Software Tax Assignment Question 401-1 – Carbon Green Ltd.
Carbon Green Ltd. (CGL) is a Canadian controlled private corporation that specializes in the sale of car parts and accessories. All its sales occur within Canada.
CGL’s main contact and company info are as follows:
| Address | 5632 Diamond Way in Ajax, Ontario, L8N 9G1 |
| Ontario corporation tax account number | 3344556 |
| Phone number | (905) 555-3925 |
| Date of incorporated | June 13, 1990, in Ajax |
Enter “NR” (for not registered) in the Business Number field to reduce the number of ProFile error messages.
Ms. Danny Hamilton (SIN 401-000-001) owns all 10,000 common shares issued and outstanding. She is also the president and director of the company. All contacts with respect to the company’s financials, records, and signing authority will be through her.
CGL has net assets of $255,000 on December 31, 2020. This includes a few investments that Ms. Hamilton inherited from her father two years earlier.
CGL owns all the 3200 common shares of Metal Weave Inc., which holds most of the investments Ms. Hamilton inherited from her father. The common shares have a book value of $1,190,000. Metal Weave Inc. has the same contact info as CGL. Metal Weave Inc. also has a December 31 fiscal year end. Like CGL, enter NR (for not registered) in the Business Number field for Metal Weave Inc.
Metal Weave Inc. earns active business income through the manufacturing and sale of cosmetic car parts that mimic the look of carbon fiber. The following information applies to Metal Weave Inc.:
| Total Assets as at Dec 31, 2020 | $2,329,000 |
| Total Revenue for 2020 | $310,000 |
| Taxable capital employed in Canada as at Dec 31, 2020 | $380,000 |
| Taxable capital employed in Canada as at Dec 31, 2019 | $365,000 |
The following information applies to CGL:
| Taxable capital employed in Canada—2019 | $288,000 |
| Taxable capital employed in Canada—2020 | 397,000 |
| Total assets as at December 31, 2020 | 779,300 |
| Non-eligible RDTOH as at December 31, 2019 | 5,540 |
| Eligible RDTOH as at December 31, 2019 | Nil |
| Dividends declared and paid during 2019 | Nil |
| GRIP balance as at December 31, 2019 | 12,180 |
| Capital dividend account as at December 31, 2019 | 5,700 |
CGL does not use International Financial Reporting Standards (IFRS). The following is CGL’s income statement for the tax year ending Dec 31, 2020, before any deduction for income taxes:
| Sales revenues | $613,000 |
| Long-term debt interest | 32,500 |
| Foreign bank account, interest received (Note 1) | 19,860 |
| Eligible dividends on “Homes for All REIT” shares | 16,400 |
| Non-eligible dividends from Metal Weave Inc. (Note 2) | 39,100 |
| Gain on sale of shares (Note 3) | 37,100 |
| Total revenues | $757,960 |
| Cost of goods sold | $228,000 |
| Amortization expense | 131,500 |
| Other operating expenses | 151,000 |
| Total expenses (excluding taxes) | $510,500 |
| Net income (before taxes) | $247,460 |
Note 1 This interest is net of $2,200 in taxes withheld in Ireland.
Note 2 As a result of paying this $39,100 in dividends to CGL, Metal Weave Inc. received a dividend refund of $14,000 from its non-eligible RDTOH.
Note 3 On November 23, 2020, CGL sold 2,850 shares of Shopify. These common shares had cost of
$139,000 on June 6, 2017, and were sold for net proceeds of $176,100. Other Information:
- CGL’s expenses include a charitable donation to the Markham Food Bank for $4,800.
- CGL’s expenses include a $6,100 penalty resulting from a judgment in the Tax Court of Canada.
- CGL reimbursed Ms. Hamilton $29,000 for business meals and entertainment for clients and suppliers during the year.
- During the year, CGL incurred $19,350 in landscaping costs. For accounting purposes these are being treated as a capital expenditure, to be amortized using the straight-line method over 10 years. The related amortization is included in the amortization expense of $131,500 shown on the income statement.
- The opening UCC balances were $235,000 for class 1, $124,000 for class 8, and $89,000 for class
10. The only disposition during the year was the sale of a delivery truck. The truck cost $46,000 and was sold for its carrying value of $9,000. The only acquisition was an arm’s-length purchase of $39,000 in office furniture on June 29, 2020.
- During 2020, CGL paid taxable dividends of $87,000. Of these dividends, $26,100 were designated as eligible. On September 1, 2020, CGL also elected to pay the maximum capital dividend allowable.
- CGL allocates $57,000 of the annual business limit to Metal Weave Inc. This is $2,000 more than Metal Weave Inc. can use in 2020, but CGL cannot use the excess.
- CGL paid quarterly income tax instalments of $7,300 each on the 18th of March, June, September, and December during 2020.
- CGL has a website describing the products it carries, but no income is generated from the website.
- Assume that the adjusted aggregate investment income (AAII) of both companies is nil at the end of the 2019 year.
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Required: Prepare the federal corporate tax return for CGL for the 2020 taxation year using the ProFile T2 corporate software program. Determine the eligible and non-eligible RDTOH. On the ProFile schedule titled “Info,” the Filing question “Complete return from GIFI?” is answered Yes by default; click No.
Ignore the GIFI requirements except as follows:
On GIFI Schedule 125:
- Input the total revenues less the gain on sale of shares ($720,860) on the line “Total Sales of Goods and Services” (Code 8000).
- Choose “Realized gains/losses on sale of investments” (Code 8211) from the drop-down menu under Code 8089 and input the gain on sale of shares.
- Choose “Purchases/cost of materials” (Code 8320) from the drop-down menu under Cost of Sales and input the cost of goods sold
- Choose “Amortization of tangible assets” (Code 8670) from the drop-down menu under Operating Expenses and input the amortization expense.
- Choose “Other expenses” (Code 9270) from the drop-down menu under Operating Expenses and Other Operating Expenses.
On GIFI Schedule 100:
- Input the net income figure of $247,460 as “Cash and deposits” (Code 1000) in order to make the total assets equal to the total liabilities and equity.
Although this will not properly complete the GIFI statements, it will eliminate the warning messages that would otherwise be generated when the net income figure and amortization expense are input on Schedule 1. These GIFI entries will have no effect on the calculations in the tax return.
In addition, to prevent audit warnings, S141, “Notes Checklist,” must be completed. Assume there are no notes to the financial statements and answer “No” to any other relevant questions. Click “review engagement” in Part 2.
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