Income Statement Assignment

SCENARIO 1: IT’S ALL ABOUT THE TAXES
ANS -1
Income Statement of Mr. Fred Flintstone for the year ending 2017
Pension Income (Note 1)
30,00
0.00
Eligible dividends (Note 2)
41,40
0.00
Non-Eligible dividends (Note 3)
5,85
0.00
Capital Gain on sale of XYZ shares (Note 4) NIL NIL
Stock option Benefit 5000
-
Total Income
82,25
0.00
2017 RRSP contribution room (Note 5)
(6,000
.00)
RRSP contributions made during 2017 (Note 5)
(11,000
.00)
Pension Income Deduction (Note 1)
(15,000
.00)

Child Care expense for Pebbles (Note6)
(2,000
.00)
Net Income
48,25
0.00
Stock option Deduction ( 50% Deduction)
(2,500
.00)
Taxable Income
45,75
0.00
Note 1- Pension income is not fully taxable as per the Canadian tax laws , the pension income is
partially taxable and can be taxed at 50% of the pension income earned by the taxpayer.
Here deduction of $15000 has been provided to arrive at the net income of the assessee.
Note 2- Eligible dividend is taxable on gross up basis and the gross up rate for the eligible
dividend is 38% and that is why the formula for the same can be applied as follows
(30000*138/100). So as to arrive at the gross up dividend and tax can be paid at the grossed up
dividend.
Note 3- Non eligible dividend is taxable on gross up basis and the gross up rate for the non-
eligible dividend is 17% and that is why the formula for the same can be applied as follows that
is (5000*117/100). So as to arrive at the gross up dividend and tax can be paid at the grossed up
dividend.

Note 4- As in the question the sale price of the shares has not been provided ,It is assumed that
the capital gain arise on the transfer of shares of XYZ are sold on the Purchase price of $72000,
thus no capital gain arising. And it is e shown as NIL in the solution
Note 5-RRSP contribution is allowed up to 18% of earned income up to a maximum of $26,010
total contribution is $17000(6000+11000) which is within the limit hence deductible.
Note6-The assessee has provided for child care expenses of $2000 ,Child care expenses allowed
up to $8000 per year. Hence deductable. (Turbotax, 2017)
Ans-2
Statement for the Calculation of Fred’s federal tax liability
Net Income/ Taxable Income 45750
Tax Due (Note1) 6862.5
Tax Credits
Federal Tax Credit
Basic personal amount (Note2) 1745
Spouse/common-law partner amount (Note3) NIL
Pension income amount (Note4) 2000
Canada employment amount (Note5) 1177
Dividend tax credit rate on eligible taxable dividends (Note6) 6218

Dividend tax credit rate on non-eligible taxable
dividends(Note7) 615
Donation tax credit(Note8) 182 11937
Tax Refund(Note9) -5074.5
Note1- As the income is below $45,916 so the tax rate applicable is 15% and thus the tax is
calculated on $45750.
Note 2 – Credit on the basic personal amount is 15% which is the federal tax credit rate and
thus the credit available on such amount is as per the rate specified.
Note3 - Spouse/common-law partner amount is also available for tax credit but the amount is
above the specified limit and thus no credit for the same can be claimed.
Note4- Pension income amount is available for tax credit as per 15% but here it is assumed it is
assumed that the amount provided $2000 is the tax credit and not the final amount provided.
Note5- Canada employment amount can be claimed as tax credit from the amount due for tax
purpose and the limit for the same is $1177 which the amount which the assessee has invested
and also it has been assumed that the amount given in the question is the tax credit and not the
amount invested .
Note-6 Dividend tax credit rate on eligible taxable dividends is available to the person or
shareholder who receives the eligible dividend and the credit on such dividend is available on

gross up basis which is 38% and after that tax credit is calculated on the amount after the
grossing up is done.
Here the tax credit rate on the eligible dividend is 15.02% which is given in the question and has
been taken for the purpose of calculating tax credit.
Note-7 Dividend tax credit rate on non-eligible taxable dividends is available to the person or
shareholder who receives the non-eligible dividend and the credit on such dividend is available
on gross up basis which is 17% and after that tax credit is calculated on the amount after the
grossing up is done.
Here the tax credit rate on the eligible dividend is 10.52% which is given in the question and has
been taken for the purpose of calculating tax credit.
Note8- Donation tax credit is available as tax credit if the person claiming such donation tax
credited has donated sum of money to any notified donation by himself or by the spouse of him
such an amount qualifies for tax credit .
Tax credit is available at the rate of 15% for the first $200 donated and for the next $800 donated
tax credit is available at the rate of 19%.
Note9- Since the amount of tax due is less than the credits available the assessee can claim
refund of taxes paid by him over the amount of tax due as he should not have paid that but has
paid so he can claim the credit os such taxes. The refund amount can be claimed by the assessee
by submitting his tax return for the respective year.
SCENARIO # 2: Thinking About retirement

Ans-3a
The pension benefit that John will accrue for 2013 is $31680
NOTE- 2% * Average salary of last 5years *Number of service years
2/100*88000*18=$31680
as per the question the maximum annual pension entitlement for a defined benefit pension plan is
$2 697 per year of service. But as per the provision the benefit should be
$31680. In the question we will assume that our calculation that we have provided in the
question is on scientific basis and shall be considered as correct and reasonable but we have also
provided that as per the question the maximum benefit has also been provided.
Ans-3b
John’s annual pension income if his employment continues and he retires from Mega Pharmacy
on December 31st, 2021 is $45760.
Note- 2% * Average salary of last 5years *Number of service years
2/100*88000*26=$45760. The annual pension which is accrued for john in 2013 has also been
taken from the specifications provided to us by the question and the formula form the references
has been applied for the calculation of such pension.
(taxtips.ca, 2017)

Ans-3c
The present value of John’s pension at age 60 is $591852.22
Note- Present Value factor at 6% compounded monthly for 25 years is 155.206.The present
value taken is an approximate value that has been considered as it might differ when rounding
off is considered.
At the age of 60 the monthly pension that has been calculated is also also an approximate
assumption as number of years has not been mentioned which is very important criteria that has
to be taken care.
So, PV of pension at the age of 60 is
=155.206*Monthly pension
=155.206*45760/12
=$591852.22
Ans-4a
The total contributions made into Starlight’s Pension Plan, on Mary’s behalf for 2013 is
5% of $92000

$4600
Note- As per the canadian taxation law the contributions in the pension plan that is made on the
behalf of Marry is 5% of the total salary that is to be received by her , is to be accounted for and
for the purpose of calculation of contribution the total benefit has to be taken care of . Marry
contributes 5% towards her earned income and that is the only limit that is to be considered for
the purpose of tax as per tax laws.
Ans4b
The value of Mary’s pensions adjustment that will affect her 2013 RRSP contribution room. Is
$9200
Note – Pension adjustment is total contribution by the employee and employer. The employee
and employer both contributes towards the pension account of the person and the total amount
contribution made is almost equal for both the employee and employer. The total amount of
pension amount deposited becomes the pension adjustment for the person in whose account such
benefit is provided.
That is 2*5%*92000=$9200
Ans4c
Mary’s pension assets the value of her pension assets at the end of 10 years from now
is$129522.76

Note- Value of Pension assets can be calculated as Future value * Value of asset
=1.708*75833
= $129522.76
Note – The pension asset that the assessee has in his pension account is calculated when the
assessee has Interest receivable on such pension asset compounded monthly.
Here in the question the same treatment is considered and following the same approach is
adopted in the question.
Ans5
Amount of income that Mary’s pension assets will buy is $163960.42
Note- As per the question the value of the pension asset that is to be considered for buying the
asset is taken here and is the present value of the pension asset on the day when the asset is to be
purchased and similarly in the question the same principle is adopted and taken care.
Value of Pension asset is $274794
Present Value factor at 4.5% compounded monthly for 25 years is 179.91
So, Pension asset buy is
=179.91*Monthly income
=179.91*274794/12/25

=$164793.96
Ans6
John’s monthly income from these assets is $3310
Note- It has been assumed that benefit @6% as been taken from the asset for the 1st year and
compounded monthly as number of years has not been mentioned in the question. As in the
question the number of projected year for the assessee has not been provided so the future value
of the 1st year. Number of years after the retirement is not provided.
Ans-7a
John’s new RRSP contribution room for 2013 is not ascertainable since, the amount of
investment made is not available but maximum amount of RRSP contribution is 18% of Earned
Income which is $15840($88000*18/100). So we assume that he contributed the above amount
in his RRSP.
Note- RRSP contribution is limited upto 18% of the earned income maximum of $26010 and that
is why his earned income is $88000 and so the 18% of the earned income is within the specified
limit of $26010 which is the contribution limit of 2017 as per the law enforceable during the
year.

Ans7b
Marry’s new RRSP contribution room for 2013 is not ascertainable since, the amount of
investment made is not available but maximum amount of RRSP contribution is 18% of Earned
Income which is $18360(102000*18/100). Already invested $7000 of the matured deposit, so the
remaining $11360 can be contributed to the RRSP.
So we assume that he contributed the above amount in his RRSP. (Sun Life Global Investment,
2017)
Ans8a
If Marry contributes $2000 per annum she will be able to save 2000$ she will be able to save
(26/100*2000)
$520 tax will be saved as she has to pay tax at the rate 26%.
Note- As per the tax benefit available to Marry is available for the contribution made by her to
the respective fund is to be calculated before tax and as per the provision the benefit is to be
calculated before tax and tax it to be calculated on the amount obtained and the tax saving on the
amount of investment made is to be calculated.
Ans8b
Let us assume that she has to pay tax at the rate of 26%, so after tax cost is $2000,
Before tax is $2702.70 that she has to contribute in the RRSP plan.

Note- As per the tax benefit available to Marry is available for the contribution made by her to
the respective fund is to be calculated before tax and as per the provision the benefit is to be
calculated before tax and tax it to be calculated on the amount obtained and the tax saving on the
amount of investment made is to be calculated. The purpose here is to calculated the before tax
contribution and hence the same is done.
Bibliography
Adjusted Cost Base.CA. (2017). Retrieved Nov 26, 2017, from Adjusted Cost Base.CA:
https://www.adjustedcostbase.ca/blog/how-to-calculate-adjusted-cost-base-acb-and-capital-gains/
Canada.ca. (2017). Retrieved Nov 26, 2017, from Canad.ca: https://www.canada.ca/en/revenue-
agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/
deductions-credits-expenses/line-214-child-care-expenses.html
OPB.ca. (2017). Retrieved NOV 26, 2017, from OPB.ca: http://www.opb.ca/portal/opb.portal?
_pageLabel=AboutOPB&_nfpb=true&path=/OPBPublicRepository/OPB/Public/AboutOPB/
DefinedBenefitModel/en/Defined%20Benefit%20Model
queensu.ca. (2017). Retrieved Nov 26, 2017, from queensu.ca:
http://www.queensu.ca/alumni/newrules
Sun Life Global Investment. (2017). Retrieved Nov 26, 2017, from
http://www.sunlifeglobalinvestments.com/Slgi/For+Investors/Investor+Learning/RRSP+limits?
vgnLocale=en_CA