Charlotte Martin is a lawyer. For five years, until June 30, 2020, she had been employed by
Roadhouse Ltd., a national hotel chain. On July 1, 2020, she began to practice law as a sole
proprietor from an office in her home. Personal information for Charlotte and her husband is as
follows:
/
Personal Information /
Taxpayer / Spouse
Title Ms. Mr.
First Name Charlotte Seymour
Last Name Martin Martin
SIN 527-000-129 527-000-079
Date of birth (Y/M/D) 1977-12-08 1956-01-29
Marital status Married Married
Canadian citizen? Yes Yes
Provide information to Elections Canada? Yes Yes
Own foreign property of more than $100 000 Canadian? No No
/Taxpayer'sAddress
12 3 ABC Street Windsor, ON NOE OEO
Phone number (519) 111-1111
Spouse's address same as taxpayer? Yes
Charlotte has asked you to prepare her and her husband’s 2020 income tax return. At a recent
meeting, you gathered the information provided in Exhibits I, II and III.
Required:
a. Prepare a T4 slip for Charlotte using the given information.
b. Determine Charlotte’s and Seymour’s minimum net and taxable income for tax purposes
and calculate their federal and Ontario income tax for the 2020 taxation year using
CANTAX.
c. Why did the CRA deny the deduction of Charlotte’s 2018 convention expenses? Can she
obtain a deduction for the proposed 2021 convention? If so, why?
EXHIBIT I
Work at Roadhouse and Law Practice (2020)
- Charlotte’s salary to June 30th, was $70,000. From this, Roadhouse deducted EI and CPP
of $3,754 (includes CPP enhanced contributions of $166), income tax of $11,000, and
$400 for Charlotte’s portion of the private group medical insurance premium. An additional
premium of $400 was paid by Roadhouse. Also, Roadhouse paid the $800 premium for
Charlotte’s group term life insurance coverage of $100,000. - On June 30th, Charlotte returned the company car that Roadhouse had provided her. The
car had a cost of $32,000, and Roadhouse’s undepreciated balance was $18,000.
Roadhouse also had paid the operating costs for the car, which amounted to $2,100.
Charlotte had driven her car 16,000 kilometres, of which 12,000 kilometres were for
business use. - Charlotte travelled by air when working for Roadhouse. Charlotte used her personal credit
card and accumulated frequent-flyer points. She submitted monthly expense reports and
was reimbursed by Roadhouse for the travel costs. In March, she and her husband used
some of her accumulated frequent-flyer points to obtain free airline tickets for a vacation.
As a result, they each saved the $800 airfare. - In 2018, Charlotte borrowed $60,000 from Roadhouse. She has paid interest at 1% on the
loan. Charlotte used the borrowed funds for the down payment to purchase a rental
property. The CRA’s prescribed interest rate was 3% throughout 2020. Charlotte repaid
the loan on June 30th when her employment ended. - On June 30th, Charlotte sold 500 shares of Roadhouse Ltd. for $20 per share to the
company’s controlling shareholder. Roadhouse had issued the shares to Charlotte at $10
in 2017. At that time, the shares were appraised at $12. Roadhouse Ltd. is a Canadiancontrolled private corporation. At the time of the share sale, all of Roadhouse’s assets
were being used in an active business. - Charlotte began practising law from her home office on July 1st and registered for HST.
She purchased the client list and files of a retiring lawyer for $50,000. She also purchased
a computer for $4,000 and a legal library for $5,600. - On July 4, Charlotte purchased an automobile for $34,000, plus HST. She used the car
60% of the time for her law practice. - For the six months ended December 31, 2020, the financial statements of Charlotte’s law
practice showed a profit of $164,000. The gross revenue of $194,000 consisted of the
following: (use form T2125)
Fees billed and received $170,000
Fees billed but received at the year end 24,000
$194,000 - Operating expenses for the law practice included the following:
Liability insurance $ 2,200
Depreciation and amortization 9,100
Reserve for bad debts 1,200
Golf club dues—while attending the club, clients are
entertained approximately 30% of the time 1,600
Charitable donations 1,800
Promotion—client lunches 400
Secretarial services 12,000
Computer software—word processing and billing program 900 - Charlotte uses 12 square metres of her house exclusively as an office for her law practice.
Expenses for the entire 80-square-metre home for all of 2020 consist of the following:
Insurance $ 700
Mortgage interest 9,000
Property taxes 2,300
Utilities 3,000
$15,000
The financial statements do not include the home-office costs.
EXHIBIT II
Other Financial Information (2020) - Charlotte owns a residential rental property, which she had purchased in 2018. Details of
the rent and expenses in 2020 are as follows: (use form T776)
Rental $6,000
Repairs and maintenance $1,200
Property tax 900
Interest on first mortgage 3,300 (5,400)
$ 600
As of December 31, there were no unpaid rents from the tenant. - Charlotte contributed $11,000 to her RRSP and another $1,000 to a spousal RRSP during
the year. She has contributed the same amount to the spousal plan for the past four years.
On December 20, her spouse withdrew $4,000 from this spousal account. - The following additional receipts and disbursements occurred during the year:
Paid dental fees $2,900
Paid contributions to a registered federal political party 1,400
Paid interest on late payment of 2019 income tax 240
Received cash dividends (Non-eligible) on Roadhouse shares 1,000
Received proceeds from the sale of a silver tea set (original cost—$1,600) 1,100 - Charlotte received 100 shares of TXE Ltd., a public corporation. The shares were a stock
dividend (Eligible) on the 2,000 shares she had purchased at $4 per share five year ago.
At the time of the stock dividend, the shares were trading at $8. She sold the 100 stock
dividend shares in December, at $7. - In 2018, while employed at Roadhouse, Charlotte attended a national law convention. She
deducted her expenses of $2,300 on her 2018 tax return. Her employer willingly gave her
the time off from work to attend the convention, even though it was not directly related to
her work. In 2020, Charlotte received a reassessment notice from the CRA disallowing the
entire convention expense deduction. Now that Charlotte is practicing law, she will attend
the 2021 convention to upgrade her skills. - A review of Charlotte’s 2019 tax return showed the following:
Maximum RRSP deduction available in 2020 $10,500
Capital gain deductions claimed in past years 75,000
Net income from real estate rentals (after deducting a reserve for
uncollectible rents of $500) 860
Undepreciated capital cost—class 1 (rental property) 52,000
Reserve for unpaid rents
EXHIBIT III:
Seymour’s tax information.
T4 :
Issuer – More-Corp
Employment Income 14 152,866.08
Employee’s CPP Contributions 16 2 ,479.95
Employee’s El Premiums 18 930.60
RPP Contributions 2 0 Nil
Income Tax Deducted 22 48, 665.11
Charitable Donations 46 1 000.00
/T2202A - Seymour /Box/
Amount
Tuition fees A 2,200
Number of months in school - part-time B 3
Number of months in school - full-time c 0
//T5 Box # Slip 1 /
Slip 2
Issuer Power
Corp.
TD Bank
Receipt Seymore Joint 50% each
Actual amount of eligible
dividends
24 950.00
Taxable amount of eligible
dividends
25 1 311.00
Interest from Canadian sources 13 236.11
500
/T3 /Box
Amount
Issuer - TD Asset Management
Recipient – Seymore Martin
Foreign country - United States
Foreign non-business income (Canadian dollars) 25 1 553.10
Foreign income tax paid - investment (Canadian
dollars)
34 37.00
Other income - interest 26 214.50
Actual amount of eligible dividends 49 346.00
Taxable amount of eligible dividends 50 477.48
Real Estate Rental – Seymour (use form T776)
/ Amount
Address - 555 KKK StreetBele River, ON NOP OPO
Gross rents 12 000.00
Property taxes 3 610.00
Insurance 650.00
Interest on mortgage 4 207.25
Payment on principal 1 511.92
Wiring and furnace repairs 2 282.71
Snow removal and landscaping annual contract 1,070.00
Building purchased Mav 1 2002 for $1 50 000 - UCC beginning
of year
150,000.00
Appliances purchased June 6 2013 for $1 ,700 - UCC beginning
of year
1 350.00