1. Your neighbor, Mrs. White, has heard that you are studying personal tax. She has come to you with her financial information for 20XX. In 20XX, Mrs. White had employment income of $40,000, property income of $3,000, a business loss of $22,000, an allowable business investment loss of $5,000, income from an RRSP withdrawal of $2,000, and a capital loss of $40,000 on the sale of shares in a public corporation. Mrs. White hopes that her losses will result in a net income for tax purposes of $0. Required: A) Determine Mrs. White’s net income for tax purposes in accordance with the aggregating formula. B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a tax liability this year, assuming that her taxable income will be equal to her net income for tax purposes. C) How would your answer change in Part A if Mrs. White realized a taxable capital gain of $30,000 in 20XX?
2. Kate Bell was employed by The Tea Shop (a Canadian controlled private corporation) from January to
December of 20X4. She earned a gross salary of $72,000.
She had the following deductions from her pay during the year:
The following amounts were paid by The Tea Shop in 20X4 on Kate’s behalf:
On January 15, 20X2, Kate was given an option to purchase 500 shares of The Tea Shop for $5.00 per share.
The market value of the shares on that date was $5.50. Kate exercised her option on June 1, 20X3 when the
shares were valued at $7.00. She then sold the shares on March 17, 20X4 when the market value was $8.00 per
Kate pays $50 a month for her cell phone which she uses to keep in touch with friends and family. She also
pays $80 a month to dry-clean her suits, and she purchases a new suit for $200 every three months. Kate
purchased $300 worth of merchandise (at cost) from her employer during the year. The retail value of the
merchandise was $500.
Kate purchased a $1,000 RRSP during the year.
A) Calculate Kate’s minimum net income for tax purposes in 20X4 using the aggregating formula. Identify
items that have been omitted in your calculations.
B) Will Kate be able to deduct the stock option deduction to arrive at her taxable income? Why or why not?
3. An individual has the option to receive a $1000 annual bonus and invest the after-tax amount for 25 years, or receive $1000 per annum in a registered pension plan for the next 25 years. Assuming a constant rate of return of 8% and a tax rate of 40%, what will be the total after-tax difference between the two plans? Show all of your work.
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