Solution to AP Tax Software Eleven – 2
AP 11-2 pages 673-677
Tax Software Assignment Problems
Note The 2021-22 edition, at pages 673 to 677, contains information necessary to complete the 2020 individual income tax return for assignment problem 11-2. The following information modifies that material so that the 2021 individual income tax return can be completed following the January 2022 Profile tax software release for the 2021 taxation year. The updated version of this problem will be available on MyLab at:
http://www.pearsonmylabandmastering.com
Tax Software AP 11-2
This problem is continued in Chapter 11 with tax software problem 11-2 which begins on page 673 of Volume 2.
DISCLAIMER: All characters appearing in this problem are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.
George Pharmacy is a pharmaceutical sales rep who has been very successful at his job in the last few years. Unfortunately, his family life has not been very happy. Three years ago, his only child, Anna, was driving a car that was hit by a drunk driver. She and her husband were killed and their 14-year-old son, Kevin, was blinded in the accident. He also suffered extensive injuries to his jaw that have required major and prolonged dental work.
George and his wife, Valerie, adopted Kevin. Valerie quit her part-time job to care for him. She also cares for her mother, Joan Drugstore, who lives with them. Joan suffers from dementia, Parkinson’s, and severe depression. The family doctor has signed a letter stating that she is dependent on George and Valerie because of her impairments. Joan does not meet the residency requirements necessary to qualify for Canadian OAS payments.
Valerie’s parents separated two years ago in Scotland after her father, David Drugstore, suffered enormous losses in the stock market. They were forced to sell their home and David moved to Chile. David phones periodically to request that money be deposited in his online bank account.
George’s brother, Martin, completed an alcohol rehabilitation program after being fired for drinking on the job. He is also living with George and Valerie while he is enrolled as a full-time student at Western University. George is paying his tuition, and Martin has agreed to transfer any available education-related amounts to George. Although Martin plans to file his 2021 income tax return, he has not done so yet.
Kevin is taking several undergraduate psychology courses at Western University. After hearing a talk given by an expert blind echo locator (a person who uses sound to locate objects), his goal is to become a researcher at the Brain and Mind Institute and study the use of echolocation. Kevin has agreed to transfer the maximum tuition credit to George.
Other information concerning George for 2021 is provided on the following pages.
Required: Prepare the 2021 income tax return of George Pharmacy using the ProFile tax software program assuming Valerie does not file an income tax return. List any assumptions you have made and any notes and tax planning issues you feel should be placed in the file. Ignore GST/HST implications in your solution by assuming that George does not qualify for the GST/HST rebate.
Byrd/Chen’s Canadian Tax Principles. Copyright © 2022 Pearson Inc. All rights reserved.
Solution to AP Tax Software Eleven – 2
Personal Information
Taxpayer
Title
Mr.
First Name
George
Last Name
Pharmacy
SIN
527-000-509
Date of birth (Y/M/D)
1957-07-02
Marital Status
Married
Canadian citizen?
Yes
Provide information to Elections Canada?
Yes
Own foreign property of more than $100,000 Canadian?
No
Taxpayer’s Address
123 ZZZ Street, London, Ontario, N0Z 0Z0
Phone number (519) 111-1111
Family Members
Spouse
Child
Mother-in-Law
First Name
Valerie
Kevin
Joan
Last Name
Pharmacy
Pharmacy
Drugstore
SIN
527-000-483
527-000-517
None
Date of birth (Y/M/D)
1956-12-30
2005-10-17
1936-02-24
Net income
$6,520 in CPP
Nil
$500
Family Members
Father-in-Law
Brother
First Name
David
Martin
Last Name
Drugstore
Pharmacy
SIN
None
527-000-533
Date of birth (Y/M/D)
1937-01-12
1974-06-02
Net income
Nil
$8,300
During September, David was arrested in Chile. Valerie had to spend three weeks in Chile and pay $2,000 in bribes before she could get him released from jail. George had to pay Nannies On Call $3,500 for in-home help to take care of Kevin while she was gone.
Byrd/Chen’s Canadian Tax Principles. Copyright © 2022 Pearson Inc. All rights reserved.
Solution to AP Tax Software Eleven – 2
T2202—(Martin)
Box
Amount
Tuition fees—for Martin Pharmacy (brother)
A
8,000
Number of months in school—part time
B
0
Number of months in school—full time
C
8
T2202—(Kevin)
Box
Amount
Tuition fees—for Kevin
A
3,600
Number of months in school—part time
B
8
Number of months in school—full time
C
0
Donor
Charitable Donation Receipts
Amount
Valerie
Mothers Against Drunk Drivers (MADD)
George
Canadian Institute for the Blind (CNIB)
1,000
3,000
T4
Box
Amount
Issuer—Mega Pharma Inc.
Employment income
14
378,000.00
Employee’s CPP contributions
16
3,166.45
Employee’s EI premiums
18
889.54
Income tax deducted
22
114,000.00
Employment commissions
42
82,000.00
Charitable donations
46
400.00
In 2021, Mega reimbursed George $3,788 for meals and entertainment with clients, $2,268 for hotels, and $4,925 for airline tickets.
In addition to George’s salary, he also earns commissions of $82,000 which are included in the employment income of $378,000. His employer requires him to have an office in his home and has signed the form T2200 each year to this effect.
On October 1, 2021, George purchased a new computer and software that will be used solely in his home office for employment-use. The computer cost $3,600 and the various software programs cost $1,250.
House Costs
Area of home used for home office (square feet)
Total area of home (square feet)
Telephone line including high speed internet connection
650
5,000
620
Byrd/Chen’s Canadian Tax Principles. Copyright © 2022 Pearson Inc. All rights reserved.
Solution to AP Tax Software Eleven – 2
Hydro
3,200
Insurance—House
4,000
Maintenance and repairs
3,800
Mortgage interest
6,200
Mortgage life insurance premiums
400
Property taxes
6,700
(Y/M/D)
Patient
Medical Expenses
Description
Amount
2021-12-31
George
Johnson Inc.
Out of Canada insurance
731.00
2021-08-31
George
Dr. Smith
Dental fees
155.40
2021-09-19
George
Optician
Prescription glasses
109.00
2021-11-07
Valerie
Pharmacy
Prescription
66.84
2021-06-07
Joan
Dr. Wong
Psychiatric counselling
2,050.00
2021-03-22
David
Tropical Disease Centre
Prescription
390.00
2021-12-20
Martin
Dr. Walker
Group therapy
6,000.00
2021-10-01
Kevin
Dr. Takarabe
Orthodontics and dental
30,000.00
George paid $800 for the care and feeding of Kevin’s seeing eye dog, Isis, in 2021.
At the beginning of 2021, George had a 2020 net capital loss balance of $10,500 from the sale of shares in 2020. He had not disposed of any capital property prior to 2020.
Dispositions of Property
Property 1
Property 2
Property 3
Description
Molson Inc. shares
Imperial Oil shares
Sailboat
Number of units
150
387
N/A
Year of acquisition
2018
2019
2019
Date of disposition
February 14
June 6
October 1
Proceeds of disposition
37,000
9,600
74,000
Adjusted cost base
27,600
12,100
72,000
Outlays and expenses
35
29
N/A
Dispositions of Property
Property 4
Property 5
Property 6
Description
Motorcycle
Painting
Coin collection
Year of acquisition
2020
2014
2018
Date of disposition
November 17
August 28
March 24
Proceeds of disposition
14,000
1,100
700
Byrd/Chen’s Canadian Tax Principles. Copyright © 2022 Pearson Inc. All rights reserved.
Solution to AP Tax Software Eleven – 2
Adjusted cost base
21,000
450
1,800
Outlays and expenses
N/A
N/A
N/A
Real Estate Rental—Commercial Property
Amount
Address—888 YYZ Drive, Toronto, Ontario, M0M 0M0
Year of purchase
2017
Gross rents
16,000
Property taxes
5,128
Insurance
1,890
Interest on mortgage
3,175
Payment on principal
2,200
Furnace repairs
550
Maintenance contract
3,469
Building purchased for $120,100—UCC beginning of year
107,441
Fixtures purchased for $8,500—UCC beginning of year
4,651
The building and fixtures were purchased on August 28, 2017. At the time the building and fixtures were being used as a drugstore and Mr. Pharmacy has retained the same tenant.
George knows he should have been contributing to various savings plans over the years, but his increasing number of needy dependants required he spend all of his take-home pay to support them and he has not yet contributed to any savings plans. It was only in 2021 that his compensation had increased enough so that he had sufficient funds to consider savings plans for the first time.
His daughter had made contributions totalling more than $10,000 to an RESP for Kevin prior to her death, but George has made no RESP contributions to the plan since then.
George’s 2020 RRSP deduction limit is $285,550.
Byrd/Chen’s Canadian Tax Principles. Copyright © 2022 Pearson Inc. All rights reserved.