Taxable Income

Assignment 2
Please show all calculations and provide notes on which items are included (or not included).
Due: April 13th at midnight.

[ITA: 5(1); 6(1)(a), (e), (k); 6(2); 6(4); 71.1); 12(1)(j), (k); 20(1)(n), (p); 38(a), (b); 39(9); 40(2)(g)(iii); 50(1); 60(o); 110(1)(d.1); 111(1)(a), (b); 117; 118(1)(a); 118(2); 118.1(3); 118(10); 118.5; 118.7; 121; 126(1)]

Carl Kay is the vice-president of KM Ltd., a Canadian-controlled private corporation located in Halifax, Nova Scotia. KM operates a real estate development business constructing and selling commercial buildings and residential apartments. Kay’s 20X3 financial transactions include the following:

• Kay received a salary of $95,000 from KM. From this amount, KM deducted CPP and EI of $3,609 and income tax of $30,000. The company provided him with a car that cost $40,000 and that has an undepreciated capital cost of $18,000. The operating costs of $3,000 were paid by KM. In 20X3, Kay drove the car 20,000 km, of which 8,000 km was for employment purposes. KM contributed $4,000 on Kay’s behalf to a deferred profit sharing plan. Although KM does not have a group life insurance plan, it paid Kay’s personal life insurance premium of $1,000 (coverage – $75,000).

• During the year, Kay sold 1,000 shares of KM Ltd. for $10 per share. He had acquired the shares three years earlier for $6 per share as part of a company stock-option plan. At the time of purchase, the shares were valued at $7 per share.

• In 20X2, Kay constructed a 10-suite apartment block. He sold the property in 20X3 for $800,000, which was $150,000 more than the original land and building cost. He received $80,000 of the proceeds in cash, with the balance due in five annual instalments beginning in 20X4. The property incurred a net rental loss of $7,000 (before amortization).

• Kay sold his summer cottage for $90,000 after it was announced that a waste disposal site would be developed in the area. He had purchased the cottage six years earlier for $120,000.

• In 20X0, Kay loaned $16,000 to Alloy Ltd., a Canadian-controlled private corporation. All of the company’s assets are used in an active business. The 20X2 interest of $1,400, which Kay included in income, has not been received. The company is in severe financial difficulty and may not survive beyond next year.

• Kay sold shares of a public corporation, purchased in 20X1 for $12,000, for $20,000.

• In November, Kay received a legal bill for $2,000 relating to a dispute over a tax reassessment. Kay paid $1,200 in December 20X3 and the balance in January 20X4.

• Kay received Eligible dividends of $2,000 and Non-eligible dividends of $1,000 from Canadian corporations and $1,800 from a foreign corporation. The foreign corporation remitted a 10% withholding tax to its government.

• Kay celebrated his 65th birthday in December 20X3. He supports his spouse, who is retired. She had interest income of $4,000 in 20X3. During the year, Kay made gifts of $3,000 to a local charity. He paid tuition fees of $900 to attend a three-month evening course at a university.

• Kay has used his entire capital gain deduction. At the end of 20X2, he had unused net capital losses of $12,000 and non-capital losses of $7,000.

Required:

Calculate Kay’s minimum 20X3 net income for tax purposes, taxable income, and federal income tax.