Calculate The Personal Income Tax By Using Profile Software.

James Doode decided to start his own personal business in 2019 after retiring from the Canadian Armed

Forces. Upon retirement in 2018, James elected to receive immediate monthly pension payments from

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his employer's pension plan. James� business consists of a motorcycle shop known as James�

Specialty Bike Shop, selling and repairing motorcycles (industry code 441220). James proudly specializes

in customizing motorcycles such as exotic choppers to very exclusive clients.

James hired you to prepare his personal tax return for the year 2020, as well as for his common-law

partner, Susan Bond. James and Susan want to pay the very least tax possible. They will use any

election or choice legally available to them to achieve that objective. James' income is mainly from his

pension and personal business. Attached is an Appendix showing the relevant financial information pulled

from the accounting records for James' business. The amounts shown have not been adjusted for tax

purposes. James expects you to identify which items are allowed for tax purposes to comply with the tax

laws in Canada.

James and Susan have other income from their investments and rental property. Below is the information

needed to prepare their tax returns. Tax forms James and Susan received are included on the Case

Study link as separate documents.

Detailed Information:

James was born on November 1, 1970. He is divorced but currently lives with Susan Bond, his common-

law partner, at 123 Main Street, Anytown, Ontario, K0H 1H0. Both have been living together for several

years now. James� Social Insurance Number (SIN) is 527-000-145. Susan�s SIN is 130-692-544.

Susan was born on December 2, 1970 and has been blind since birth but still manages to work as a

bookkeeper. Susan�s main source of income is the salary she received working as a bookkeeper at

James� Specialty Bike Shop during the entire year – see T4 slip issued to Susan for 2018 and financial

information from James' business records in the Appendix. She also has income from joint investments

with James (see further below).

During 2020, James received bi-weekly pension payments from his former employer's pension plan for a

total pension income of $50,000 – see T4A slip issued to James for 2020 (box 16). Federal income tax of

$8,000 was withheld at source on that pension income – see box 22 of the T4A slip.

James has spousal support obligations from his previous marriage. He is required to pay $1,000 per

month to his former spouse (Mary Doode; SIN: 527- 000-129) in accordance with a court order. During

the year 2020,James was only able to pay 3 months worth of support. James and Susan have no children

but James' older brother Rick lives with them on a permanent basis since 2016 as he cannot live on his

own due to a permanent mental disability. Rick was born on June 10, 1966 and has $8,000 of social

assistance income for 2020 under the Ontario Disability Support Program. His SIN is 527-000-947. Forms

T2201 have already been filed with CRA in previous years for both Susan and Rick and their condition

has not changed since.

During 2020 James received $7,000 of eligible dividends on shares he owns of the Great Bank of

Canada, a Canadian public company – see the T5 slip James received from the bank (box 24) for 2020

No income tax was withheld on that dividend. James and Susan also earned interest income for a total of

$5,000 during 2020 from a joint investment account(co earned 50% – see the T5 slip James and Susan

received from the bank (box 13) as co-owners. No income tax was withheld on that income either. During

the year 2020, James sold $2,000 were paid by James in 2020 to the financial planner. Following the

advice obtained, James sold 2000shares of the Great Bank (a publicly traded company) that he had

acquired over the last 10 years with an average cost of$21.00 per share. The shares were sold on June

1, 2020at a price of $71.00 per share, on which a 1% commission was paid to a broker.

Rental Activities

James and Susan acquired jointly 50% each a rental property during 2020 The property was acquired on

February 1, 2020 and immediately leased for a 1-year period that young family recently moved to the

area for $3,500 per month. Below is the information relating to that property for 2020, which is shared

equally between James and Susan (50% each):

Address: 121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each)

Cost of property purchased: $395,000 of which $55,000 was for the land. Cost of additions made to the

building in 2020: $90,000 addition of garage.This addition ,it was agreed that the rent for the home

increase to $4,000 per month starting November 1,2020.


Gross Rents $36,000


Property taxes $3,200

Insurance 1,100

Interest on mortgage 6,300

Mortgage principal 1,525

Regular maintenance & repairs 3,000

During 2020, James and Susan sold a cottage they jointly owned (50% each) located at 123 Beach Lane,

AnyLake, ON. They had purchased the cottage back in 2010 at a cost of $60,000. They sold the cottage

on  2020  jun 15 for $260,000 cash. All transaction costs were borne by the purchaser. James and Susan

do not want to designate the cottage as their principal residence because they feel their current home has

a much greater accrued gain and want to preserve the principal residence tax exemption for that property

instead.james also sold a board he owned near the cottage. The boat has cost of $35,000 and was sold

for $15,000 on June 20,2020.

James contributed $22,000 into his own RRSP on September 1, 2020. James wants to deduct the

maximum amount this year. His unused RRSP Deduction Room at the end of 2019 was $10,500 and his

Earned Income for 2019 (business income) was $60,000. He had no Pension Adjustment for 2019. Susan

also contributed $6,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the

end of 2019was $1,500 and her Earned Income for 2019 was $20,000. She had no Pension Adjustment

for 2019.

While talking with James you discovered that  as a former member of the Canadian armed forces he

remains on call for his high risk search and rescue mission .during the year 2020 James worked 275

hours volunteer on search and rescue mission for which he did not received any compensation.

Finally James paid following medical in 2020.

Jun1 2020 James chiropractic 2,000

Jun5 2020 Susan prescription 900

Dec 20 2020 susan prescription 900

Every 2 month Rick  prescription 600 per 3600

Total medical expenses for 2020 $7400.00

Finally James paid federal income tax installments of 2500 quarterly to the CRA through out the year

2020 for the total of 10,000.


Accounting Information for 2020

James' Specialty Bike Shop


Motorcycle and Parts Sales $320,000


Purchase of inventory, parts and supplies (Note 1) $110,000

Golf club dues (Note 2) 5,000

Fines and penalties (Note 3) 7,500

Insurance (Note 4) 5,000

General office expenses 3,000

Home Office expenses (Note 5) 3,012

Salaries (Note 6) 58,000

Employer contributions to CPP and EI 3,960

Depreciation (Note 7) 45,650

Loss on sale of equipment (note 7) 8,250

Truck expenses (Note 8) 5,700

Total Expenses $255,072

Note 1: The opening inventory on January 1, 2020 was $15,000. The closing

inventory on December 31, 2020 was $35,000.

Note 2: James joined the local golf club to find new customers. The

membership cost was $5,000 for the year.

Note 3: In 2019 the business was sued for selling branded motorcycle parts

without proper authorization from the brand owner. In early 2020, James reached

an out-of-court settlement with the brand owner which provides that James will

pay a penalty of $7,500 for pre-2020 transactions that were completed without

proper authorization, in exchange for the brand owner dropping the charges

against him. The penalty was paid February 1, 2020. The agreement also

provided that James would enter into a new distributorship agreement with the

brand owner effective January 1, 2020 – see Note 7 below for further details

under "Intangible Assets".

Note 4: The insurance expense includes the cost of the truck insurance of

$2,000 – see Note 8 below.

Note 5: Starting January 1, 2020, James moved the bookkeeping office from the

shop to his home. A room representing 12% of the 1,000sq.m. home was set

aside for the exclusive use of Susan's bookkeeping functions. The home has a

cost of $500,000. Below are the costs for 2020 relating to the home office space:

Home Insurance $1,500

Interest on mortgage $8,500

Property taxes $5,200

Home telephone line $800

Utilities $5,100

Maintenance and repairs $4,000

TOTAL $25,100 x 12% = $3,012

Note 6: There are 2 employees: one mechanic (George Dewlitle) and one

bookkeeper (Susan Bond). George was paid a gross salary of $33,000 for 2020

while Susan was paid a gross salary of $25,000 for 2020. The T4 slip for Susan

is included as a separate pdf document to this case study for your information,

confirming the CPP contributions ($1,128.75 – box 16), EI premiums ($395.00 –

box 18) and Federal Income tax ($5,000.00 – box 22) withheld at source on her

salary for 2020.

Note 7: The following is the information relating to the fixed assets of the


Building: The building is 3,000 sq.m. located at 124 Main Street, Anytown, ON. A

third (1/3) of the surface is used as a showroom for the customised motorcycles.

The rest of the building (2/3) is used as a shop for mechanic and customization

work. The building was constructed on March 1, 2019 at a cost of $195,000. The

UCC for tax purposes (class 1) at the beginning of 2020 was $189,150.

Truck: The truck is a Ford F150 extended cab pick-up that James uses for both

business and personal purposes – see Note 8 for operating costs. The truck was

purchased on June 1, 2019 at a cost of $55,000. For tax purposes, maximum

CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of


Other Tangible Assets: The following details relate to the other fixed assets used

in the business:

CCA UCC Balance

Description class Jan.1, 2020

Customizing tools and equipment class 53 $9,000

Computer-assisted design equipment class 12 $7,500

Computer class 50 $2,538

Class 53

Customizing tools were acquired on March 1, 2019 at a total cost of $12,000.

For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance

on January 1, 2020 of $9,000. Additional new equipment was acquired on

December 1, 2020 at a cost $45,000.

Class 12

Computer-assisted design (CAD) equipment was acquired on March 1, 2019 at a

cost of $15,000. For tax purposes, maximum CCA was deducted in 2019 leaving

a UCC balance on January 1, 2020 of $7,500. During 2020, James decided to

replace the CAD equipment because it was not performing well enough for the

demands of his growing business. A new more powerful CAD equipment was

purchased on March 1, 2020 at a cost of $55,000. The vendor of the new

equipment accepted to take the old equipment in exchange. A trade allowance of

$3,000 was received for the old equipment. The net book value for accounting

purposes was $11,250 resulting in a loss of $8,250 included in the total expenses

for accounting purposes for the year.

Class 50

Computer hardware was acquired on March 15, 2019 at a total cost of $3,500.

For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance

on January 1, 2020 of $2,538. No further additions were made in 2020.

Intangible Assets: On January 15, 2020, James signed a new 25-year

distributorship agreement with the owner of a well-known motorcycle brand.

James paid $100,000 to obtain the 25-year license, which is effective January 1,


Note 8: James has a truck that he uses for both business and personal

purposes. Total distance driven for the year was 29,500km of which 90% were

for business (26,550km). Total truck expenses for 2020 paid by the business

were as follows (included in the financial information above):

Insurance $2,000

Fuel $3,200

Maintenance $2,500

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