ADMS4561 Fall 2022 Midterm - For Posting

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York University *

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4561

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Accounting

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Feb 20, 2024

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1 YORK UNIVERSITY FALL 2022 MIDTERM EXAM AP/ADMS 4561 TAXATION OF PERSONAL INCOME IN CANADA Number of Questions: 4 Number of Pages: 10 (please ensure you have all pages before you start) Time allowed: 2.5 hours (80 marks) ______________________________________________________________ Instructions (Please read before you start the test): 1. Time allotments are provided for each question as a guide to ensure that you spend the appropriate amount of time on each question. You do not need to cite sections of the Income Tax Act. 2. The exam must be prepared in ink and “whiteout” not used for the exam to be considered for remarking. 3. Questions 1, 2 and 3 are to be answered in your solution booklet. ONLY ONE SOLUTION BOOKLET IS ALLOWED. Use both sides of the pages if necessary. If you feel you require more information in a fact situation, outline the exact nature of the information CLEARLY and specify how it would affect your decision, but do not contradict facts or assume the abnormal. 4. Question 4 is to be answered on this question paper. You must hand in the question paper inside the solution booklet. Do not take it apart. 5. You may use a non-programmable calculator and the Exam Information Sheet included with this exam. You cannot use a dictionary or any other aids. 6. This exam contains confidential and proprietary information and York University wishes to ensure that the said information is treated in strictest confidence. The undersigned shall not disclose, release or communicate in whole or in part any of the said information to any third party at any time. Any such disclosure, release or communication shall be considered a breach of this agreement and will be considered academic dishonesty resulting in a final course grade of F. By writing your name below, you acknowledge your understanding of this . _______________ _______________ _____________ __________ LAST NAME FIRST NAME STUDENT # SECTION # YOU MUST HAND IN THIS QUESTION PAPER - DO NOT TAKE IT APART
2 Question 1 (30 marks; suggested time 56 minutes) Melissa Kain is the sole shareholder of DanceCo., a known dance studio in Etobicoke offering dance lessons in a variety of styles, ballet, jazz, tap and acro to students of all ages. DanceCo.’s roster of teachers are accomplished and very well respected amongst the dance community. Melissa grew up dancing and inherited the studio from her mother, Kate Kain. DanceCo. owns 100% of MerchCo., a corporation that sells dance merchandise such as footwear, apparel and hair accessories. MerchCo. primarily sells its merchandise to students of DanceCo., however, it also sells merchandise wholesale to a number of dance studios in Ontario. The business is very profitable, so any cash surplus is usually invested by MerchCo. in an investment portfolio. Both DanceCo. and MerchCo. are Canadian controlled private corporations (“CCPC”) with a December 31 st fiscal year-end. The small business limit is always 100% allocated to DanceCo. For the 2022 year, MerchCo. earned the following types of income, all of which are correctly computed for tax purposes: Active business income carried on in Canada $ 650,000 Capital gain on the sale of investments $ 65,000 Eligible dividend income from Canadian public corporations $ 15,000 As at January 1, 2022, DanceCo. and MerchCo. have the following tax attribute balances and carry-forward amounts: DanceCo. MerchCo. Eligible refundable dividend tax on hand (“ERDTOH”) $5,000 $4,000 Non-eligible refundable dividend tax on hand (“NERDTOH”) $6,000 $6,000 General rate income pool (“GRIP”) Nil $360,000 Capital dividend account (“CDA”) Nil DanceCo. never earned any capital gains, however a capital loss of $20,000 was triggered in 2015. $12,000 Net capital loss carry- forward Nil $10,000 …Continued on next page
3 In 2021, MerchCo. paid a non-eligible dividend of $40,000, which triggered a dividend refund of $10,000 of which $6,000 came from the NERDTOH and the remaining from ERDTOH. A decision was made in 2021 to not designate the $40,000 dividend as an eligible dividend in order to recover the NERDTOH. In 2022, MerchCo. paid a capital dividend in the amount of $40,000 and an eligible dividend of $120,000 instead of reinvesting the cash in the investment portfolio. DanceCo. did not pay any dividends in 2021 or 2022. All of DanceCo.’s income for the 2022 year was active business income, with the exception of the dividend income received from MerchCo. REQUIRED: (a) Compute and provide detailed calculations of the following for MerchCo. for the year-ended/as at December 31, 2022: 1. Net income for tax purposes 2. Taxable income 3. Part I and Part IV taxes payable 4. Refundable Part I tax 5. ERDTOH 6. NERDTOH 7. GRIP (b) Compute and provide detailed calculations of the following for DanceCo. for the year-ended/as at December 31, 2022: 8. CDA 9. ERDTOH
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