividend tax credit ($3,800 x 6/11) (2,073) (2,073)

Federal tax payable $ 626 $ 8,421