Question

Michelle Huang runs a rapidly expanding cosmetics store in Penticton as a sole-proprietorship. She has provided you with the following information:
Income statement To Dec 31, 2019

Sales $ 520,000

COGS $ (350,000)

Gross profit $ 170,000

Sales, general & admin $ (60,000)

Amortization $ (20,000)

loss on sale of building $ (15,000)

Net income before income tax $ 75,000

Provision for income taxes $ (13,000)

Net income after income taxes $ 62,000


Other information:


(a) The fixed assets information for the company is as follows:

a. UCC balances at January 1, 2019 were as follows: i. Class 1 (Single building) $200,000 ii. Class 8 (Multiple assets) $ 60,000 iii. Class 10 (Multiple assets) $ 80,000

b. During the year Michelle had the following transactions: i. On September 8th, 2019 a new building was purchased for $700,000. The cost of the related land was an additional $400,000. It cost $20,000 to pave part of the land for use as a parking lot, for accounting purposes the $20,000 was added to the cost of the land. Although she will be using most of the building for her business it qualifies as a rental property for CCA purposes. Her first tenant began renting at the end of December and she included the amount in sales.
This problem is very loosely based on a Wolters Kluwer textbook question
ii. On December 8th, 2019 the original building was sold for $220,000. The original cost of the building was $400,000 and the net book value was $235,000. iii. New furniture and fixtures were purchased for $25,000 on October 15th, 2019. This purchase replaced office furniture which was sold for its $4,000 net book value (original cost $10,000)

(b) Michelle is eligible for the personal and spousal tax credits. Her spouse’s NITP for the year is $3,000.

(c) She contributed $13,000 to her RRSP in June 2019. The entire amount is deductible.

(d) The $13,000 accounting provision for income taxes has not yet been paid.

(e) Michelle has a non-capital loss of $25,000 and a net capital loss of $5,000 available from her 2018 tax return.

Please do the following (and ignore provincial taxes and provincial credits):

1. Calculate Michelle’s UCC at Jan 1, 2020 after considering additions, disposals and CCA for 2019. 2. Calculate Michelle’s net income for tax purposes using the S3 ordering rules 3. Calculate taxable income 4. Calculate taxes payable before credits 5. Calculate taxes payable after credits 6. Provide Michelle’s filing and payment dates

Answer 1

(Notes as question contains multiple question answered for the first only)

Assumption and note :

1. No disposal of any UCCA of any class is subject to 1/2 rule

2.Expense of $20,000 made to pave part of the land for use as a parking lot is considered as revenue in nature or otherwise not eligible for CCA.

3. Land is not depreciable property hence CCA will not be calculated on it.

Michelle’s UCC balances at January 1, 2020 were as follows:

i. Class 1 (Single building) $316800

ii. Class 8 (Multiple assets) $ 54800

iii. Class 10 (Multiple assets) $ 56000

i. Class 1 (Single building)

balance as on 01-01-2019 : 2,00,000

Addition subject 1/2 rule ---7,00,000

Disposal subject to 1/2 rule --- nil

Net addition subject to 1/2 rule --- 7,00,000

Addition not subject to 1/2 rule --- -

disposal not subject to 1/2 rule --- (2,20,000)

lower of.....

1. Original cost - 4,00,000

2. Sales proceed - 2,20,000

balance before CCA 6,80,000

50 % of net asset subject to 1/2 rule (7,00,000*50%) (3,50,000)

balance before CCA 3,30,0000

CCA rate 4%

CCA (13,200)

UCCA as on 01-01-2020) 3,16,800

ii. Class 8 (Multiple assets)

Balance as on 01-01-2019 : 60,000

Addition subject 1/2 rule ---25,000

Disposal subject to 1/2 rule --- nil

Net addition subject to 1/2 rule --- 25,000

Addition not subject to 1/2 rule --- -

disposal not subject to 1/2 rule --- (4000)

lower of.....

1. Original cost - 10000

2. Sales proceed - 4,000

balance before CCA 81,000

50 % of net asset subject to 1/2 rule (25000*50%) (12,500)

balance before CCA 68,500

CCA rate    20%

CCA    (13,700)

UCCA as on 01-01-2020     54,800

iii. Class 10 (Multiple assets)​​​​​​​

Balance as on 01-01-2019 : 80,000

Addition subject 1/2 rule ---Nil

Disposal subject to 1/2 rule --- nil

Net addition subject to 1/2 rule -nil--

Addition not subject to 1/2 rule --- nil

disposal not subject to 1/2 rule --- nil

balance before CCA 80,000

CCA rate 30%

CCA    (24,000)

UCCA as on 01-01-2020 56,000