Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Chapter 6 Self-Study Problems (SSPs)

Solutions are available in the Study Guide.

SSP 6-1 Sources of Income and Property

In the following cases indicate:
1) whether there is a source of income;
2) if there is a source of income whether it is from business or property;
3) the type of property whether inventory, depreciable property, or non-depreciable
capital property; and
4) the type of income earned from the activity and the type of income from the sale of the
property.
Provide reasons for your answers.
Case 1 An individual purchases a residential property on August 15, 2022 for $225,000 and
sells it August 21, 2022 for $380,000 after paying a real estate commission of $20,000. The
individual has never done this before.
Case 2 An individual purchases a run-down residential property on October 2, 2022 for
$140,000. The property is renovated extensively at a cost of $150,000. The property is sold
December 22, 2022 for $500,000 after paying a real estate commission of $25,000. The
individual has never done this before.
Case 3 An individual purchases a residential property for $165,000 and moves in on January
15, 2009. The individual purchases a new home and moves in on December 19, 2020. The old
home is rented to an arm’s length individual at market rental rates starting January 1, 2021. The
tenant purchases the home from the owner on December 3, 2022 for $315,000. Assume that no
CCA was claimed.
Case 4 How would your answer to Case 3 have changed had the property remained vacant for
one year because there was an excess of rental properties available. Assume that the individual
took all necessary steps to advertise and rent out the home as soon as it became unoccupied.
Case 5 How would your answer to Case 3 have changed had the property been rented to the
individual’s adult child at half the market rental rate and then later sold to this adult child for
$165,000.
Case 6 Tasha Merz owns and operates a retail shoe store. She sold the operation October 29,
2022 for $600,000. She initially purchased the land for $100,000 and had a store constructed
for $240,000 many years ago. CCA of $50,000 has been claimed over the years with the UCC
balance at $190,000. The shoe inventory on hand cost $63,000. The sale price included
$145,000 for the land $270,000 for the building, $85,000 for the inventory and $100,000 for
goodwill.

SSP 6-2 Bad Debts

Dr. Peter Allworth is a dentist with a busy dental practice. He performs a large amount of
services on account, and occasionally has trouble collecting the amounts that are due to him.
As a consequence, he takes great care in keeping track of outstanding balances in accounts
receivable and in making estimates of the amounts that he expects will not be collectible.

Copyright © 2023 Pearson Education Inc. 6-1

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

At the end of 2021, his accounts receivable balance was $104,000 and, for income tax
purposes, he claimed a reserve for doubtful debts of $11,500. The corresponding balances at
the end of 2022 were $208,000 in total receivables, with a reserve for doubtful debts of $15,900.
Both reserves were established on the basis of a detailed aging schedule, applied on a
receivable-by-receivable basis.

In 2021, there were recoveries of $190 that had been written off as uncollectible in 2020.

In 2022, $8,800 in accounts receivable were written off as bad debts. Of this amount $700
related to a patient where there was some hope of collecting the amount due. As the patient
was a personal friend of Dr. Allworth, no real effort had been made to collect the amount and
further dental services had been extended on a credit basis. In addition, other accounts totaling
$1,500 that had been written off as bad debts in 2021 were recovered in 2022.

Required: How would the preceding information affect the calculation of Dr. Allworth’s business
income for 2022?

SSP 6–3 Reserves

Opal Schwartz carries on the business of providing interior decorating services as a sole
proprietor. The business began January 1, 2022, and has a fiscal period ending December
31.
The following information relates to the fiscal period ending December 31, 2022:
• Sales of delivered merchandise and services provided totaled $259,000. As of
December 31, $88,000 of this total had not been collected. As several of her
clients are having financial difficulties, she anticipates that $7,000 of these
outstanding accounts are doubtful of collection.
• In addition to sales of delivered merchandise, the business received deposits on
orders in the amount of $27,000. This merchandise is scheduled to be delivered
in early 2023.
• Opal purchased a large stock of top-quality decorating materials from the trustee of
a bankrupt decorating business. Since the material is a style that does not
appeal to her own clientele, she found another decorating business that agreed
to purchase all the stock for $62,000. Her cost for these materials was $47,000,
resulting in a gross profit of $15,000. Because of the size of the sale, Opal has
accepted a down payment of $22,000, that will be followed by two annual
instalments of $20,000. The instalments are due on December 31, 2023, and
December 31, 2024.
The following information relates to the 2023 fiscal period:
• A total of $6,500 of accounts receivable were written off in 2023 as bad debts.
• All the merchandise on which 2022 deposits were received was delivered.
• The $20,000 instalment on the sale of decorating materials was received.
• Sales of delivered merchandise and services provided totaled $360,000. As of
December 31, $72,000 of this total had not been collected. Opal anticipates that
$9,500 of these outstanding accounts are doubtful of collection.
• In addition to sales of delivered merchandise, the business received

Copyright © 2023 Pearson Education Inc. 6-2

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

deposits on orders in the amount of $21,000. This merchandise is

scheduled to be delivered in early 2024.

Required: How would the preceding information affect the calculation of Opal Schwartz’s
business income for the 2022 and 2023 fiscal periods? Include the full details of your
calculations for each year, not just the net result for each year. Ignore GST/HST & PST
implications.

SSP 6-4 Work Space in the Home Costs and CCA

Veronica Hart is employed in retail sales with a large department store. Because of the
expertise in sports clothing that she has gained as an employee, she has decided to
start an online sports clothing business to supplement her employment income. The
business commences on January 20, 2022.
On that date, Ms. Hart acquires office furniture and display racks at a total cost of $14,000,
a computer for $1,350, and software appropriate to her business activities for $795. She
also has a separate telephone line installed for dealing exclusively with the online business.

The business is run out of Ms. Hart’s home, making exclusive use of 15% of the total
livable floor space including common areas. The business has a fiscal period ending
December 31.
During the period January 20, 2022, through December 31, 2022, Ms. Hart’s mail order
sales total $89,000. Costs associated with these sales are as follows:

Cost of Merchandise Sold $46,000

Unsold Merchandise (Lower of Cost and FMV) 23,500
Packaging Materials 1,547
Shipping Costs 3,216
Miscellaneous Office Supplies 825
Telephone Charges (Total for the period) 210
Printing of Brochures that have been Distributed 156
Ms. Hart’s home was purchased several years ago for $355,000, of which $80,000 was
allocated to the land and $275,000 to the house. Costs accrued with respect to the
home for the fiscal period ending December 31, 2022, are as follows:

Utilities for Home (Heat, Electricity, and Water) $2,850

Mortgage Interest Paid 4,183
House Insurance 400
Property Taxes 1,230
Repairs and Maintenance for Home 1,125
Total $9,788

Required:
A. Determine whether Ms. Hart can deduct costs for work space in her home.
Briefly explain your conclusion.
B. Compute the minimum business income or loss that Ms. Hart must include in her

Copyright © 2023 Pearson Education Inc. 6-3

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

2022 income.
C. Briefly describe any issues that should be discussed with Ms. Hart concerning
her business costs and the costs of the workspace in her home.

SSP 6–5 Valuation of Business Inventories

Arnold Fortin carries on a business, as a sole proprietor, of selling hockey jerseys for
school sports teams. The business has fiscal period ending December 31. During the first
year of business, he has the following purchases:

Date Quantity Price Total Cost

January 20 2,200 $ 17.00 $ 37,400
March 12 1,800 $18.50 33,300
June 15 6,600 $20.25 133,650
October 8 3,200 $ 21.42 68,544
December 9 1,500 $16.50 24,750
Totals 15,300 $297,644

On December 31, the end of the first year of business, the inventory on hand amounts to
5,000 units. It is estimated that these units have a replacement cost of $16.75 per unit
and a net realizable value of $18.30 per unit.

Required: Calculate the various closing inventory values that could be used to determine
business income for income tax purposes. Your answer should indicate the valuation
method being used, as well as the resulting value.

SSP 6–6 Business/Employment Income—

Employee vs. Self-Employed
Ms. Wise is a very successful salesperson. She pays all of her own expenses and
provides the following information related to her 2022 taxation year:
1. Travel expenses, largely airline tickets, food, and lodging on trips outside the area
in which she resides, totaled $23,000. Included in this amount is $8,000 of
business meals.
2. During the year, she used 40% of her personal residence as an office, which includes
a component for common areas. She has owned the residence for two years. It is her
principal place of business and it is used exclusively for meeting clients on a regular
and continuous basis throughout the year. Interest payments on the mortgage on this
property totaled $13,500 and property taxes for the year were $4,700. Utilities paid for
the house totaled $3,550, and house insurance for the year was $950. Other
maintenance expenses associated with the property amounted to $1,500. The
January 1, 2022, UCC of the 40% portion of the residence that is used for
business is $140,000.
3. Ms. Wise drives a car that she purchased for $53,000 on October 15, 2021. In
2022, she drove a total of 50,000 kilometres, 35,000 of these being for business
purposes and the remaining 15,000 for personal use. The business use of her car
varies from 60% to 80% each year. The total operating costs for the year were
$6,000. In addition, there were interest expenses of $2,500 on a bank loan used
to purchase the car. She has always claimed maximum CCA on her car.

Copyright © 2023 Pearson Education Inc. 6-4

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

4. She paid dues to the Salesperson’s Association (a trade union) of $600.

5. She was billed a total of $12,000 by a local country club. Of this amount, $2,500
was a payment for membership dues and the remaining $9,500 was for meals
and drinks with clients. Assume that $5,700 of the $9,500 represented the cost
of client meals and drinks and the balance of $3,800 was for Ms. Wise’s own
consumption.
Required:
A. Calculate the maximum amount of expenses that can be claimed by Ms. Wise for
2022 assuming:
i. She is an employee of a manufacturing company. Her employment income of
$137,000 includes $15,000 in commissions.
ii. She carries on a professional services business as a sole proprietor. Business
clients include a group of manufacturers with a diversified product line. In 2022,
she earned fees of $137,000.
In making these calculations, ignore GST/HST & PST considerations.
B. Comment on the desirability of claiming CCA on Ms. Wise’s principal residence.

SSP 6–7 Deductible Automobile Expenses and Taxable Benefit

Bob Neat is the sole shareholder and only employee of Bob’s Bookkeeping Services
Ltd., a Canadian controlled private corporation (CCPC) with a December 31 taxation
year end. The company provides onsite bookkeeping services to a number of clients in
the Greater Toronto Area.

As Bob must travel extensively to service clients, the company provides him with an
automobile to be used in his employment. Bob does not personally own another
automobile. Instead he uses the corporate automobile for both business and personal
travel. In 2022 two different automobiles were provided:

Ford Focus During the period January 1, 2022, through April 30, 2022, Bob had
use of a Ford Focus that had been purchased in 2021 for $23,600. As of
January 1, 2022, the Class 10 UCC balance was $12,980. During this period,
Bob drove the automobile a total of 31,000 kilometres, 18,000 of which were for
employment purposes and 13,000 for personal use. On April 30, 2022, the car
was sold for $18,200.
Mercedes E-Class Sedan As the business was becoming very profitable, Bob
decided he deserved a better equipped and more comfortable automobile. On
May 1, 2022, the company acquires a Mercedes E-Class sedan for $52,000.
During the period May 1, 2022, to December 31, 2022, Bob drives a total of
42,000 kilometres, 19,000 for employment purposes and 23,000 for personal
use.
These were the only automobiles owned by Bob’s Bookkeeping Services Ltd in 2022.
The company does not own any other depreciable properties.
In 2022, the company paid for all of the operating costs of both automobiles, a total of $17,460.
Required: Determine the following:

Copyright © 2023 Pearson Education Inc. 6-5

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

A. The income tax consequences to Bob’s Bookkeeping Services Ltd. that result
from owning and selling the Ford Focus and owning the Mercedes E-Class
sedan in 2022.
B. The minimum amount of the taxable employment benefit that Bob will have to
include in his net income for 2022.
Ignore GST/HST & PST considerations in your solution.

SSP 6–8 Employer Provided vs. Employee-Owned Automobile

Jordan Nash has an employment contract with Emmitt Industries, a Canadian public
company. The contract commences as of January 1, 2022, and covers the three years
ending December 31, 2024. His taxable income puts him in the top federal income tax
bracket of 33% resulting in a combined federal/provincial marginal income tax rate of
50%.
Jordan will require an automobile for use in his employment duties. Because of the
nature of his employment, a luxury automobile is required, and he and the employer
have agreed that a $125,000 BMW 750 would be an appropriate choice. Based on
this decision, Emmitt has offered Jordan the following two alternatives. Emmitt is
indifferent as to which alternative he chooses.
Alternative 1 The company will provide the automobile and pay all of the
operating costs, including those related to Jordan’s personal use. The
automobile will be available to Jordan on a full time basis throughout the three
year term of his employment contract. It will be returned to the company at the
end of that period.
Alternative 2 The company will provide Jordan with an interest free loan for
$125,000 in order to facilitate the purchase of the automobile. No payments are
required on the loan and it must be repaid in full on December 31, 2024. Jordan
will pay all the operating costs and, to assist with these costs, the company
will provide him with an allowance of $2,000 per month. Jordan will retain
ownership of the automobile at the end of his employment contract.

To make a decision on these alternatives, Jordan recognizes the need to make

estimates of both operating costs and use of the automobile. The estimates that he
will use in making his decision are as follows:
• He anticipates driving the vehicle 65,000 kilometres each year, with 47,000
kilometers for employment purposes and 18,000 for personal use.
• If he owns the automobile, he estimates that his operating costs will
average $0.32 per kilometre over the three year term of his employment
contract. At the end of the employment contract, he will sell the automobile
for an estimated $52,000.

Assume that the prescribed rate for the operating cost benefit is $0.29 per
kilometre in each of the years 2022, 2023, and 2024, and that the prescribed
interest rate is 2% for the same years.
Required: Advise Jordan as to which of the alternatives he should accept. Base
your decision on the undiscounted cash flows associated with the two alternatives.
Ignore GST/HST & PST considerations.

Copyright © 2023 Pearson Education Inc. 6-6

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

SSP 6–9 Reconciliation of Business Expenses—Corporation

Astrolab Industries Ltd. has a calendar-based taxation year that ends on December 31.
For the 2022 taxation year, the company’s financial statements prepared in accordance
with ASPE showed accounting income of $278,000. The accountant has provided the
following other information that was used in the preparation of this amount:
1. A total of $123,000 was deducted as income tax expense. This amount included
$16,000 in future income taxes.
2. As the company was late in making its required income tax instalments, it was
required to pay interest of $400 which it expensed.
3. The company recorded $83,000 in amortization expense. Maximum available CCA
is $97,000.
4. The company’s accounting expenses included a payment for membership
dues in a local golf club of $2,500. The golf club has a separate dining facility
frequently used to entertain clients. Meal expense at this club was $9,600.
5. For accounting purposes, no allowance for bad debts was established at either
the beginning or the end of 2022. The company expensed $5,200 in 2022 for
bad debts written off as uncollectible. For income tax purposes, the company
claimed a reserve of $3,400 for doubtful debts for the 2021 taxation year and a
further reserve of $4,200 for the 2022 taxation year.
6. The 2022 accounting expenses include $1,500 for the premiums on a life insurance
policy on the life of the company’s president. The company is the beneficiary of this
policy however the policy has been assigned to the financial institution that has
provided capital loans necessary to the business as collateral security.
7. The 2022 accounting expenses included $37,000 in bonuses that were declared
in favour of company executives. Only $12,000 of these bonuses were paid in
2022, with the balance being payable in February 2023.
8. The bond interest expense that is included in the accounting records includes
$3,200 in discount amortization.
9. On December 31, 2022, the company paid landscaping costs of $27,000. These
costs are capital expenditures for both accounting and income tax purposes and,
as the expenditure was made at the end of the year, no amortization was claimed
for accounting purposes.

Required: For each of the preceding items, indicate the appropriate reconciliation
treatment for Astrolab Industries Ltd. for the 2022 taxation year. Explain your answer
identifying, where necessary, the required reconciliation adjustments.

SSP 6–10 Proprietorship—Reconciliation

Fairway Distribution is the registered name of a business, carried on by John Fairway as a
sole proprietorship, that distributes a wide variety of health aid products to retailers. John’s
spouse, Jane Fairway, is an avid golfer with no interest or experience in business matters.
For the taxation year ending December 31, 2022, the accountant calculated a pre-income
tax accounting income for Fairway Distribution of $273,000. In calculating this amount,

Copyright © 2023 Pearson Education Inc. 6-7

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Mr. Fairway’s accountant relied on ASPE except for the fact that no provision was made
at the end of the year for anticipated doubtful debts.
Other Information Other information related to the 2022 taxation year is as follows:

1. In 2021, a reserve for doubtful debts was claimed for income tax purposes in the
amount of $15,000. For accounting purposes, only the actual 2022 write-offs of
$17,500 were deducted. The accountant felt that an appropriate reserve to be
deducted for income tax purposes at the end of 2022 would be $19,200.
2. Accounting income included a deduction for amortization expense in the amount of
$78,500. The accountant has determined that the maximum CCA for 2022 is
$123,600.
3. The following items were included in the accounting expenses:

Cost of advertising in a foreign newspaper

that is distributed in Canada $ 3,500
Donations to registered charities 1,260
Cost of appraisal on real estate to be sold 1,470
Costs of landscaping work done on the
grounds of Mr. Fairway’s principal residence 5,260
Management fee to Mrs. Jane Fairway 123,000
4. As the business is not incorporated, no income taxes were deducted in
determining net income.

Required: Calculate the minimum business income for Fairway Distribution that will be
included in Mr. Fairway’s income for the 2022 taxation year.

SSP 6–11 Reconciliation of Business Income with CCA

Darlington Inc. has a calendar-based taxation year ending December 31. For the 2022
taxation year, the company’s after-tax accounting income, determined in accordance
with ASPE, was $596,000. Other information related to the preparation of its 2022
income tax return is as follows:

1. The income tax expense was $55,000, including $7,000 in future income tax
expense.
2. The company spent $95,000 on landscaping for its main office building. This
amount was recorded as an asset in the accounting records and, because the
work has an unlimited life, no amortization expense was deducted.
3. The company spent $17,000 on advertisements in Fortune Magazine, a U.S. based
publication. Approximately 90% of its non-advertising content is original editorial
content. The advertisements were designed to promote sales in Canadian cities
located on the U.S. border.
4. The 2022 amortization expense is $623,000.
5. At the beginning of 2022, the company had a UCC balance in Class 1 of
$1,000,000, representing its headquarters. The company has owned this

Copyright © 2023 Pearson Education Inc. 6-8

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

building since 2001.

In general, all other buildings are leased. However, in February 2022, a policy
change results in the purchase of a new building at a cost of $650,000, of which
$125,000 is allocated to land and $525,000 for the building. This building is used
100% for non-residential purposes and an election is made to include the building
in a separate Class 1. None of the building is used for manufacturing and
processing.

The January 1, 2022, the UCC balance in Class 8 was $4,200,000. In 2022,
there were additions to this class in the amount of $700,000. In addition, Class 8
property with a capital cost of $400,000 was sold for $550,000. The carrying
value of the property sold in the accounting records was $325,000, and the
resulting accounting gain of $225,000 was included in the accounting income for
the year. There are numerous properties remaining in the Class 8 on the last day of
the 2022 taxation year.

At the beginning of 2022, the UCC in Class 10 was $800,000, reflecting the
company’s fleet of cars. As the company is changing to a policy of leasing its cars,
all of these cars were sold in the year for $687,000. The capital cost of the cars was
$1,200,000, and their carrying value in the accounting records was equal to the
sale proceeds of $687,000.
6. Included in travel costs deducted in 2022 for accounting purposes was $12,000 for
airline tickets and $41,400 for business meals and entertainment while away for
more than twelve hours.
7. The company paid, and deducted for accounting purposes, a $2,500 initiation fee
for a corporate membership in the Highland Golf and Country Club.
8. The company paid, and deducted, property taxes of $15,000 on vacant land that
was being held for possible future expansion of its headquarters site.

Required: Calculate Darlington Inc.’s minimum 2022 net income. In addition, calculate the
January 1, 2023, UCC balances for each CCA class.

SSP 6–12 Proprietorship—Business Income, Employee

vs. Self-Employed
Montpetit Fashion is the registered name of a sole proprietorship that carries on the
business of custom designs and retails high-fashion clothing in Calgary. The business
commenced February 1, 2022.

Part I The sole proprietor, Henri Dubois, has sought your advice on a number of issues
related to the income tax treatment of the business. Provide advice on each of the
following issues:

A. The business has not yet chosen a fiscal period. Henri would like to know what
options are available.
B. Designer gowns, for which there are no production economies of scale, are
designed and made by private seamstresses who work in their own homes. Henri
supplies the fabric and accessories and pays a previously agreed fixed amount
upon satisfactory completion of each gown. Henri is uncertain as to the need for

Copyright © 2023 Pearson Education Inc. 6-9

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

source deductions (income tax, EI, and CPP) on payments made to the
seamstresses.

Part II Henri would like you to review the following transactions that occurred during the
first fiscal period, which ends December 31, 2022. Advise Henri on the income tax
treatment of these transactions. Similarly, for expenditures, provide advice on the specific
deductions (with amounts) that can be claimed.

A. Legal fees of $2,400 were paid for registering the business name.
B. An industrial sewing machine was acquired at the beginning of the year for
$2,500. Sewing accessories (thread, needles, scissors, etc.) were also acquired
for a total of $8,500.
C. Designer clothes with a retail price of $260,000 are held on consignment by
boutiques throughout the city. The cost of making these clothes was $50,000 in
labour and $45,000 in fabric. Replacement cost and net realizable value are both
estimated at $130,000.
D. Henri paid $15,000 for the exclusive right to distribute Dali sweaters for five years.
E. In 2022, payments totaling $3,250 were made to the Champs Elysée Club. Of
this amount, $1,100 was for the annual membership fee and the remaining
$2,150 was for charges in the Crepe Suzette Diner. Of the dining charges,
$1,500 was spent on meals for clients and the remainder was for Henri’s own
meals.

SSP 6–13 Proprietorship—Business Income with CCA

Christine Powell is a visual designer. Until May 2022, she worked as an employee for a
printing supply firm. On June 1 2022, she began to carry on a visual designer business
as a sole proprietor under the registered name of Design Power. Through this business,
she works with several advertising agencies in the design and desktop publishing of
promotional materials.

In January 2023 Christine comes to you for income tax advice. Being vaguely aware of
the complexity of the income tax laws, she has kept meticulous track of all business
related costs for the period from June 1, 2022 to December 31, 2022, the end of the
company’s fiscal period.

Christine works out of her home. Her studio occupies 20% of the livable space in the
house including a component for common areas. Christine does not intend to claim any
CCA on her home. The total operating costs related to the house during the period
June 1, 2022, through December 31, 2022, are:

Utilities $1,500
Home Insurance 700
Mortgage Interest 1,600
Property Taxes 2,600
Total Home Office Expenses $6,400

On June 1, 2022, Christine bought a used automobile for business and personal use. The total
purchase price of the automobile was $18,000, financed with a $3,000 cash down payment
and a $15,000 term loan. Her detailed records show that she uses the car 70% for business

Copyright © 2023 Pearson Education Inc. 6-10

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

purposes and 30% for personal purposes. The automobile costs include:

Down Payment on Car Purchase $3,000

Gasoline and Oil 1,100
License and Registration 200
Insurance 800
Interest on Car Loan 700
Total Automobile Costs $5,800

On July 15, 2022, Christine purchased computer equipment for $5,000 and application
software for $1,200. On August 1, 2022, she purchased several pieces of office
furniture for $2,000. All these purchases were acquired solely for business purposes.

Revenues and other costs for the period June 1, 2022, to December 31, 2022, were as
follows:

Revenues
Collected $22,000
Billed, but not collected 4,000
Unbilled WIP 1,500

Costs
Legal and annual business license fees $1,000
Business meals and entertainment with clients 500
Office and computer supplies 650
Printing subcontract fees 1,800

Required: Calculate Christine’s minimum business income for the 2022 fiscal period.
Ignore GST/HST & PST implications.

SSP 6–14 Proprietorship—Business Income with CCA

Carla Jensen is a Chartered Professional Accountant (CPA) who is employed as an
internal auditor by a Canadian public company. She has decided to expand her horizons by
starting a business of providing tax and accounting services as a sole proprietor.

This business has a fiscal period ending December 31 and has been in operation for
several years. The business operates out of a building that Carla purchased, new, in 2019.
She uses this building exclusively for non-residential purposes. Carla has made the
appropriate election to include the building in a separate Class 1.

On December 31, 2021, Carla had unbilled WIP of $29,000 that was billed in 2022. In
2022, Carla records 800 billable hours at her billing rate of $145 per hour for a total of
$116,000. She bills $81,000 of this amount in 2022 and collects $75,800. On
December 31, 2022, her unbilled WIP has increased to $35,000.

Copyright © 2023 Pearson Education Inc. 6-11

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

On January 1, 2022, the business has the following UCC balances:

Class 1 Building $226,000

Class 8 Furniture and Fixtures 46,500
Class 10 Vehicle (Purchased for $20,300) 17,255

During January 2022, Carla acquires a new computer for $1,800, along with application
software for $725.

In March 2022, the Class 10 vehicle is involved in a serious accident, requiring it to be

permanently taken off the road. The insurance proceeds are $12,300. In April 2022
Carla replaces it with a vehicle with a manufacturer’s list price of $32,000 that is leased
for $475 per month. Both vehicles are used exclusively for business purposes.

In July 2022, Carla replaces some of the furniture in her office. The old furniture has a
capital cost of $18,000, while the new items cost $34,000. Carla receives a trade in
allowance for the old furniture of $6,000.

In September 2022, Carla acquires a client list from an accountant who is retiring. The
cost of this list is $47,000.

In 2022, the various costs of operating her business, determined on an accrual basis,
are as follows:

Building Operating Costs $24,500

Costs of Operating Leased Vehicle 7,200
Payments to Assistants 13,500
Miscellaneous Office Expenses 3,750
Meals with Clients 4,200

Required: Calculate Carla’s minimum 2022 business income. Ignore GST/HST & PST
considerations.

SSP 6–15 ITA 22 Accounts Receivable Election

Gail Gates carries on a business as a sole proprietor, of providing wholesale distribution of
various types of ornamental gates. The business has a fiscal period ending December 31.

Gail has been approached by a larger competitor who has offered to purchase the
business. The offer is too good to turn down and she decides to sell. The purchaser is Ms.
Mandy Portals, an unrelated person. The transaction will be finalized on July 1, 2022, and
will involve the sale of all of the business properties. Ms. Portals does not anticipate
incorporating the business and will also use a calendar-based fiscal period ending
December 31.

On the date of the sale, the face value of the accounts receivable is $263,000. Gail and
Mandy agree that the current FMV of the receivables is $249,000. In 2021, Gail claimed
a reserve for doubtful debts under ITA 20(1)(l) of $15,000.

Between July 1, 2022, and December 31, 2022, $251,000 of the accounts receivable

Copyright © 2023 Pearson Education Inc. 6-12

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

are collected with the remaining $12,000 written off as bad debts.

Both Gail and Mandy have heard of an election under ITA 22 that may have some influence
on the income tax treatment of the sale of accounts receivable. They would like your advice
on this matter. Gail notes that she did not have any capital gains in the previous three
years. Further, she does not expect to have any capital gains in 2022 or in the
foreseeable future.

Required:
A. Indicate the income tax consequences, for both Gail and Mandy, of the sale of
the accounts receivable and the subsequent 2022 collections and write-offs,
assuming:
• that no election is made under ITA 22.
• that an election is made under ITA 22.
B. Indicate, from the point of view of each individual, whether making the election
would be a desirable course of action.

SSP 6–16 Comprehensive Case Covering Chapters 1 to 6

Andrew Bank is 51 years old and lives with his common-law partner, John Bream. John
is 49, qualifies for the disability tax credit, and has 2022 net income of $4,500.

The couple has two adopted children. Their 19-year-old son, Bart, is dependent on Andrew
because he is disabled. However, the disability is not sufficient to qualify Bart for the
disability tax credit. Bart has 2022 net income of $2,800. Because of his outstanding
academic abilities, their 15-year-old son, Carl, is attending university on a full time basis
throughout 2022. Andrew has paid his tuition fees of $17,000. As Carl has no income of his
own, he has agreed to transfer the maximum tuition credit to Andrew.

In 2022, Andrew paid for family medical expenses as follows:

Andrew $ 2,300
John 12,600
Bart 4,600
Carl 400
Total $19,900

Andrew is employed by Martin Inc., a Canadian public company. In 2022, his salary is
$123,000. In addition, he has commissions of $11,500. For the 2022 taxation year, his
employer withholds the following amounts from his income.

RPP Contributions* $6,300

EI Premiums 953
CPP Contributions 3,500
Parking Fees at Employer’s Lot** 600

*Andrew’s employer makes a matching contribution of $6,300 to his RPP.

** The parking fees charged represent the value of the parking used during

Copyright © 2023 Pearson Education Inc. 6-13

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

the course of the year.

Andrew is required to use his own automobile for employment-related travel, mainly going
to meet with clients in their homes. His automobile was acquired on January 1, 2022, at a
cost of $42,000. In 2022, Andrew drove the car a total of 46,000 kilometres, of which
31,000 were for employment purposes and 15,000 for personal use. His total operating
expenses for the year were $9,300. His employer provides him with a flat rate allowance
of $800 per month to reimburse him for the employment-related use of the automobile.

Andrew’s sales territory is large, and in 2022 his employment-related expenses were
as follows:

Hotels $ 8,500
Airline tickets 4,500
Meals alone while travelling 2,000
Meals with clients and client entertainment 8,600
Total expenses $23,600

Assume that the meals with clients occurred while Andrew was away on overnight trips
(ITA 8(4)). Andrew’s employer does not reimburse him for any of these expenses.
In 2022, Andrew received options to acquire 500 shares of Martin Inc. at a price of $23
per share. At that time, the shares were trading at $25 per share. In December of
2022 Andrew exercises all these options. At the time of exercise, the shares were
trading at $28 per share. He was still holding the shares at year end.
Many years ago, Andrew purchased a business that he carries on as a sole proprietor. On
January 1, 2022, the UCC balances for the business were as follows:

Class 1 (Building purchased in 2004) $472,200

Class 8 143,300
Class 50 12,500
Andrew accounts for all of his business income and expenses using income tax rules
avoiding the need to make reconciliation adjustments. He has correctly calculated his
business income for income tax purposes, prior to any CCA amounts, as $189,000.

Required: Calculate Andrew’s 2022 net income, his 2022 taxable income, and his
minimum 2022 federal income tax payable without consideration of any income tax
withheld by his employer. Ignore GST/HST & PST considerations.

SSP 6–17 Comprehensive Case Covering Chapters 1 to 6

Mr. Martin Bowles is 43 years old and is employed in the marketing department of
Dominion Brass, a large public company. In 2022, his basic salary was $89,000. In
addition, he earned $12,000 in commissions. His employer withheld the following
amounts from his income during 2022:

RPP Contributions* $3,750

EI Premiums 953

Copyright © 2023 Pearson Education Inc. 6-14

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

CPP Contributions 3,500

Union Dues 430
Payments for Personal Use of Company Car 1,200
*Mr. Bowles’ employer makes a matching contribution of $3,750 to his RPP.

His employer provides Mr. Bowles with an automobile, which is leased at a rate of $459
per month, a total of $5,508 for the year. In 2022, the automobile is driven 33,000
kilometres, of which 24,500 are for employment use and 8,500 for personal use. The
automobile was used by Mr. Bowles for 11 months of 2022. When he is not using the
car, he is required by company policy to return it to the company’s premises.

Mr. Bowles is provided with an allowance of $400 per month to cover hotel and meal
expenses during his employment-related travel. Mr. Bowles’ actual expenses for 2022
were as follows:

Hotels $2,850
Meals 1,875

It is the policy of Dominion Brass to reimburse tuition paid by employees when taking
college or university courses. In 2022, Mr. Bowles received reimbursements of $1,600
for two courses. Of this total, $1,000 was for a two-day marketing course that was
required by his employer, while $600 was for a week-end course in art appreciation
that was taken for personal interest.

In 2022, Dominion Brass gave Mr. Bowles a $450 watch in recognition of his 10 years of
service with the company. In addition, all employees were given a $400 gift certificate for
purchases at a local mall.

In 2020, Mr. Bowles was granted options to purchase 1,500 shares of Dominion Brass
stock at a price of $52 per share. At that time, the shares were trading at $50 per
share. In June 2022, when the shares were trading at $61 per share, Mr. Bowles
exercises the options and immediately sells the shares at that price.

On January 1, 2022, Mr. Bowles started a management consulting business which he

carried on as a sole proprietor. The business is located in an office that he rents for
$500 per month. In order to run his business effectively, he made improvements to the
office space that cost $12,000. His lease on the office terminates on December 31,
2024, and does not contain any renewal options.

Other information related to the business is as follows:

Revenues In 2022, Mr. Bowles issued invoices for all his services totaling
$50,250. There are no unbilled amounts.

Capital Expenditures Mr. Bowles spent $10,000 for furniture for his new
office. In addition, he purchased a computer for $1,150 and application
software for $836.

Costs In 2022, the following expenses were incurred in operating the

management consulting business:

Copyright © 2023 Pearson Education Inc. 6-15

 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Part-time Assistant $5,725

Office Supplies 347
Monthly Telephone Service ($26 per month) 312
Cell Phone Charges (Business only) 211
Meals with Clients and Client Entertainment 3,150
As the rented office is in the same building complex as his home, Mr. Bowles makes no
use of his employer’s automobile in his business.
All meal expenses are incurred while traveling away from the employer’s place of
business for a period of more than 12 hours.
Mr. Bowles is married and has two children:
Sally, Martin’s spouse, is 40 years old and has 2022 net income of $3,450.
Marie is 14 years old and has 2022 net income of $2,300. All `this income
resulted from the investment of cash awards that she has received for science
projects.
Ellen is 19 years old and attends university on a full-time basis for eight months of
2022. Martin pays her tuition costs of $9,800. As Ellen has no income of her own, she
intends to transfer the maximum tuition tax credit to Martin.
The family’s 2022 medical expenses, all paid for by Mr. Bowles, are as follows:

Martin $ 2,500
Sally 1,850
Marie 1,600
Ellen 6,540
Total $12,490

In 2022, Mr. Bowles makes donations to registered charities of $1,425, as well as

contributions to registered federal political parties in the amount of $275.

Required: Calculate Mr. Bowles’ 2022 net income, taxable income, and his minimum
federal income tax payable without consideration of any income tax withheld by his
employer. Ignore GST/HST & PST considerations.

Copyright © 2023 Pearson Education Inc. 6-16