Chelsea’s Minimum Net Income & Tax for Tax Purposes
Case 1
It is March of 2021 and you have been hired to prepare the 2020 tax return for Chelsea Lee. She has provided you with the following information:
Chelsea is thirty years old, divorced, and has an eight-year-old child from a former marriage. Child support payments from Chelsea are $500 a month. Chelsea lives in Cornwall, and is a salesperson for Tri-scope Inc. The earnings from the job include a base salary of $6,000 per month plus a commission of 1% on the sales Chelsea makes in the month, which were $50,000 every month in 2020.
Chelsea moved to Cornwall from Bermondsey on December 1, 2019 due to a promotion with Tri-scope. Chelsea’s tax deductible moving expenses totaled $9,500, and there was no reimbursement from Tri-scope. $4,500 of this expense was accurately claimed on the 2019 tax return. Chelsea took out a $120,000 mortgage to purchase a new home in Moncton. The total interest payments were $8,400 in 2020.
Chelsea’s personal vehicle is used to perform the work duties, and Chelsea pays for the expenses with no reimbursement from Tri-scope. However, an allowance of $400 is received each month which is treated as unreasonable for tax purposes. Chelsea purchased a new car in 2019 which is used seventy-five percent of the time for business purposes. The undepreciated capital cost of the vehicle at the beginning of 2020 was $28,000. Total costs to operate the vehicle are $800 per month. Interest expense on the car loan is $200 per month.
Chelsea spends $300 per month on fashionable clothing for work, and $500 per year on a new cell phone. The cell phone bill is $80 per month, of which seventy-five percent is for employment use. Chelsea takes files home from the office at the end of the day and reviews the sales calls in a home office. The files are then returned to the office at Tri-scope in the morning prior to leaving for the day to make sales calls. Chelsea’s monthly total expense for the home insurance, property taxes, maintenance, and utilities is $1,000. The home office occupies ten percent of the square footage in the home. Chelsea maximizes RRSP contributions each year. The 2019 Notice of Assessment showed RRSP room of $12,000. Earned income was $42,000 in 2019 which consisted of $6,000 in commissions. Tri-scope does not have a registered pension plan. CPP for enhanced contribution is $166.
Required:
A. Calculate Chelsea’s minimum net income & Tax for tax purposes for 2020. Use the aggregating formula from Section 3 of the Income Tax Act to show your answer (40 marks).
B. Indicate why any items have been omitted from your calculations (10 marks).
A. Calculating Chelsea’s Minimum Net Income & Tax for Tax Purposes for 2020
To calculate Chelsea’s minimum net income and tax for tax purposes for 2020, we need to consider various income sources, deductions, and credits. Let’s break down the calculations step by step:
Employment Income:
Base salary: $6,000/month x 12 months = $72,000
Commission: 1% of sales ($50,000/month x 12 months) = $600/month x 12 months = $7,200
Total employment income = Base salary + Commission = $72,000 + $7,200 = $79,200
Child Support Payments:
Child support payments: $500/month x 12 months = $6,000
Moving Expenses:
Deductible moving expenses: $9,500 - $4,500 (already claimed in 2019) = $5,000
Mortgage Interest:
Total mortgage interest payments: $8,400
Vehicle Expenses: a. Depreciation:
Undepreciated capital cost of the vehicle at the beginning of 2020: $28,000
Business use percentage: 75%
Depreciation expense: $28000 75% = $21,000
b. Operating expenses Monthly operating expenses: $800/month x months = $9,600
c. Interest expense on the car loan:
Total interest expense: $200/month x 12 months = $2,400
Clothing Expenses:
Monthly clothing expenses: $300/month x 12 months = $3,600
Cell Phone Expenses:
Employment use percentage: 75%
Annual cell phone expenses: $500/year
Monthly cell phone expenses: ($80/month x 75%) x 12 months = $720
Home Office Expenses:
Total monthly home office expenses: $1,000/month
Business use percentage: 10%
Monthly home office expenses for tax purposes: $1,000/month x 10% = $100/month
RRSP Contributions:
RRSP room carried forward from 2019: $12,000
CPP Contributions:
Enhanced CPP contribution: $166
Now, let’s calculate Chelsea’s minimum net income and tax for tax purposes using the aggregating formula:
Total Employment Income = Base Salary + Commission = $72,000 + $7,200 = $79,200
Net Income Calculation: Employment Income = Total Employment Income
Child Support Payments
Moving Expenses
Mortgage Interest
Vehicle Expenses (Depreciation + Operating Expenses + Interest Expense)
Clothing Expenses
Cell Phone Expenses
Home Office Expenses
RRSP Contributions
CPP Contributions
Net Income = $79,200
(-$6,000)
(-$5,000)
(-$8,400)
(-$21,000 + -$9,600 + -$2,400)
(-$3,600)
(-$720)
(-$100)
($12,000)
(-$166)
Net Income = $34,134
To calculate the Tax for Tax Purposes, we will apply the federal and provincial tax rates based on Chelsea’s net income. Since the specific province is not mentioned in the provided information, I will assume a federal tax rate of 15% for illustrative purposes.
Tax for Tax Purposes = Net Income x Tax Rate
Tax for Tax Purposes = $34,134 x 15% = $5,120.10 (approximately)
B. Explanation of Omitted Items
Some items have been omitted from the calculations as they were not specified or relevant to the given information:
Other personal deductions like medical expenses or charitable donations were not provided.
Provincial tax rates were not provided.
Capital cost allowance (CCA) for the vehicle was not calculated as it was not mentioned whether Chelsea used the vehicle for business purposes or claimed CCA in previous years.
Other employment-related deductions like professional development expenses or union dues were not mentioned.
Other non-employment-related income sources like investment income or rental income were not provided.
These omissions may affect the final tax calculations and should be considered when preparing a complete and accurate tax return for Chelsea Lee.