In the Public Limelight

[Griet van Vliet]

First, the art collection nd the jewelry: both were bequeathed to her daughter, the adjusted cost base is 23,400 and the fair market value is 57,000, which is also the price at which the daughter sold it. The jewelry, on the other hand, was originally purchased for 32,000 but was worth a paltry 8,300. As for the Sith Inquisitor shares, they were bought for 12,400 and paid 860 in dividends inter vivos, and their fair market value was 28,600 at death, which was donated to the Humane Society (and hence can be ignored for capital gains purposes) while receiving a receipt for 28,600. Also, she inherited Hikaido Fittings shares, worth 72,000 when her father died, and paid 6,200 in non-eligible dividends (and grossed up at 17% rather than at 38%), and were not eligible for the LGCD; they were left to the husband. Who got 1.123 million rolled over into his own RRSP. Plus the family residence can be disregarded because of the primary residence exemption; she also had a capital loss carry forward of 89,400 and LPP loss carry forwards of 5,400. Finally, the will requires her to elect out of the Income Tax Act Section 70(6) which provided for spousal rollover of capital assets at ACB or UCC (depending on whether the assets are depreciable or not).

 

[Griet van Vliet]

The husband's tax return was completed in earnest, and no balance owing, nor refund. In death, capital losses, whether carried forward or not, can be counted against all income. Electing out of ITA 70(6) had the consequence of incurring a recapture of CCA for 5,900, on top of the 35,205 on the rental property. As for the capital gains, there were already 43,000 on the rental property, and 9,900 in the LPPs, and electing out of ITA 70(6) also caused her to incur an additional 32,000 in capital gains, for a taxable total of 42,450. Now I understand why she elected out of ITA 70(6); typically people elect out of ITA 70(6) when they incurred big capital losses when they lived, she thought, while calculating the net income, 161,403.80, prior to any carry forwards being applied, worth 89,400. The taxable income was therefore 72,003.80, and the basic income tax liability is (72,003.80-45,916)*20.5%+ 6,887 = 12,235, reduced by the basic 1,745.25, by the dividend tax credit of 326.80*6/11+1,054*21/29 = 941.50, and the donation tax credit of 30+28,400*29% = 8,266, to which one should add the unpaid SPP liability of 5,136, which forces the estate pay a balance owing of 6,091.45.

 

[Griet van Vliet]

Let's see: sometimes clients send some information that may as well not relate to their fiscal situation, but along with the tax returns for that Jedi during the past three years, that is, the years he is allowed to carry back what he came here for, he received a fiscal warning about the.. alternative minimum tax as it pertains to that year? she thought, upon reading the pile of documents, and he was hoping that carrying back capital losses and allowable business investment losses (that is, an investment loss, minus the LGCD already used) would allow him to absorb all the tax liabilities, and pay the AMT liability based on the refund from the loss carryback. Four years ago, he won 1 million credits in a casino on Vorzyd V, but he blew about 100,000 of it on a number of things such as drugs, alcohol and luxury travel. He went into rehab at the beginning of the year covered by the AMT reassessment, costing nearly 10,000, but before there was an AMT, he used up just enough of the LGCD for him not to pay anything that year. The net income was, when accounting for the personal base amount and medical expense minimums, 175,119 before accounting for a 156,000 use of LGCD, all of which is a taxable capital gain from a LGCD-eligible company.

 

[Griet van Vliet]

So his taxable income for that year was 19,119, to which one needed to add 60% of that 175,119, so he was assessed AMT based on 84,190.40, given the 40,000 exemption. Then his base AMT liability, at a 15% rate for that year, was 12,628.56, and, given the medical expenses and personal amount, he had to pay 9,760.71 plus two years of interest at 5%, compounded yearly, for a total of 10,761.18. For the last tax year, he earned 17,300 in net capital gains, 91,450 in net rental income and 38,275 in interest income. This year, notwithstanding the loan of 675,000 he made to another company that went bankrupt that he wrote off, he earned 18,620 in taxble capital gains, 86,300 in net rental income and 27,438 in interest income, and, of course, the 675,000 he invested, for fiscal purposes, in that company that went bankrupt. But he used 312,000 in gross LGCD three years ago so there was 156,000 to absorb past capital gains. The balance in capital gains carry forwards is thus 120,080. The allowable business investment loss is thus 181,500 since it's 50% of the difference between the investment loss and the use of gross LGCD.

 

[Griet van Vliet]

He must use up the full amount of ABIL this year so there's only 67,762 left to carry back. No taxes payable, no balance owing for this year, this year is over, but she has to file a request for loss carryback for 17,300 in capital gains and 67,762 to be applied against rental income, so the taxable income for last year is now 61,963 as opposed to 147,025. Last year's tax brackets placed him at 29% on the final 6,637 but paying 29,029 on the first 140,388, so his balance owing was then 30,953.73 - 1,721.10 (15% of the personal amount of 11,474) = 29,232.63; under the loss carryback provision, the base tax liability is paid at 20.5% on any credit above 45,282, for which he is paying 6,792. So the new base liability is 10,211.61 and the balance owing under the new arrangement is 8,490.51; the refund he is thus getting is the net of the two, 20,742.12, but any refund would be applied on any owed balance first, so the real refund he is getting is 9,980.94. I'm happy for the Jedi but I hope he doesn't find himself in a situation where AMT must be paid when it wouldn't otherwise be the case, she thought, while sending in the tax return and the request for loss carryback. While he is still short 665,000 credits or so, would he be willing to use the proceeds to buy VPN shares? Only time would tell.

 

[Griet van Vliet]

The IPO was wildly successful, with a bunch of investors that bought 20 million shares at 23.50 each, for a total of 470 million, of which there's 430 million left after all expenses associated with the IPO are accounted for. One of the clients wanted some advice regarding transactions on those shares, and what the tax consequences are. She bought 9,500 VPN shares, and she thought that gifting those equity securities were a good idea because they were suffering financially. In a few short weeks, she gave 3,500 shares to her husband, and the remaining 6,000 to her daughter. But because she couldn't personally come, since she was critically injured on Skor, her husband came in his stead. If we're on track to keep up the revenues, even after accounting for the purchase of accounting firms on other Wild Space worlds, we could be declaring another 80 cents dividend for the next quarter, she thought, while keeping her estimate of the dividends to herself. And also reading the list of transactions the wife made with the VPN shares, which were the only equity securities not covered in the will.

"I come here because there is one thing that I believe is not covered by the will, these VPN shares that my wife gave to me and my daughter. My wife is in a critical condition and was injured on Skor when the First Order initiated an orbital bombardment"

"Welcome. I hope your wife's condition has stabilized because it may well be a factor"

 

[Griet van Vliet]

"What do you mean, it is a factor?"

"Income attribution. It typically ceases at the death of the transferor, here, your wife; capital gains on the shares you hold are attributed back to your wife, but not your daughter's, while all dividends involved in this set of transactions are attributed back to your wife. Did your wife elect out of Section 73(1)?"

"What's Section 73(1) about?"

"It allows for tax-free rollovers of capital assets to one's spouse while the owner is alive; Section 70(6) is the same but at the owner's death"

"No, but why would one elect out of Section 73(1) or 70(6)?"

"If the owner accumulated losses large enough to absorb a significant portion, typically business losses or capital losses, of the resulting capital gains or CCA recaptures"

She had to lay out the consequences of what's already been incurred, given the non-arm's length people the client's wife dealt with: from the first transaction, since the wife didn't elect out of 73(1), she doesn't incur any capital gain but the capital cost for any subsequent transaction will be 23.50. However, for the child, the wife incurred 6,000 in capital losses, since gifts of this nature are deemed to be made at fair market value for both parties for the purposes of capital gains, so the daughter's ACB is 22.50/share. Yet, under attribution rules, the eligible dividends earned of 2,800 and 4,800 respectively would be attributed back to the wife, which would then have to report 10,488 because gross-up. These are the tax consequences of what has already happened. Then came the part where the wife's hypothetical death could come into play: what happens if she dies before the next quarterly dividend is paid, and also what happens if they sell the shares at some point after death (and after that dividend is paid out) vs. the wife lives an extra three months and lives to see those two sell the shares and receive the second quarter's dividends.

 

[Griet van Vliet]

"Why did you say that the dividends are taxed at higher amounts than the actual amounts received?"

"The aim was originally to ensure that, since dividends are paid out of the company's after-tax money, the same amount of taxes would be paid whether from a corporation or directly. However, because the new regime in place feels that dividends are mostly earned by the rich, the dividend tax credits are no longer 100% of the gross-up"

This means that 1,575.27 would be claimable as a tax credit for dividends by the wife, and once again that amount, assuming another 0.80 dividend is declared and paid while she lived. And also taxed on another 10,488 in eligible dividends. As for the consequences of selling the shares, assuming both do so simultaneously at 26.25, an estimate she made for where the share price will be some time after the payment of the second quarter's dividend, the wife would thus have 9,625 in capital gains attributed from her husband, while the 22,500 would stay in the daughter's hands per attribution rules. Then the wife would, for that, incur 10,062.50 in taxable capital gains and 20,976 in dividends up to this point. If the wife died before the second quarter's dividends were paid, however, the husband would report 3,864 for the quarter and the daughter would report 6,624, while their respective taxable capital gains would be, under these assumptions, 4,812.50 for the husband and 11,250 for the daughter. Hopefully, that ought to clear up the case of the client, and he was grateful for the fiscal advice relative to these shares.

 

[Griet van Vliet]

Just because the clients expect her to prepare tax returns, in this fiscal high season for personal taxation, doesn't mean she can't understand the circumstances behind these numbers. The next client is a divorced person that has two healthy children without any income, and the divorce decree requires her former spouse to pay 3,000/month in child support (not taxable to her, and not deductible for him) and 1,000/month in spousal support. However, she received only 40,000 in alimony (4,000 is taxable because child support alimony isn't taxable). Her 85-year-old grandfather lives with him and only has a 7,950 net and taxable income (and hence no balance owing). With that return out of the way, the base salary is 75,000, on which she was withheld 12,000 in taxes, 3,400 in RPP, 2,564 in SPP, 836 in EI, and paid life insurance contributions of 250 (the employer paid 44/month). Since the bonus of 19,500 was paid in relation to last year's end, it's a factor. However, 15,000 has been paid out as a housing allowance, and also to reimburse for the loss on the sale of the old house.

 

[Griet van Vliet]

Speaking of the sale of the old house, she only lost 7,200 and hence this sum is not taxable (payments made by employers for reimbursing losses incurred by employees on the sale of their homes are tax-free for the first 15,000 and 50% for every credit thereafter). But before she could even think of what's deductible or not in these moving expenses, the 10,000 allowance is taxable. And, of course, the speeder standby charge will be reduced first for 11 months, leased at 560/month, to the tune of 8,240/18,337. So the standby charge is 2/3*11*560*8,240/18,337 = 1,845.39, altogether eliminated since she paid 6,300 in operating expenses, thanks to her driving 43,360km in the year (but that does nothing to eliminate the operating charge of 2,060 = 8,240/4). Plus an imputed interest benefit of (9/12*200,000*2%) = 3,000. So the total, net employment income is thus 121,688. As for capital gains, since there is no way to use FIFO basis for tax purposes, weighted-average is the way to go. First 360 shares at 5, 500 shares at 5.25 and 400 shares at 6, paying 0.30/share in yearly dividends (378 total, 143.64 in gross-up), selling 900 at 6.10. The real capital gain is 615, of which 307.50 is taxable. Therefore the total income is 122,517.14.

 

[Griet van Vliet]

Since the house-hunting trip expenses of 900 were not deductible, and reimbursed, they were irrelevant to the tax return. Soon, the other expenses followed: 950 in legal fees to sell the old house, 600 to buy the new house, 3,540 in mover fees, and 19 nights in a suite, of which the first 15 were deductible. For the last seven of the 19 nights, she had a coupon voucher for 200/night and all other nights were at 325/night. And the meal allowance for the purposes of moving expenses were 51/day/person, and they were four people to live in there. So 7,435 in deductible room and board, for a total of 12,525 in deductible moving expenses. Now that she was moving into the childcare costs, the question of eligible income was to be asked: the income for that purpose, of which one of the ceilings to test against was 2/3 of that, was gross employment income plus net business income plus research grants and scholarships, here 125,088, which clearly exceeded the other ceiling. The other ceilings are the actual expenses or the annual childcare expense amounts of 13,000 (8,000 for the younger and 5,000 for the older), of which only 1,300 can be applied against the boarding, summer camp.

 

[Griet van Vliet]

Speaking of the summer camp, she paid 4,000 for the four weeks spent in camp so she spent 2,700 in non-deductible fees, and the remaining 11,700 can be deducted against the remaining expenses: 200/week for 11 weeks, 250/week for the remaining 36 weeks, so 11,200 total. Thus the total deduction is 12,500, and the net and taxable income is therefore 97,492.14. As for the base tax liability, it is (97,492.14 - 91,831)*26% + 16,300 = 17,771.90. Then came the NRTCs: the base amount of 11,635, the base worker's amount of 1,178, the deductions for SPP/EI, the dependent amounts: 2x 11,635 for the kids and (11,635-7,950) = 3,685 for the grandfather. The hard part was the medical expenses: 465+493+245 vs. 2,278: undeductible. But she could, on the other hand, deduct the grandfather's expenses, to the tune of 12,473 - 3%*7,950 = 12,234.50. The total NRTC base was therefore 55,402.50 at 15% = 8,310.38. Then came the dividend tax credit: 78.35, and the gross income tax payable is 9,383.17. When combined with the withheld tax of 12,000, she thus receives a refund for 2,616.83.