FIP 503 Fall 2021

Group Assignment (15%)

Case 1

It is March of 2021 and you are about to prepare the 2020 tax return for Chelsea Lee. Your
meeting with Chelsea has provided the following information:

Chelsea is thirty years old, divorced, and has an eight-year-old child from a former marriage.
Child support payments from Chelsea are $500 a month.

Chelsea lives in Cornwall, and is a salesperson for Tri-scope Inc.. The earnings from the job
include a base salary of $6,000 per month plus a commission of 1% on the sales Chelsea
makes in the month, which were $50,000 every month in 2020.

Chelsea moved to Cornwall from Bermondsey on December 1, 2019 due to a promotion with
Tri-scope. Chelsea’s tax deductible moving expenses totaled $9,500, and there was no
reimbursement from Tri-scope. $4,500 of this expense was accurately claimed on the 2019 tax
return. Chelsea took out a $120,000 mortgage to purchase a new home in Moncton. The total
interest payments were $8,400 in 2020.

Chelsea’s personal vehicle is used to perform the work duties, and Chelsea pays for the
expenses with no reimbursement from Tri-scope. However, an allowance of $400 is received
each month which is treated as unreasonable for tax purposes. Chelsea purchased a new car in
2019 which is used seventy-five percent of the time for business purposes. The undepreciated
capital cost of the vehicle at the beginning of 2020 was $28,000. Total costs to operate the
vehicle are $800 per month. Interest expense on the car loan is $200 per month.

Chelsea spends $300 per month on fashionable clothing for work, and $500 per year on a new
cell phone. The cell phone bill is $80 per month, of which seventy-five percent is for
employment use.

Chelsea takes files home from the office at the end of the day and reviews the sales calls in a
home office. The files are then returned to the office at Tri-scope in the morning prior to leaving
for the day to make sales calls. Chelsea’s monthly total expense for the home insurance,

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 property taxes, maintenance, and utilities is $1,000. The home office occupies ten percent of
the square footage in the home.

Chelsea maximizes RRSP contributions each year. The 2019 Notice of Assessment showed
RRSP room of $12,000. Earned income was $42,000 in 2019 which consisted of $6,000 in
commissions. Tri-scope does not have a registered pension plan. CPP for enhanced
contribution is $166.

Required:

A. Calculate Chelsea’s minimum net income & Tax for tax purposes for 2020. Use the
aggregating formula from Section 3 of the Income Tax Act to show your answer (40
marks).

B. Indicate why any items have been omitted from your calculations (10 marks).

(Work must be shown for marks to be awarded.)

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 Case 2

It is March of 2021 and Clayton and Shaleen Miller have come to discuss their tax situation with
you. They predict that Clayton will not have to pay taxes for the 2020 year, which they believe
will allow Shaleen to claim the non-refundable tax credit of ‘spouse credit’. They have provided
you with the following information, including the statements from their companies (Exhibits I and
II) which they have prepared themselves but are not sure if they are correct. Shaleen is the sole
shareholder Windy Co.

Shaleen and Clayton and family

 Shaleen and Clayton have been married for ten years. They are both 39 years old, and
they have three children under the age of five. The children attended daycare four
mornings a week during 2020 while their parents worked. The total cost of the daycare
for all three children was $2,300. Shaleen and Clayton receive the monthly Canada
child benefit for each child.

Shaleen

 Shaleen earns a pre-tax salary of $65,000 per year from Windy.

 Shaleen received the following benefits from Windy in 2020:
 Private health and dental care: $400
 Life insurance: $500
 $2,000 worth of products at cost
 Registered pension plan (RPP) contributions: $3,000.
 Windy also deducted $3,000 from Shaleen’s salary for the RPP.
 Shaleen contributed $2,000 to an RRSP for the 2020 taxation year (which is within the
allowable limit).

Clayton

 Clayton began part-time employment at Fitness Inc. in 2020, and earned a gross salary
of $15,000, and did not have any employment income in 2019.
 Clayton received free use of the owner’s cottage for two weeks in May, which is typically
rented out for $500 per week.
 Clayton began a small home-based proprietorship – “Clayton’s Consulting” in 2019-
which generated $250 a month in pre-tax profits in 2020. The business operates from a

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 200 square foot room in the family’s 2000 square foot home, and is used exclusively for
the business.
 Clayton did not file a tax return in 2019 since no taxes were owing.
 Clayton contributed $4,000 to a TFSA in 2020.
 More on Clayton Consulting in Exhibit 1 below:

Exhibit I - Clayton’s Consulting

Note 1: All of the administrative expenses are compliant with the rules of the Income Tax Act.

Note 2: Work space expenses represent ten percent of Clayton and Shaleen’s housing costs.
The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of
$2,500, and home insurance of $1,200. (The business has met the conditions necessary to
allow for the deduction of home-based business expenses.)

Required:

A. Prepare detailed calculations (in accordance with the statutory formula of S.3 of the
Income Tax Act) to determine the taxable income & Tax for both Shaleen and Clayton for
2020 (40 marks).
B. Determine if Shaleen will be able to claim the non-refundable ‘spouse credit’ for the 2020
taxation year? (10 marks)

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