AFM 361 Spring 2008
Final Solution
Question 1: 55 marks,  = 1.2 mark, max 53 
(A) Calculation of taxable income (max 21 )
105,000 
Net income
Add:
19,500 
10,000 
Tax expense
Charitable contribution
Depreciation
Golf membership
Taxes on U.S. dividends
Less: CCA on furniture and fixture 60,000  x 20% 
CCA on leasehold improvements 144,000  ÷ (10  + 5 )
CECA (48,500  + ¾  x 40,000 ) x 7%  no half year rule 
Division B income 
Division C Deductions:
Charitable contributions lesser of (a) contribution,
10,000
(b) 75% of 229,905
172,429
Canadian dividends
Net capital loss not deducted 
120,000 
2,000 
500 
( 12,000)
( 9,600)
( 5,495)
229,905
(
10,000)
( 2,000) 
217,905
(B) Calculation of tax payable (max 32 )
Tax
217,905 x 38% 
Abatement (Schedule 1)
Tax reduction 8.5%  x 217,905 
Non-business foreign tax credit (Schedule 2)
Business foreign tax credit (Schedule 3)
82,804
( 17,705)
( 18,522)
( 500)
( 7,000)
39,077
Schedule 1 (abatement)
Revenues
Salaries
Canada
600 + 300  75% 
120+ 30 + 112.5 87.5% 
U.S.
300 
37.5 
1,200
300.0
Abatement: 81.25%  x 10%  x 217,905  = 17,705
Schedule 2 (Non business FTC)
Avg.
81.25% 
500 
Lesser of (a) tax paid
(b) for. non-bus. inc.
x tax otherwise payable1
Div. B inc – dividend dedn – NCL
3,000 
229,905  – 2,000 
x (82,804 – 17705 – 18522  )=
613
Schedule 3 (Business FTC)
Least of (a) tax paid
7,000 
(b) for. bus. inc.
x tax2
Div. B inc – dividend dedn – NCL
35,000 
x (82,804– 18522  )=
229,905 – 2,000 
9,872
(c) tax (*) w/o abatement – non-bus. FTC = 82,804– 18522  – 500 63,782
Question 2: 55 marks,  = 1.2 mark, max 59 
(A) Calculation of losses (max 20 )
Non-capital
42,000 
Prior year – non-capital
– net capital
Current year – a.c.l.
Property: dividend
Div C ded’n
interest
Net capital
Expiring
11,000 
11,000
10,000 
10,000
( 1,500) 
1,500 
2,500 
2,500 
2,500
Business: operations
inventory
CCA on cl 43
27,000 
500 
3,000 
30,500
73,500
23,000
23,500
Elect on land for t.c.g. of 23,500; deemed PoD of 100,000 + 2 * 23,500 = 149,000
Net capital losses used up, therefore $0
Non-capital losses: Beginning balance
New: business loss
property loss
Dividends deduction
Net capital loss claimed
3(c) income 25,500  – 10,000 
30,500 
1,000 
1,500 
13,000 
( 15,500)
42,000 
30,500
72,500
Verify that loss can be used:
continue business with reasonable expectation of profit
(B) Asset values (max 8 )
Assets after acquisition
Inventory
Equipment – CC
UCC
Building – CC
UCC
Land – ACB 100,000  + 2 * 23,500
1,500 
30,000 
15,000 
250,000 
235,200 
149,000
(C) Calculation of taxable income (max 31 )
174,000 
31,000 
120,000 
2,000 
15,000 
( 34,200)
( 9,600)
( 9,600)
( 4,500)
( 5,110)
Net income
Add: Tax expense
Depreciation
Golf membership
Loss on sale
Less: Terminal loss on the building (Sch. 1)
CCA on furniture and fixture (60,000 – 12,000)  x 20% 
CCA on leasehold improvements 144,000  ÷ (10  + 5 )
CCA on equipment 15,000  x 30% 
CECA (78,500 – 5,495)  x 7%
Division B income 
Division C Deductions:
Non capital losses (assume businesses are similar) 
Schedule 1 (subsection 13(21.1)
PoD on building:
Lesser of
(i) FMV land and building
minus lesser of
(A) ACB land
(B) FMV land
(ii) greater of
(A) FMV building
(B) lesser of CC
UCC
278,990
( 72,500) 
196,490
350,000 
149,000 
150,000 
250,000 
235,200 
149,000
201,000
200,000 
235,200
Therefore, PoD on building is 201,000, 
leading to a terminal loss of 235,200 – 201,000 = 34,200 
Therefore, PoD on land is 350,000 – 201,000 = 149,000 
leading to an allowable capital loss of (149,000  – 149,000 ) / 2 = 0.
235,200
Question 3: 40 marks,  = 1.2 mark, max 38 
Division B income before the following
SR&ED: last year’s ITC
new computer
used computer
new furniture
salaries
operating costs
CCA: building 1.5M  x 6%  x ½ 
CECA: 209,250  x 7% 
inclusion *
Non-capital loss carry-forward
Taxable income
Tax @ 38%
Abatement @10%
Tax reduction @8.5% (technically 7% in 2007)
ITC
max: 20% x (300 + 100 + 200 + 30)  = 126,000
limited to tax payable 
max: 20% x (50 + 20 + 450 + 100) 
carryforward: 126,000 – 111,553 
2007
1,200,000 
(
(
(
(
(
(
(
(
2008
1,500,000 
111,553 
300,000) ( 50,000)
50,000)
100,000) ( 20,000)
200,000) ( 450,000)
30,000) ( 100,000)
45,000) ( 87,300)
14,648)
125,148
10,000)
450,352
1,029,401
171,134 
( 45,035)
( 38,280)
111,553
( 111,553)
0
* Lesser of (a) negative amount: opening balance
209,250 
2007 CECA
( 14,648)
2008 disposal ¾  x 500,000  ( 375,000)
180,398
(b) total CECA
350,000  + 14,648  + 15,750  380,398
less previous recaptured
( 350,000)
30,398
Plus: 2/3  x (180,398  – 30,398 )
391,172 
( 102,940)
( 87,499)
200,733
( 124,000)
( 14,447)
62,286
30,398
100,000
130,398