Question 1 (20 marks)
Yogi owns 1,000 common shares of Bear Ltd., a corporation that he founded in 1978. The paid-up capital & ACB
of the shares was $1,000.
Yogi grew tired of running the company and decided it was time to sell the family business. An arm’s length party
came forward and was willing to pay $575,000 for Bear Ltd.’s business assets (after which, the corporation would
be wound up), or $515,000 for 100 percent of Bear Ltd.’s common shares.
Yogi has utilized all of his capital gains deduction. If he accepts the offer to sell the assets, the accounts receivable
would be transferred by way of a section 22 Election. Yogi is in the top federal tax bracket and has a combined
marginal tax rate of 33% for ineligible dividends, 22% for eligible dividends and is taxed at 43% on other income.
For Bear Ltd., active business income eligible for the small business deduction is taxed at 15% and income in
excess of the small business limit is taxed at 26%. Other income is taxed at 47% including 6.67% additional
refundable tax
Additional information:
 The capital dividend account had an opening balance of $11,500.
 The RDTOH account had an opening balance of $6,000.
 Bear Ltd. has no Grip.
 The small business limit is $500,000 for the 2019 taxation year.
The balance sheet and pertinent tax data as at December 31, 2019, are outlined below.
Accounting
Book Value
Cash
Accounts receivable
Inventories
Buildings (cost $38,000)
Equipment (cost $55,000)
Land
Total assets
275,000
15,000
125,000
25,000
45,000
22,000
507,000
Account payable
Share capital
Retained earnings
46,000
1,000
460,000
Total liabilities and equity
507,000
Tax Value
275,000
15,000
125,000
21,000
41,000
22,000
499,000
FMV on Dec 31/19
275,000
11,000
150,000
75,000
37,000
29,000
577,000
REQUIRED:
a) Which offer should Yogi accept if he wants to maximize the net after tax funds received for Bear Ltd.? Show
all calculations! (20 marks)
Question 2 (10 marks)
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Wayne has a 25% partnership interest in the GMM Partnership. The calculation of business income from the
partnership for tax purposes before any allocation to the partners for the December 31, 2019, taxation year is as
follows:
Net income per financial statements
Add:
Partner salaries
Non-deductible meal and entertainment expenses
Donations to registered charities
Non-deductible life insurance premiums
$625,000
Net business income for tax purposes to be allocated
$915,000
100,000
10,000
150,000
30,000
The partnership also received the following income that was not included in the calculation of business income
above:
Capital dividends
Capital gains
Dividend income
40,000
80,000
100,000
The adjusted cost base (ACB) to Wayne of his partnership interest was $75,000 at the beginning of the year.
Wayne received 25% of partner salaries.
Required:
Compute the ACB of Wayne’s partnership interest in GMM at the end of the year. Show all calculations!
(10 marks)
Question 3 (20 marks)
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Jerry created an inter vivos trust for the benefit of his adult child, Elaine. The trustee is a family friend, and has
complete discretion to distribute the income to the beneficiary annually in any manner he chooses. He may even
choose to capitalize the income in whole or in part.
The trustee determined that 50% of the income of the trust including capital gains will be payable to Elaine each
year. The capital of the trust will be distributed to Elaine, who was 19 years of age at the time the trust was
created, reaches age 45. However, the trustee may at his discretion distribute the capital before that date, but not
before Elaine reaches age 39.
Jerry transferred the following property to the trust:
Land
Shares of Public Corporations
COST
FMV
200,000
1,000,000
300,000
1,500,000
In 2019, the trust had interest income of $100,000, capital gains of $50,000, and received taxable non-eligible
dividends of $30,000. The trust’s taxation year-end is December 31.
Additional information:
Elaine attended university full-time during 2019 for 6 months and incurred tuition fees of $9,500. Elaine had no
other sources of income.
REQUIRED:
a) Outline the tax consequences to Jerry regarding his transfer of shares of public corporations to the trust.
(2 marks)
b) Calculate the taxable income and the Federal taxes payable for Elaine and the Trust for the 2019 taxation
year assuming the Trust deducts the amounts paid or payable to Elaine. The personal tax credit for 2019 is
$12,069. The personal tax rate for Elaine is 15% on the first $47,630 and 20.5% on the remaining income.
Show all calculations. (13 marks)
c) If the land were subsequently sold by the trust for $500,000, what amount of taxable capital gain would result
from the disposition? Show all calculations. (2 marks)
a) Is there a tax consideration that should cause the trustee to consider liquidating the trust before Elaine reaches
45 years of age? Explain. (3 marks)
Question 4(10 marks)
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Donald died on November 15, 2019, at the age of 68. The following information relates to his earnings & assets:
1) Disney Shows Inc. employed Donald and his annual salary was $600,000, payable on the last day of
each month. The estate received Donald’s paycheque of $25,000 for the period November 1 to
November 15, 2019, on November 30, 2019.
2) Donald's estate also received an additional payment of $100,000 on November 30, 2019, representing
Donald's unused sick leave credits.
3) Donald’s estate also received $15,000 on December 15, 2019 in recognition of Donald’s dedication
and hard work while employed with Disney Shows Inc.
4) Donald owned a rental property that had the following tax attributes:
Original cost
Land
Building
$40,000
60,000
UCC
FMV
32,000
60,000
75,000
The property earned $6,000 of rental income, before CCA, for the period January 1, 2019 to
November 15, 2019.
According to Donald’s will, all his property was left to his spouse. The property bequeathed to Donald’s spouse
vested indefeasibly in her within 36 months of Donald's death.
REQUIRED:
a) What is Donald's minimum taxable income for the 2019 taxation year? Show all calculations and describe all
elections made to arrive at your conclusions. (8 marks)
b) What are the due dates for the Income Tax return(s) filed on Donald’s behalf? (2 marks)
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