Deck 7: Income From Property

Question 1

Thato Smit has provided you with the following information for 2020:
That owns rental properties originally valued at $275,000.(Property 1: land $70,000, building $55,000) (Property 2: land $90,000, building $60,000)
The buildings are Class 1 (4%) properties.Net rental income before CCA in 2020 was $11,000.
$\bullet$ The UCC on building 1 at the beginning of 2020 was $50,000.
$\bullet$ The UCC on building 2 at the beginning of 2020 was $40,000.
$\bullet$ Property 2 was sold in 2020 for $250,000 (land $200,000, building $50,000)
Thato owns shares in ABC Inc.(a CCPC) valued at $50,000, and received $5,000 in non-eligible dividends on the shares in 2020.
Thato purchased a 5-year GIC two years ago for $30,000, and the interest earned in 2020 was $1,000.
Thato worked full-time as a baker in 2020, earning a gross salary of $45,000.
Thato is in a 45% tax bracket.
Required:
Calculate Thato's net income for tax purposes in 2020 in accordance with Section 3 of the Income Tax Act (exclusive of the enhanced CPP).Thato will take the maximum CCA allowed this year on the rental properties.

Answer 1

$\begin{array}{|l|r|l|l|}\hline \text { ITA 3(a): } & & \\\hline \text { Employment income } & &&\$45,000.00 \\\hline \text { Property income: } & & \\\hline \text { Rental income } & \$ 11,000.00 & \\\hline \text { CCA-Bldg. } 1(\$ 50,000 \times .04) & -\$ 2,000.00 & \\\hline \text { Recapture - Bldg. 2 (UCC of } \$ 40,000 \text { less } & \$ 10,000.00 \\\text { the lower of cost or proceeds, } \$ 50,000 \text { ) }\\\hline \text { Total rental income } & \$ 19,000.00 & \$ 19,000.00 \\\hline \text { Dividend income }(5,000 \times 1.15) & & \$ 5,750.00 \\\hline \text { Interest income } & & \$ 1,000.00 \\\hline \text { Total property income } & & \$ 25,750.00 &\$25,750.00\\\hline \text { ITA 3(b): } & & \\\hline \text { Capital gain: } & & \\\hline \text { Land: Proceeds } & \$ 200,000.00 & \\\hline \text { ACB } & \$ 90,000.00 & \\\hline \text { Capital Gain } & \$ 110,000.00 \\\hline \text { Taxable Capital Gain } & \$ 55,000.00 & & \$ 55,000.00 \\\hline \text { Net Income for Tax Purposes } & & & \$ 125,750.00 \\\hline \text { (Enhanced CPP is excluded from exam } & & & \\\hline \text { questions until Chapter 9.) } & & &\\\hline\end{array}$

Question 2

Midori Sato owns a rental property which had a UCC of $85,000 at the beginning of 2019.After all allowable expenses other than CCA, Midori's total rental income was $1,000 in 2019 and $10,000 in 2020.Midori always deducts the maximum CCA allowed.What is the UCC for the rental property at the end of 2020? (The property is a Class 1 building amortized at 4%.)

A)$78,336
B)$80,640
C)$84,000
D)$85,000

Answer 2

B

Question 3

Varuna Doshi had rental income before CCA of $3,000 in 2019.The UCC at the beginning of 2019 was $50,000 (Class 1 - 4%).In 2020 the rental income before CCA was $1,000.Varuna chose to expense the allowable CCA on the rental property both years.Which of the following statements is true?

A)Varuna has a net rental loss in 2020 of $920.
B)Varuna has net rental income in 2020 of $1,000.
C)Varuna has net rental income in 2020 of $0.
D)Varuna has net rental income in 2019 of $3,000.

Answer 3

C

Question 4

Royalty income requiring considerable effort to earn the income is typically treated as

A)Employment income
B)Business income
C)Property income
D)Other income

Question 5

In 2020, Mango Inc.earned $150,000 of pre-tax income.The tax rate for the company is 13%.The sole shareholder received all of the net earnings in the form of a non-eligible dividend during the year.The shareholder has a personal tax rate of 50%.Supposing the shareholder is entitled to a total (federal + provincial) dividend tax credit equal to $20,000, what is the net personal tax liability on the dividend (ignoring all other tax implications)? (Round all numbers to zero decimal places.)

A)$19,500
B)$20,000
C)$55,038
D)$75,038

Question 6

Which of the following is true concerning dividends?

A)The system to eliminate double taxation assumes that the corporate tax rate is 27.5% when eligible dividends are grossed-up to include 138% of the dividend.
B)Dividends received from a CCPC's business income that is not subject to the small business deduction are typically grossed-up to include 115% of the dividend.
C)Dividends received from a CCPC's business income that is subject to the small business deduction are typically grossed-up to include 138% of the dividend.
D)Eligible dividends require a 115% gross-up.

Question 7

A public corporation earns $500,000 in pre-tax profits and pays out all of its after-tax earnings in dividends.The corporate tax rate is 27.5% and the sole shareholder is in a 50% tax bracket.The dividend gross-up rate is 1.38 and the total dividend tax credit (federal and provincial) is 27.5%.
Required:

A) Calculate the tax liability for 1) the corporation and 2) the shareholder.
B) Briefly explain how this tax structure illustrates the theory of integration.

Question 8

Which of the following statements concerning the tax treatment of interest income is true?

A)Individuals must accrue interest on a daily basis.
B)The anniversary day accrual method of recognizing interest income requires that interest income received by a corporation be recognized for tax purposes for every twelve-month period from the date the investment is made.
C)Foreign interest income is exempt from taxes in Canada.
D)The anniversary day accrual method of recognizing interest income requires that interest income received by an individual be recognized for tax purposes for every twelve-month period from the date the investment is made.

Question 9

Gurpreet Sandhu received a $300,000 inheritance in 2020.With the proceeds, Gurpreet purchased the following investments:
1) Two rental properties: Property A has a value of $85,000, of which $40,000 is allocated to the building.Property B has a value of $110,000, of which $60,000 is allocated to the building.The properties earned a total of $9,750 in rental income before CCA.Both buildings are Class 1 - 4% assets, and the maximum allowable CCA will be claimed each year.The capital growth of the two properties combined is expected to be 5%.
2) A bond: Valued at $50,000 with 10% annual interest paid at maturity
3) Portfolio shares: Worth $10,000 - Eligible dividends in the amount of $700 were paid to Gurpreet before the end of the year.The capital growth of the shares is expected to be 3%.
The remainder of the money was applied to the mortgage.
Gurpreet is in a personal marginal tax bracket of 45% for ordinary income, 30% for eligible dividends, and 23% for capital gains.
Required:

A) Calculate Gurpreet's minimum property income for 2020.
B) Calculate the annual pre-tax return (as a percentage) for each of the three investments.
C) Calculate the after-tax yield (as a percentage) for each of the three investments based on the information provided.
D) Briefly explain the tax benefit that Gurpreet could have realized if the inheritance had been used to pay off the mortgage, and the investments were then purchased using a bank loan.

Question 10

As a result of several anti-avoidance provisions of the Income Tax Act, property income shifted to a spouse or child in a lower tax bracket will typically

A)be permitted in order to utilize the lower tax rate.
B)be disallowed unless the child is under the age of 18.
C)be attributed back to the transferor of the property or subject to the top personal tax rate.
D)be attributed back to the transferor of the property or subject to the lowest personal tax rate.