TAXATION Joan Fung, age 67, is married to Alan, age 56, who has three children from a previous marriage, ages 22,20 and 15. The children live with the couple and are supported by both. Joan is a manager with X Ltd. Alan is an economist who occasionally finds contract work preparing economic forecasts at the minimum wage. Alan is certified as having a mental impairment. Alan is incapable of caring for the children as a result of his mental impairment. A. The following information has been provided:- a. Joan’s salary slips show the following:- Gross salary and taxable benefits………………………………………………………………..$130,000 Less withholdings: Income tax withheld………………………………………………..$32,000 RPP contributions to a defined benefit plan…………… 7,000 Donations to the United Way(registered charity)….. 600 Employment insurance premiums……………………………… 747 40,347 Net salary and taxable benefits…………………………………………………………………… .$89,653 b. Joan has the following other sources of income:- Dividends from Y Ltd.,(CCPC) ……………………………………………………………………….. 3,600 Dividends from Bell Canada…………………………………………………………………………… 5,000 Interest on Canada Savings Bonds…………………………………………………………………. 4,000 Canadian sourced interest income………………………………………………………………… 2,000 Interest on loan to her sister…………………………………………………………………………. 875 Taxable capital gains(allowable capital losses):- Tax Trivia Canada Ltd., common shares………………………………………………………..29,000 Painting by a Canadian artist……………………………………………………………………….. 2,500 Growth Potential, common shares………………………………………………………………..(1,100) Loss on common shares of X Ltd., a small business corporation……………………..(40,000) Monthly pension of $4,500 from previous employer…………………………………………54,000 Old Age Security Pension received……………………………………………………………………. 6,400 At the beginning of 2011, Joan had two rental properties. These properties are expected to have the following operating cash flows associated with them:- Property #1 Property #2 Gross rents received……………………………………………$ 60,000……………………………………$36,000 EXPENSES:- Advertising for tenants………………………………….1,200……………………………………………0………. Property taxes……………………………………………….5,400………………………………………..3,000….. Utilities(Landlord provided)………………………… 6,200………………………………………..3,800….. TOTAL EXPENSES……………………………………………………12,800………………………………………. 6,800….. Property #1 was purchased in 1985 at a cost of $120,000 for both land and building. The cost of the land was $50,000. Property #2 was purchased in 1999 at a total cost of $210,000. The cost of the land was $80,000. The UCC balance in Class#3(5%) was $20,780 and Class #1(4%) was $67,280 at January 1,2011. During 2011, new bylaws on safety requirements of rental properties were enacted. To upgrade the two properties would require $80,000 for Property #1 and $90,000 for Property #2. As a result, Joan decided to improve Property #1 and paid the $80,000 fo.

1. TAXATION
Joan Fung, age 67, is married to Alan, age 56, who has three
children from a previous marriage, ages 22,20 and 15. The
children live with the couple and are supported by both. Joan is
a manager with X Ltd. Alan is an economist who occasionally
finds contract work preparing economic forecasts at the
minimum wage. Alan is certified as having a mental
impairment. Alan is incapable of caring for the children as a
result of his mental impairment.
A. The following information has been provided:-
a. Joan’s salary slips show the following:-
Gross salary and taxable
benefits………………………………………………………………..
$130,000
Less withholdings:
Income tax
withheld………………………………………………..$32,000
RPP contributions to a defined benefit
plan…………… 7,000
Donations to the United Way(registered
charity)….. 600
Employment insurance
premiums……………………………… 747 40,347

2. Net salary and taxable
benefits………………………………………………………………
…… .$89,653
b. Joan has the following other sources of income:-
Dividends from Y Ltd.,(CCPC)
………………………………………………………………………..
3,600
Dividends from Bell
Canada…………………………………………………………………
………… 5,000
Interest on Canada Savings
Bonds………………………………………………………………….
4,000
Canadian sourced interest
income…………………………………………………………………
2,000
Interest on loan to her
sister…………………………………………………………………
………. 875
Taxable capital gains(allowable capital losses):-
Tax Trivia Canada Ltd., common
shares………………………………………………………..29,000
Painting by a Canadian
artist…………………………………………………………………
…….. 2,500
Growth Potential, common

3. shares………………………………………………………………..(
1,100)
Loss on common shares of X Ltd., a small business
corporation……………………..(40,000)
Monthly pension of $4,500 from previous
employer…………………………………………54,000
Old Age Security Pension
received………………………………………………………………
……. 6,400
At the beginning of 2011, Joan had two rental properties. These
properties are expected to have the following operating cash
flows associated with them:-
Property #1
Property #2
Gross rents
received……………………………………………$
60,000……………………………………$36,000
EXPENSES:-
Advertising for
tenants………………………………….1,200………………………
……………………0……….
Property
taxes……………………………………………….5,400……………
…………………………..3,000…..
Utilities(Landlord provided)…………………………
6,200………………………………………..3,800…..

4. TOTAL
EXPENSES……………………………………………………12,800
………………………………………. 6,800…..
Property #1 was purchased in 1985 at a cost of $120,000 for
both land and building. The cost of the land was $50,000.
Property #2 was purchased in 1999 at a total cost of $210,000.
The cost of the land was $80,000.
The UCC balance in Class#3(5%) was $20,780 and Class
#1(4%) was $67,280 at January 1,2011.
During 2011, new bylaws on safety requirements of rental
properties were enacted. To upgrade the two properties would
require $80,000 for Property #1 and $90,000 for Property #2.
As a result, Joan decided to improve Property #1 and paid the
$80,000 for the upgrade. She decided to sell Property #2 and
did so for $248,000. The fair market value of the land was
appraised to be $120,000 and the building $128,00.
c. Joan’s disbursements included the following:
Interest on funds borrowed to purchase the investment
portfolio……………………...$ 1,700
RRSP contributions(fully deductible and based on last
year’s earned income)……… 9,000
d. Alan has the following income:
Income(for tax purposes) from part-time
employment…………………………………………$8,000
e. Dot , the 22 year old, attended the University of Toronto

5. for eight months during 2011 as a full-time student. She has
income for tax purposes of $4,500 and paid tuition fees of
$3,100.
f. Duncan, age 20, attends high school and Duggan, age 15,
attends a special school for the hearing impaired, since he has
no hearing. Child care expenses for Duggan were incurred of
$4,000. Joan paid $6,500 in expenses for rehabilitative
therapy fees to Duggan’s special school in 2011.
g. The following additional disbursements were made by Joan
in 2011:-
Donations to the University of
Toronto………………………………………..$1,300
London Life extended health care
premiums……………………………….. 875
Donations to federal political
parties……………………………………………. 1250
g. Joan has a net capital loss balance of $1,350 and a non-
capital loss of $5,500 at the end of 2011. Both are available
for carry over.
Joan and her brother have a manufacturing business,Y Ltd.,
inherited from her deceased parents. Joan’s brother,Matthew,
manages the business on a day-to-day basis. Joan and Matthew
have an agreement that any profits or losses from the business
are to be shared 40% to Joan and 60% to Matthew.
B. The following income statement and miscellaneous
financial information for the year ended December 31,2011,for

6. Y Inc. has been provided to you.
Y Incorporated
Condensed Income Statement
For the Year Ended December 31st,2011
Sales……………………………………………………………
……………………………………..$1,832 ,000
Cost of goods
sold……………………………………………………………………
…………. 1,439,000
Gross
Profit…………………………………………………………………
………………………$ 393,000
General and administrative
expenses………………………………$ 79,000
Depreciation and
amortization……………………………………………54,000
Interest…………………………………………………………
…………………. 20,000 ……….153,000
$240,000
Gain on disposal of fixed
assets……………………………………………………………..
85,000
Net Income before
taxes…………………………………………………………………

7. ………$325,000
Income taxes:-
Current……………………………………………………….$6
0,000
Deferred………………………………………………………
40,000 (100,000)
Net
Income…………………………………………………………………
………………………….$ 225,000
During your review of the working paper file and last year’s tax
return, you have made the following notes to yourself, because
you think that there might be tax implications associated with
these items.
i. Included in cost of sales is a reserve for a possible decline
in the market value of finished goods inventory of $50,000.
There is also an obsolescence reserve of $50,000 for some raw
materials that were purchased from a supplier and were later
found to be defective and worthless. So far, the supplier has
refused to allow X to return the materials for a refund.
ii. The gain on disposal of fixed assets consists of the
accounting gain on the sale of some land for $415,000 on May
30th, 2011, and the sale of a limited life license for $16,000 on
July 15th, 2011. X purchased the land on January 15th, 2011,
for $325,000. The land was purchased with the intention of it
being used to expand the manufacturing operation. After

8. purchasing the property, X received some bad publicity and
complaints regarding the expansion plans, as the land was
relatively close to a new subdivision. The management group at
X decided to sell the land and expand its operations at the
current location instead. Real estate commissions of $15,000
were paid in relation to the sale. X expanded its manufacturing
space by constructing a new building adjacent to its current
manufacturing plant. The construction of the new building
started March 1st, 2011 and was completed June 30th, 2011.
The CCA on new residential buildings is 6%.
The license was purchased in 2008 for $6,000. It was the only
asset left in the CCA class when it was disposed in
July,2011.(Class #14)
iii. General and administrative expenses include:
a. Donations of $63,000 to registered charities and
$1,000 to registered
political
parties…………………………………………………………………
…………$64,000
b. Accrued bonuses-fully paid June
28th,2012……………………………………..44,000
c. Accrual for a potential settlement to a former
employee for an injury
received on the job; X was notified of the pending
lawsuit
on December
18th,2011……………………………………………………………

9. …… 60,000
d. Utility connection costs for the new
building………………………………………..5,000
e. Insurance costs:-
$400 per month for the existing
property………………………………….4,800
$200 per month for the new building(Starting
March 1st,2011)…2,000
f. New software purchased November 1st,2011($3,000
for applications..Cl#12
and $10,000 for new systems-Cl#52-
100%)………………………………………….13,000
g. Application to the State of Michigan for an unlimited
life license to sell
in the
State……………………………………………………………………
………………… 6,000
4. Interest includes the following:-
a. Interest on 9%-$215,000 Mortgage for land
purchased. The mortgage
was repaid on May 30th,2011, on the sale of the
property
(see 2
above)…………………………………………………………………

10. ………………… 7,210
b. Interest on 5%-$340,000 mortgage for the
construction of the new
building taken out on April 15th, 2011. Interest
is payable
semi-annually starting October 15th, 2011. No
principal payments
were made in
2011……………………………………………………………………
………12,156
5. The undepreciated capital cost balances at December
31,2010, were as follows:-
Class
#3(5%)……………………………………………………………….$
550,000
Class
#8(20%)……………………………………………………………..
35,000
Class
#10.1(30%)…………………………………………………………
9,200
Class
#14……………………………………………………………………
… 5,000
Class#43(30%)…………………………………………………

11. ………….. 313,750
Class
#44(25%)…………………………………………………………….
15,000
6. The cumulative eligible capital balance at December
31,2010, was $10,000. The Company has claimed CECA in
prior years of $4,000, none of which has been recaptured for tax
purposes.
7. Purchases and sales made during 2011 were as follows:-
a. The cost of constructing the new building was
$340,000.
b. The Company purchased a new facsimile machine for
$1,200.
c. Some outdated desks used by the finance department
with a cost of $5,000 were sold
for proceeds of $3,500.
8. A 20-year patent to use a manufacturing process was
purchased on July 1,2011 for $120,000.
9. A company car for use by the president of the company
was purchased for $40,000 before HST. This car replaced the
only other existing company car, which was purchased in 2004
for $35,000. The old car was sold for $12,000.
10. Dies and moulds for manufacturing equipment were
purchased for $85,000 in January, 2011.
11. A customer list was sold for $40,000 to a former sales

12. agent of the company located in Vancouver.
C. In 2011 Joan had two properties. Details of the properties
are listed below. She sold the City Home in September 2011 for
$1,170,000.
Residence…………………………………………Date of
Purchase…………………….Selling
Price…………………Cost………
City
Home……………………………………………2002………………
………………………..$1,170,000………………$1,000,000
Cottage………………………………………………..2007…………
……………………………..$ 900,000………………... 400,000
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Required:-Complete the following Federal T1 forms for 2011:-
a. T1-1
b. T1-2
c. T1-3
d. T1-4
e. Federal Tax Schedules with the non-refundable credits