Calculate the personal income tax by using profile software.
James Doode decided to start his own personal business in 2019 after retiring from the Canadian Armed
Forces. Upon retirement in 2018, James elected to receive immediate monthly pension payments from
his employer's pension plan. James� business consists of a motorcycle shop known as James�
Specialty Bike Shop, selling and repairing motorcycles (industry code 441220). James proudly specializes
in customizing motorcycles such as exotic choppers to very exclusive clients.
James hired you to prepare his personal tax return for the year 2020, as well as for his common-law
partner, Susan Bond. James and Susan want to pay the very least tax possible. They will use any
election or choice legally available to them to achieve that objective. James' income is mainly from his
pension and personal business. Attached is an Appendix showing the relevant financial information pulled
from the accounting records for James' business. The amounts shown have not been adjusted for tax
purposes. James expects you to identify which items are allowed for tax purposes to comply with the tax
laws in Canada.
James and Susan have other income from their investments and rental property. Below is the information
needed to prepare their tax returns. Tax forms James and Susan received are included on the Case
Study link as separate documents.
James was born on November 1, 1970. He is divorced but currently lives with Susan Bond, his common-
law partner, at 123 Main Street, Anytown, Ontario, K0H 1H0. Both have been living together for several
years now. James� Social Insurance Number (SIN) is 527-000-145. Susan�s SIN is 130-692-544.
Susan was born on December 2, 1970 and has been blind since birth but still manages to work as a
bookkeeper. Susan�s main source of income is the salary she received working as a bookkeeper at
James� Specialty Bike Shop during the entire year – see T4 slip issued to Susan for 2018 and financial
information from James' business records in the Appendix. She also has income from joint investments
with James (see further below).
During 2020, James received bi-weekly pension payments from his former employer's pension plan for a
total pension income of $50,000 – see T4A slip issued to James for 2020 (box 16). Federal income tax of
$8,000 was withheld at source on that pension income – see box 22 of the T4A slip.
James has spousal support obligations from his previous marriage. He is required to pay $1,000 per
month to his former spouse (Mary Doode; SIN: 527- 000-129) in accordance with a court order. During
the year 2020,James was only able to pay 3 months worth of support. James and Susan have no children
but James' older brother Rick lives with them on a permanent basis since 2016 as he cannot live on his
own due to a permanent mental disability. Rick was born on June 10, 1966 and has $8,000 of social
assistance income for 2020 under the Ontario Disability Support Program. His SIN is 527-000-947. Forms
T2201 have already been filed with CRA in previous years for both Susan and Rick and their condition
has not changed since.
During 2020 James received $7,000 of eligible dividends on shares he owns of the Great Bank of
Canada, a Canadian public company – see the T5 slip James received from the bank (box 24) for 2020
No income tax was withheld on that dividend. James and Susan also earned interest income for a total of
$5,000 during 2020 from a joint investment account(co earned 50% – see the T5 slip James and Susan
received from the bank (box 13) as co-owners. No income tax was withheld on that income either. During
the year 2020, James sold $2,000 were paid by James in 2020 to the financial planner. Following the
advice obtained, James sold 2000shares of the Great Bank (a publicly traded company) that he had
acquired over the last 10 years with an average cost of$21.00 per share. The shares were sold on June
1, 2020at a price of $71.00 per share, on which a 1% commission was paid to a broker.
James and Susan acquired jointly 50% each a rental property during 2020 The property was acquired on
February 1, 2020 and immediately leased for a 1-year period that young family recently moved to the
area for $3,500 per month. Below is the information relating to that property for 2020, which is shared
equally between James and Susan (50% each):
Address: 121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each)
Cost of property purchased: $395,000 of which $55,000 was for the land. Cost of additions made to the
building in 2020: $90,000 addition of garage.This addition ,it was agreed that the rent for the home
increase to $4,000 per month starting November 1,2020.
Gross Rents $36,000
Property taxes $3,200
Interest on mortgage 6,300
Mortgage principal 1,525
Regular maintenance & repairs 3,000
During 2020, James and Susan sold a cottage they jointly owned (50% each) located at 123 Beach Lane,
AnyLake, ON. They had purchased the cottage back in 2010 at a cost of $60,000. They sold the cottage
on 2020 jun 15 for $260,000 cash. All transaction costs were borne by the purchaser. James and Susan
do not want to designate the cottage as their principal residence because they feel their current home has
a much greater accrued gain and want to preserve the principal residence tax exemption for that property
instead.james also sold a board he owned near the cottage. The boat has cost of $35,000 and was sold
for $15,000 on June 20,2020.
James contributed $22,000 into his own RRSP on September 1, 2020. James wants to deduct the
maximum amount this year. His unused RRSP Deduction Room at the end of 2019 was $10,500 and his
Earned Income for 2019 (business income) was $60,000. He had no Pension Adjustment for 2019. Susan
also contributed $6,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the
end of 2019was $1,500 and her Earned Income for 2019 was $20,000. She had no Pension Adjustment
While talking with James you discovered that as a former member of the Canadian armed forces he
remains on call for his high risk search and rescue mission .during the year 2020 James worked 275
hours volunteer on search and rescue mission for which he did not received any compensation.
Finally James paid following medical in 2020.
Jun1 2020 James chiropractic 2,000
Jun5 2020 Susan prescription 900
Dec 20 2020 susan prescription 900
Every 2 month Rick prescription 600 per 3600
Total medical expenses for 2020 $7400.00
Finally James paid federal income tax installments of 2500 quarterly to the CRA through out the year
2020 for the total of 10,000.
Accounting Information for 2020
James' Specialty Bike Shop
Motorcycle and Parts Sales $320,000
Purchase of inventory, parts and supplies (Note 1) $110,000
Golf club dues (Note 2) 5,000
Fines and penalties (Note 3) 7,500
Insurance (Note 4) 5,000
General office expenses 3,000
Home Office expenses (Note 5) 3,012
Salaries (Note 6) 58,000
Employer contributions to CPP and EI 3,960
Depreciation (Note 7) 45,650
Loss on sale of equipment (note 7) 8,250
Truck expenses (Note 8) 5,700
Total Expenses $255,072
Note 1: The opening inventory on January 1, 2020 was $15,000. The closing
inventory on December 31, 2020 was $35,000.
Note 2: James joined the local golf club to find new customers. The
membership cost was $5,000 for the year.
Note 3: In 2019 the business was sued for selling branded motorcycle parts
without proper authorization from the brand owner. In early 2020, James reached
an out-of-court settlement with the brand owner which provides that James will
pay a penalty of $7,500 for pre-2020 transactions that were completed without
proper authorization, in exchange for the brand owner dropping the charges
against him. The penalty was paid February 1, 2020. The agreement also
provided that James would enter into a new distributorship agreement with the
brand owner effective January 1, 2020 – see Note 7 below for further details
under "Intangible Assets".
Note 4: The insurance expense includes the cost of the truck insurance of
$2,000 – see Note 8 below.
Note 5: Starting January 1, 2020, James moved the bookkeeping office from the
shop to his home. A room representing 12% of the 1,000sq.m. home was set
aside for the exclusive use of Susan's bookkeeping functions. The home has a
cost of $500,000. Below are the costs for 2020 relating to the home office space:
Home Insurance $1,500
Interest on mortgage $8,500
Property taxes $5,200
Home telephone line $800
Maintenance and repairs $4,000
TOTAL $25,100 x 12% = $3,012
Note 6: There are 2 employees: one mechanic (George Dewlitle) and one
bookkeeper (Susan Bond). George was paid a gross salary of $33,000 for 2020
while Susan was paid a gross salary of $25,000 for 2020. The T4 slip for Susan
is included as a separate pdf document to this case study for your information,
confirming the CPP contributions ($1,128.75 – box 16), EI premiums ($395.00 –
box 18) and Federal Income tax ($5,000.00 – box 22) withheld at source on her
salary for 2020.
Note 7: The following is the information relating to the fixed assets of the
Building: The building is 3,000 sq.m. located at 124 Main Street, Anytown, ON. A
third (1/3) of the surface is used as a showroom for the customised motorcycles.
The rest of the building (2/3) is used as a shop for mechanic and customization
work. The building was constructed on March 1, 2019 at a cost of $195,000. The
UCC for tax purposes (class 1) at the beginning of 2020 was $189,150.
Truck: The truck is a Ford F150 extended cab pick-up that James uses for both
business and personal purposes – see Note 8 for operating costs. The truck was
purchased on June 1, 2019 at a cost of $55,000. For tax purposes, maximum
CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of
Other Tangible Assets: The following details relate to the other fixed assets used
in the business:
CCA UCC Balance
Description class Jan.1, 2020
Customizing tools and equipment class 53 $9,000
Computer-assisted design equipment class 12 $7,500
Computer class 50 $2,538
Customizing tools were acquired on March 1, 2019 at a total cost of $12,000.
For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance
on January 1, 2020 of $9,000. Additional new equipment was acquired on
December 1, 2020 at a cost $45,000.
Computer-assisted design (CAD) equipment was acquired on March 1, 2019 at a
cost of $15,000. For tax purposes, maximum CCA was deducted in 2019 leaving
a UCC balance on January 1, 2020 of $7,500. During 2020, James decided to
replace the CAD equipment because it was not performing well enough for the
demands of his growing business. A new more powerful CAD equipment was
purchased on March 1, 2020 at a cost of $55,000. The vendor of the new
equipment accepted to take the old equipment in exchange. A trade allowance of
$3,000 was received for the old equipment. The net book value for accounting
purposes was $11,250 resulting in a loss of $8,250 included in the total expenses
for accounting purposes for the year.
Computer hardware was acquired on March 15, 2019 at a total cost of $3,500.
For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance
on January 1, 2020 of $2,538. No further additions were made in 2020.
Intangible Assets: On January 15, 2020, James signed a new 25-year
distributorship agreement with the owner of a well-known motorcycle brand.
James paid $100,000 to obtain the 25-year license, which is effective January 1,
Note 8: James has a truck that he uses for both business and personal
purposes. Total distance driven for the year was 29,500km of which 90% were
for business (26,550km). Total truck expenses for 2020 paid by the business
were as follows (included in the financial information above):