Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
1
COMPREHENSIVE CASE SOLUTIONS
NOTE:
The cases related to these solutions are on Connect. They are not printed in the text.
Solution to COMPREHENSIVE CASE ONE
Comparison of two employment offers received by John Smith
1) Offer of employment from ABC Co.
a. Salary of $45,000 is included in income when received [ITA 5(1)]
b. Stock option: The option is “in the money” at the date of grant; exercise price =
$20; value at grant date = $25.
If ABC Co is not a Canadian-controlled private corporation (CCPC):
• there will be an employment income inclusion on the exercise date to
the extent the value at the exercise date exceeds $20 [ITA 7(1)]
• the stock option deduction will not be available [ITA 110(1)(d)]
• John will have a capital gain or loss on the disposition of the shares
based on the difference between the selling price and the value at the
date of exercise
If ABC Co is a CCPC:
• the employment income inclusion is deferred until the date of
disposition [ITA 7(1.1)]
• if John does not dispose of the ABC Co shares within two years after
acquiring them, John is entitled to the stock option deduction which is
equal to ½ of the stock option employment benefit [ITA 110(1)(d.1)]
• John will have a capital gain or loss on the disposition of the shares
based on the difference between the selling price and the value at the
date of exercise
c. Home purchase loan: John will have an imputed interest benefit included in his
employment income. The benefit is calculated by multiplying the loan principal
by the prescribed rate of interest. The benefit is reduced by the 1% interest paid
by John, provided the interest is paid by 30 days after the end of the calendar
year.
If the prescribed rate increases, the loan benefit will continue to be calculated
using the 2% prescribed rate in effect at the time the home purchase loan was
received (for a period of five years) [ITA 80.4].
d. Private health services plan: The annual premium for prescription drugs, dental,
and vision coverage does not result in a taxable benefit [ITA 6(1)(a)].

Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
2
e. Tax deductions: John will be able to claim the following deductions relating to
his car in computing his employment income.
CCA $25,000 (includes HST) x 15%
(CCA rate in the first year; 30%
thereafter)
$ 3,750 8(1)(j)
Interest Lesser of :
(i) Amount paid $3,000
(ii) $300 per 30-day period = $3,600
3,000 8(1)(j)
67.2
Gasoline 5,000 8(1)(h.1)
Insurance 2,000 8(1)(h.1)
$13,750
Employment usage 33% $4,583
2) Offer of employment from DEF Co.
a) Salary of $60,000 is included in income when received [ITA 5(1)].
b) The group term life insurance premiums are included in income [ITA 6(4)].
c) The fitness club membership results in a taxable benefit [ITA 6(1)(a)].
d) The phone is a capital asset and therefore CCA cannot be claimed for the purposes
of computing employment income.
e) Taxable benefit with respect to the car is calculated below for 2018 and 2019.
2018 2019
Monthly lease payments $700 $700
x 2/3 X 2/3
Number of months car available 1 12
Standby Charge $467 $5,600
Personal kilometers 1,200 14,400
Operating benefit at $0.26 per personal km. $312 $3,744
TOTAL $769 $9,344
The reduced standby charge is not available because the car is not used primarily
for employment purposes.
The employment offer that provides John with the greatest amount of disposable income after
tax should be accepted.
Discussion with Bob Johnson, CFO of GHI Inc.
Stock-based compensation is not deductible [ITA 7(3)(b)].
The bonuses declared by GHI Inc. in 2017 will not be deductible in 2017 because they were
not paid in 2017 or by June 29, 2018 (180 days [ITA 78(4)]. The bonuses will be deductible in
2018 or when paid.

Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
3
Solution to COMPREHENSIVE CASE TWO
Part 1
Ursula’s employment income for 2018 is $177,583. Below are the details.
Employment Income calculation Comments
Salary $180,000 5(1) - taxed when received
EI/CPP/ income tax - Not deductible; must get all 3 correct
RPP (employee
portion)
(8,000) 8(1)(m)
Gym membership - Not deductible 8(2)
Golf membership 2,500 6(1)(a); used for recreation so employer is not primary
beneficiary
Group term life
insurance
900 6(4)
Private health
insurance
- 6(1)(a)(i)
RPP (employer
portion)
- 6(1)(a)(i)
Commission 10,000 5(1) - taxed when received
Bonus - 5(1) - taxed when received
Champagne - T4130; non-cash gifts and awards under $500 are not
taxable
Gift card 200 T4130; cash and cash equivalent gifts/awards taxable
(even if under $500)
Samantha salary (6,000) 6(1)(i)
Rachel salary - 67; amount is not reasonable since no work is
performed
Car Lease payments (3,254) 8(1)(h.1) and 67.3; max is $800/month plus tax
($800*1.13*6) prorated for 60% employment usage
Standby charge 3,797 $70,000*1.13*2%*6*((1,667*6*40%)/(1,667*6))
Operating benefit 1,040 Lesser of [$0.26 x 1,667 x 40% x 6] and half of
standby charge
Spouse airfare 2,000 6(1)(a)
Employee operating
costs
(3,600) 8(1)(h); Prorated for 60% employment usage
Transportation (5,000) 8(1)(h)
Sales expenses - Ursula is better off claiming car and travel expenses
under 8(1)(h)/(h.1) rather than sales expenses (lease
costs, operating costs, transport, 50% of meals, and
advertising & promo) under 8(1)(f) because of the
commission income limitation ($10,000).
Tablet - Capital expenditure
Stock option benefit 3,000 7(1); calculated as ($18-$15) x 1,000
Employment income
$177,583

Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
4
Part 2
Deco’s business income for tax purposes for the 2018 taxation year is $6,696,580. The detailed
calculation is below.
Business
income
Comments
Accounting income $5,268,000 9(1)
Donation 10,000 18(1)(a)
Amortization 1,100,000 18(1)(b)
Stock based
compensation
400,000 7(3)
Commissions - will be paid within 180 days of year end
Bonuses - will be paid within 180 days of year end
Golf memberships 37,500 18(1)(l)
Interest paid to CRA 4,750 18(1)(t)
Financing fee 5,680 20(1)(e); add back 80% since 100% was
deducted for accounting
Remaining interest
expense
- 20(1)(c)
Site investigation - 20(1)(dd)
Client meals/
entertainment
51,750 67.1(1); add back 50% since 100% was
deducted for accounting
Holiday party - 67.1(2)(f)
Landscaping - 20(1)(aa)
Warranty accrual 1,000,000 18(1)(e)
Actual warranty claims (650,000)
Foreign advertising to
Canadians
200,000 19(1)
Audit fee - ordinary expense incurred to earn income
General corporate legal
fees
- ordinary expense incurred to earn income
Legal fees re: overdue
receivables
- ordinary expense incurred to earn income
Legal fees re: issuance
of shares
(20,000) 20(1)(e); was not deducted for accounting
purposes, but deductible for tax purposes over 5
years
Travel costs (meals) 400 67.1(1); add back 50% since 100% was
deducted for accounting
Allowance for doubtful
accounts
200,000 18(1)(e); not based on specific doubtful
accounts
CCA (983,500) See calculation below
Recapture 100,000 See calculation below
Terminal loss (150,000) See calculation below
Loss on disposal of
assets 122,000
Business income $6,696,580

Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
5
Capital cost allowance (CCA) is determined as follows:
Class 1 8 10 12 10.1 Total
Rate 6% 20% 30% 100% 30%
Opening UCC $5,000,000 $3,200,000 $400,000 - -
Additions 300,000 325,000 - - $30,000
Disposals (at lower of cost
and proceeds) - (25,000) (250,000
)
$(100,000
) -
Net additions (additions
less disposals)
300,000 300,000 - - 30,000
Half year CCA on net
additions
(9,000) (30,000) - - (4,500) $(43,500)
Full rate CCA on opening
UCC
(300,000) (640,000) - - - (940,000)
Recapture (terminal loss) - - (150,000
)
100,000 - (50,000)
Closing balance $4,991,000 $2,830,000 - - $25,500 $(1,033,500)

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Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
6
Solution to COMPREHENSIVE CASE THREE
Part 1
The tax implications to Losses Limited (LL) resulting from the acquisition of control by GI,
assuming that no elective provisions of the Income Tax Act (ITA) are used, are as follows:
a) The business loss for tax purposes for the period January 1, 2018 through June 30,
2018 is $840,000, calculated as follows:
Operating loss (given) $(240,000)
Manufacturing equipment deemed CCA (350,000)
Inventory write down (250,000)
Business loss $(840,000)
b) The tax values for each of the assets owned by LL on July 1, 2018 will be as follows:
ACB UCC Cost
Land $ 700,000 -
Building 1,200,000 $720,000
Manufacturing equip 1,500,000 500,000
Inventory - - $550,000
Securities 32,000 -
Patent 118,000 35,000
c) There are net capital losses of $37,000 available as at June 30, 2018. These losses
expire on July 1, 2018.
Opening balance $(28,000)
writedown of marketable securities (9,000)
net capital losses at June 30, 2018 $(37,000)
d) In order for the non-capital losses incurred up to June 30, 2018 to be used in the
December 31, 2018 and future taxation years, the following conditions must be met:
• The dietary supplement business must be carried on throughout the taxation year
• Non-capital losses are to be utilized for a profit or with a reasonable expectation of
profit
e) Assuming the conditions described in Part d) are met, the maximum amount of non-
capital losses available would be $1,960,000.
business loss calculated in (a) $ (840,000)
non-capital loss (2015) (90,000)
non-capital loss (2016) (430,000)
non-capital loss (2017) (600,000)
$(1,960,000)
The non-capital loss from property expires and, therefore, is not included.

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Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
7
Part 2
The following comments assume a paragraph 111(4)(e) election will be made to utilize expiring
losses.
a) The following assets are eligible for the election: land, building, and patents.
b) I recommend that the election be made on the land. Electing on either of the other two
assets would result in recapture which would result in using up non-capital losses that
are not expiring.
c) The elected proceeds for the land should be $934,000, as determined below.
Original ACB $700,000
Plus expiring losses:
Expiring property loss $80,000
Net capital losses 37,000
117,000 x 2 234,000
Elected proceeds $934,000
d) The benefit of making the election is that the adjusted cost base of the land is increased
to $934,000 which will reduce the capital gain on a future sale of the land.
Part 3
The amalgamation of the two companies will not meet the objective of utilizing losses since a
gym operation is not similar to a dietary supplement manufacturing business. Therefore, the
amalgamation of the two companies is not recommended.

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Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
8
Solution to COMPREHENSIVE CASE FOUR
The following comments relate to the incorporation of Emily’s business, effective November 1,
2018.
1. A section 85 election cannot be used for the following assets:
a. Cash
b. Land #2
c. Furniture & fixtures
Cash and land #2 are not eligible property as defined in subsection 85(1.1). Land #2 is
inventory since it is a vacant lot acquired to resell to a condo developer in the future.
A section 85 election cannot be made for the furniture/fixtures since the value is less
than the undepreciated capital cost {ITA 13(21.2)].
2. Although a section 85 election can be used for the transfer of the accounts receivable,
it should not be. A section 22 election is beneficial for both Emily and Opco.
The section 22 election permits Emily to deduct the $20,000 loss on the receivables as
a business loss. Without the section 22 election, the loss would be a capital loss and
would be denied as a superficial loss since Emily and Opco are affiliated persons.
Under section 22, Emily’s loss is included in Opco’s income and Opco is allowed to
claim an allowance for doubtful accounts on the receivables transferred.
Should some of the receivables transferred turn out not to be collectable in the future,
section 22 permits Opco to deduct the face value of uncollected receivables as a bad
debt instead of a capital loss.
3. a) The following table sets out the elected amount and the consideration that should be
taken for each of the assets on which a section 85 elections is made.
FMV Elected amount Non-share Share
Inventory $ 30,000 $ 25,000 $ 25,000 $ 5,000
Land #1 100,000 65,000 65,000 35,000
Building (class 1) 140,000 100,000 100,000 40,000
Small tools (class 12) 10,000 1 0 10,000
TOTAL $280,000 $190,001 $190,000 $90,000
b) Preferred shares of Opco worth $90,000 are received by Emily. The adjusted cost
base of these shares is $1. The paid-up capital of these shares is also $1.
c) The section 85 election is due by June 15, 2019. The election is due on the earliest
filing deadline of the tax returns of Emily and Opco. Emily is self-employed and therefore
has a June 15 filing deadline. Opco is a corporation and has a filing deadline of six
months after the December 31 year end.

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Buckwold and Kitunen, Canadian Income Taxation, 2018-2019 Ed.
Solutions Manual Comprehensive Cases
9
Solution to COMPREHENSIVE CASE FIVE
Part 1 - ABC’s Part I tax payable for its 2019 fiscal year is $96,053, as calculated below.Net income for tax purposes $857,000
Dividends from Canadian corporations (37,000)
Donations (45,000)
Net capital losses (35,000)
Non-capital losses (50,000)
Taxable income $690,000
Active business income
Net income for tax purposes 857,000
Less: dividends received (37,000)
Less: taxable capital gains (80,000)
Less: interest on 5-year bonds (30,000)
Active business income 710,000
Aggregate investment income
Taxable capital gains 80,000
Net capital losses (35,000)
Interest on 5-year bonds 30,000
75,000
Part I tax
Basic federal tax - 38% 262,200
Abatement - 10% (69,000)
193,200
Small business deduction - 19% x least of
(i) ABI 710,000
(ii) TI 690,000
(iii) Business limit (500k - 80k) 420,000 420,000 (79,800)
General tax reduction - 13% of
Taxable income 690,000
Less: Income subject to SBD (420,000)
Less: AII (75,000)
195,000 (25,350)
Refundable tax on investment income
10 2/3% times the least of:
AII 75,000
TI - income subject to SBD 270,000 75,000 8,003
PART I TAX 96,053

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