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Case 1 - Michelle and William
It is March of 2016 and Michelle and William have come to discuss their tax situation with you. They predict that Michelle will not have to pay taxes for the 2015 year, which, they believe, will allow William to claim the non-refundable spousal tax credit. They have provided you with the following information, including the statements from their respective companies (see Exhibits I and II) which they have prepared themselves.
Facts
William and Michelle have been married for 10 years. They are both 39 years old, and they have 3 children under the age of 6. The children attended daycare 4 mornings a week during 2015 while their parents worked. The total cost of the daycare was $2,300 for the year. William and Michelle receive all children care benefits for which they qualify.
William
• William is the sole shareholder and manager of EXCELIndustries Ltd., a local furniture manufacturing plant. He earns a salary of $65,000 per year from EXCEL.
• William received the following benefits from EXCELin 2015:
• Private health and dental care: $400
• Life insurance: $500
• $2,000 worth of products at cost
• Registered pension plan (RPP) contributions: $3,000 (company contribution)
• (EXCELalso deducted $3,000 from William's salary, which was William's contribution to his RPP.)
• William contributed $2,000 to his RRSP for the 2015 taxation year (which is within his allowable limit).
Michelle
• Michelle began part-time employment at Design Inc. in 2015, and earned a gross salary of $15,000.
• Michelle received free use of the owner's cottage for two weeks in May, which is typically rented out for $500 per week.
• Michelle began a small home-based proprietorship - "Michelle's Design" in 2010, which generated $250 a month in profits in 2015. The business operates from a 200 square foot room in the family's 2000 square foot home, and is used exclusively for the business.
• Michelle did not file a tax return in 20102014 since her company lost money and she had no other income.
• Michelle contributed $4,000 to her TFSA in 2015.
Exhibit I
EXCELIndustries Ltd.
The 2014 and 2015 annual financial statements for EXCEL(prepared by William) are as follows:
|
|
2014
|
2015
|
|
Revenue from manufacturing and sales
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$2,000,000
|
$2,300,000
|
|
Dividend income
|
0
|
9,000
|
|
Interest income
|
2,000
|
6,000
|
|
Cost of goods sold
|
1,300,000
|
1,500,000
|
|
Gross profit
|
$ 702,000
|
$ 815,000
|
|
Salaries and wages
|
300,000
|
350,000
|
|
Other administrative costs
|
250,000
|
300,000
|
|
Net income before interest and amortization
|
$152,000
|
$165,000
|
|
Interest expense
|
10,000
|
10,000
|
|
Amortization
|
15,000
|
15,000
|
|
Net income after interest and amortization
|
$ 127,000
|
$ 140,000
|
Other information:
i. Capital cost allowance calculations totaled $21,000 in 2014 and $24,000 in 2015.
ii. In 2015, a bonus was announced for the company's key employee, equal to 1% of the 2015 annual gross ‘revenue from manufacturing and sales'. The bonus has been structured to be distributed in two equal payments during 2016 on January 31st and November 30th, and has therefore not been included in the 2015 ‘salaries and wages'.
iii. Cost of goods sold and ‘other administrative costs' adhere to the rules of the Income Tax Act.
iv. Interest expense is compliant with Section 20(1)(c) of the Income Tax Act.
v. All of EXCEL's ‘revenue from manufacturing and sales' is from active business.
vi. The dividends were received from a public corporation, of which EXCELowns less than 1% of the shares.
vii. EXCELdid not pay any dividends in 2015.
viii. The interest income was earned on investments.
Exhibit IIMichelle's Design Company
The 2014 and 2015 annual financial statements for the business (prepared by Michelle) are as follows:
2014 2015
Revenue $13,400 $22,050
Administrative expenses* 12,550 14,000
Owner's salary 2,400 3,600
Work space in the home (Note1) 1,450 1,450
Net income (loss) ($ 3,000) $ 3,000
Note 1: The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary to allow for the deduction of home-based business expenses.)
*All of the administrative expenses are compliant with the rules of the Income Tax Act.
Required:
a. William's tax situation.
i. Prepare the calculations(in accordance with the ABCD format) to determine the taxable income for William in 2015.
ii. Determine if William will be able to claim the non-refundable tax credit of ‘spouse amount' for the 2015 taxation year. Explain your answer.
b. Michelle's tax situation
i. Verify Michelle's taxable income, if any, in 2014 (use the ABCD format).
ii. Is there any benefit for Michelle to file her 2014 tax return? Explain your answer.
iii. Calculate Michelle's taxable income in 2015.
iv. Determine whether Michelle's business made a positive contribution to her income. Explain your answer.
Hint: Adjustments will need to be paid for business income, child care benefits and childcare expenses. If multi-step calculations are required to arrive at a specific figure to be entered in the ABCD table, show these detailed steps separately as note at the bottom of the table.