COMPREHENSIVE CASE STUDY - 2021-2022 You are required to prepare personal income tax returns using a tax software as part of the evaluation components for this course

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COMPREHENSIVE CASE STUDY - 2021-2022

You are required to prepare personal income tax returns using a tax software as part of the evaluation components for this course. The case study covers all the rules learned in this course. The facts you must use are given below.

The completed tax returns must be submitted a few weeks before the end of the course no later than the date indicated on the Course Schedule. I strongly recommend you start working on the tax returns early in the course and not wait until the case study becomes due. This is a comprehensive exercise and you should expect it will take you several days (possibly over a week) to properly complete. Also, it usually takes a few days to obtain the license to download the free tax software provided with this course (see below), so plan ahead.

The publisher of the textbook for this course has made arrangements with Intuit Canada to have a professional tax return software called "Profile" made available free of charge to students of this course. The process to download the free copy of the software requires that you register with Intuit Canada. This process is explained in detail in a separate message I posted in the Case Study forum on the Discussion Board, as well as on MyLab.

REQUIRED:

Using a tax preparation software - preferably the Profile software that is provided free of charge by Intuit Canada to students of this course - and the facts given below, complete the tax return (Form T1) for Mr. James Doode for the 2021 taxation year, including all relevant schedules, forms and worksheets, e.g. Form

T2125 for the calculation of business income, etc. Ignore all GST/HST aspects.

You must submit the completed tax return for James through the Case Study link on the Blackboard portal by attaching the file containing the data if you used the

Profile tax software (the file should have a .21T extension if you are using the

2021 version of the Profile software). Do not attach the Profile program file (file called "profile.exe") as that file does not contain the data for the tax returns you prepared. No marks will be given for submitting the Profile program by itself.

You can use another tax software than Profile if you prefer. The purpose of this exercise is to work with a tax software - it doesn't matter which one you use. If you decide to use another software than Profile, you must submit a readable copy of the entire tax return with all relevant schedules, forms and worksheets, e.g. a pdf copy. If I cannot access the tax return in a readable format, I cannot

grade it and no marks can be given for your work.

I have posted hints on the Discussion Board in the forum called "Comprehensive

Tax Return Case Study" to help you with this assignment. There is also a

practice tax return I suggested you do before doing this assignment - Tax

Software Assignment Problem Four-3 in the textbook (see my separate message

on the Discussion Board in the Case Study forum for further details).

INFORMATION TO USE FOR THE TAX RETURN CASE STUDY:

James Doode decided to start his own business in 2020 after retiring from the

Canadian Armed Forces. Since 2019, James receives monthly pension

payments from his former employer's pension plan. James’ business (sole

proprietorship) consists of a motorcycle shop known as James’ Specialty Bike

Shop, selling and repairing motorcycles (industry code 441220).

James hired you to prepare his personal tax returns for the year 2021. James

wants to pay the very least tax possible and will use any election or choice legally

available. 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.

Tax forms James received are included on the Case Study link as separate

documents confirming the various items of income described below for the year.

Detailed Information:

James was born on November 1, 1971. He is divorced but currently lives alone at

123 Main Street, Anytown, Ontario, K0H 1H0. James’ Social Insurance Number

(SIN) is 527-000-145.

During 2021, James received bi-weekly pension payments from his former

employer's pension plan for a total pension income of $40,000 - see T4A slip

attached issued to James for 2021 (box 16). Federal income tax of $5,000 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 2021, James was

only able to pay 7 months worth of support. James has no other dependents

James made $2,000 charitable donations to the Red Cross on June 1, 2021.

Finally, James paid federal income tax instalments of $5,000 quarterly to the

CRA throughout the year 2021, for a total of $20,000.

APPENDIX

Accounting Information for 2021

James’ Specialty Bike Shop

Revenues

Motorcycle and Parts Sales $450,000

Expenses

Purchase of inventory, parts and supplies (Note 1) $135,000

Golf club dues (Note 2) 5,000

Fines and penalties (Note 3) 10,000

Insurance (Note 4) 5,000

General office expenses 3,000

Home Office expenses (Note 5) 3,012

Salaries 58,000

Employer contributions to CPP and EI 3,960

Depreciation (Note 6) 41,928

Loss on sale of equipment (note 6) 8,250

Truck expenses (Note 7) 5,700

Total Expenses $278,850

Net Income for accounting purposes $171,150

Note 1: The opening inventory on January 1, 2021 was $15,000. The closing

inventory on December 31, 2021 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 2020 the business was sued for selling branded motorcycle parts

without proper authorization from the brand owner. In early 2021, James reached

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

pay a penalty of $10,000 for pre-2021 transactions that were completed without

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

against him. The penalty was paid January 1, 2021. The agreement also

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

brand owner effective January 1, 2021 - 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 7 below.

Note 5: Starting January 1, 2021, James moved the bookkeeping office from the

shop to a room in his personal home. The room represents 12% of the

1,000sq.m. home that was set aside for his exclusive use to perform

bookkeeping functions. The home has a cost of $500,000. Below are the costs

for 2021 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: The following is the information relating to the fixed assets of the

business.

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, 2020 at a cost of $195,000. The

UCC for tax purposes (class 1) at the beginning of 2021 was $177,450.

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

business and personal purposes – see Note 7 for operating costs. The truck was

purchased on June 1, 2020 at a cost of $55,000. For tax purposes, maximum

CCA was deducted in 2020 leaving a UCC balance on January 1, 2021 of

$16,500.

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

in the business (other than intangible assets):

 CCA UCC Balance

Description class Jan.1, 2021

Customizing tools and equipment class 53 $0

Computer-assisted design equipment class 12 $7,500

Computer class 50 $613

Class 53

Customizing tools were acquired on March 1, 2020 at a total cost of $12,000.

For tax purposes, maximum CCA was deducted in 2020 leaving a UCC balance

on January 1, 2021 of $0. Additional new equipment was acquired on

December 1, 2021 at a cost $45,000.

Class 12

Computer-assisted design (CAD) software was acquired on April 1, 2020 at a

cost of $15,000. For tax purposes, maximum CCA was deducted in 2020 leaving

a UCC balance on January 1, 2021 of $7,500. During 2021, James decided to

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

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

purchased on March 1, 2021 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 1, 2020 at a total cost of $3,500.

For tax purposes, maximum CCA was deducted in 2020 leaving a UCC balance

on January 1, 2021 of $613. No further additions were made in 2021.

Intangible Assets: On January 1, 2021, 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,

2021 and expires on December 31, 2044.

Note 7: 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 2021 paid by the business

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

Insurance $2,000

Fuel $3,200

Maintenance $2,500