It is now late May 2018 and you, CPA, have just finished meetingwith your partner, Ms. Wong. Ms. Wong wants your help with someclients of hers.
One client, Garden Supplies Co. (GSC) has had a new shareholderbuy shares. Ms. Wong wants you to tell her if GSC is a resident ofCanada for tax purposes in 2018 and describe the personal taxconsequences that Mrs. Gardiner will have from her 2018 share sale.You can ignore the acquisition of control rules. Also, given thelist of GSC’s 2018 expenditures in Exhibit I, calculate the total2018 expenses that are deductible in 2018 when computing net incomefor tax purposes. GSC is very profitable and wants to claim themaximum amount of deductions possible. You do not need to commenton non-deductible items.
Note: Additional information about GSC is provided in ExhibitI.
Another client, Mr. Rich, who is a non-resident of Canada, hasjust purchased a newly built townhouse in Canada for $1,500,000that he plans to rent out. The home was purchased on May 1, 2018and will be rented out starting on July 1, 2018. What Canadianincome tax obligations will Mr. Rich face in 2018? If you have anyrecommendations that will reduce Mr. Rich’s Canadian income taxobligations (in 2018 or in future years) with respect to his rentalproperty, then you should provide them. Additional informationabout Mr. Rich is provided in Exhibit II.
Ms. Wong wants you to draft a memo to her answering herquestions. She says you can ignore provincial income taxes, ignoreforeign taxes and ignore any income tax treaties. Explain youranswers, show all your detailed calculations and give IncomeTax Act (ITA) section, subsection and paragraph (whereapplicable) references and Income Tax Regulations sectionand subsection references in order to support your answers. Whengiving references you must be specific. Do not just list multiplereferences!
Exhibit I
Garden Supplies Co.
Garden Supplies Co (GSC) is a private company that wasincorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for1,000 common shares in return for $100 (in aggregate). GSC does nothave any other shares outstanding
GSC has a December 31st year-end and its board ofdirectors meetings are typically held in the United States(U.S.)
GSC operates gardening supply stores in Canada and it startedwith one store in Toronto in 1963. Now it has 10 stores throughoutCanada
In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M inaggregate (which was their FMV at the time)
In late January 2018, Mrs. Gardiner sold 600 of her GSC commonshares for $3,000 per share to Marcus Jones, an arm’s length person(she still owns 400 common shares of GSC)
In January 2018, Mrs. Gardiner paid $3,500 to a charteredbusiness valuator to value her GSC shares and paid $2,500 in legalfees related to her sale of GSC shares
The FMV of GSC was determined to be $3M
Mrs. Gardiner incurred $300 of safety deposit box rental fees in2018 and she keeps her GSC share certificates in her safety depositbox
Assume GSC is not a qualified small business corporation
Marcus Jones is a non-resident of Canada
In 2018 GSC incurred the following expenditures:
Income taxes paid of $124,500
Salary and wages expense paid of $390,000
In addition, GSC accrued a bonus payable to Mrs. Gardiner of$70,000 for work performed in 2018. This bonus will not be paiduntil May 31, 2019
Interest expense paid of $5,000 on a bank loan used to financebusiness operations
Dividends paid to shareholders of $55,000
Warranty expense accrued of $25,000 (based on estimated warrantycosts). The actual cost in 2018 of servicing warranties was$20,000
Purchased new shelving units to display merchandise on April 1,2018 for $200,000
Purchased new computer software for $3,000 on January 1,2018
Purchased goodwill for $40,000 as part of a business acquisitionon January 1, 2018
Purchased a patent, with an 18-year legal life remaining onDecember 31, 2018 for $10,000
Accrued office supply expenses of $12,000, for suppliespurchased (and used) in late 2018. Payment of this account payablewas made in early 2019
Paid $7,000 for Toronto Blue Jays (baseball) tickets used totake large customers out to games
Incurred $4,000 of legal fees related to obtaining bankfinancing, and
Incurred lobbying expenses of $1,300 for matters related to thebusiness
Assume all expenditures are reasonable unless otherwiseindicated
Assume the prescribed interest rate is 1% at all times
Exhibit II
Mr. Rich
Mr. Rich’s rental income is property income; i.e., he is notrunning a business
Mr. Rich wants to minimize his Canadian rental income and hedoes not have any other Canadian income
Mr. Rich has prepared the following (assume that all theexpenses below are paid in 2018 and are reasonable):
Mr. Rich’s Canadian Rental Income
For the year-ended December 31, 2018
Gross rental revenue ($4,000 permonth) $24,000
Mortgage interest ($2,200 permonth) $13,200
Property taxes ($610 permonth) $3,660
Maintenance and repairs ($500 permonth) $3,000
Insurance ($200 permonth) $1,200
Total expenses $21,060
Netincome $2,940
