chapter two solutions

8/14/2019 Chapter Two Solutions

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CHAPTER TWO SOLUTIONS

Solution to Assignment Problem Two - 1

Need For Instalments Instalments are required when an individuals net tax owing exceeds $3,000 inthe current year and in either of the two preceding years. In somewhat simplified terms, net tax owing isdefined as the combined federal and provincial taxes payable, less amounts withheld under ITA 153. AsMs. Garonds net tax owing in all three of the years 2005 through 2007 exceeds $3,000, she is clearlyrequired to make instalment payments.

Amounts The amount of the instalments could be based on the net tax owing for 2006 or 2007. Inaddition, the first two 2007 instalments could be based on the net tax owing for 2005, with the final twoquarterly instalments based on the 2006 net tax owing. Given that the lowest net tax owing figure is 2007s$4,150 ($14,000 - $9,850), use of this figure will give the lowest instalment payments. The quarterlypayments would be $1,037.50 and are due on March 15, June 15, September 15, and December 15.


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An individual will be required to make quarterly instalment payments if the net tax owing is greater than$3,000 ($1,800 in Quebec) in:

the current year; and

either of the two preceding years.

The quarterly payments are due on or before the 15th day of March, June, September, and December andwould be based on either:

one-quarter of the estimated net tax owing for the current year; or

one-quarter of the net tax owing for the immediately preceding year.

An individual can base the March 15 and June 15 instalments on one-quarter of the net tax owing for thesecond preceding year. For the September 15 and December 15 instalments, the payments would be

calculated using the preceding years net tax owing, reduced by the total amount paid in the March 15 andJune 15 instalments.

As an alternative to calculating the instalments, individuals can make use of an administrative procedureprovided by the CRA. Early in the year, the CRA sends notices called Instalment Reminders to thoseindividuals whose income in the second preceding year indicated a need to make instalment payments. Thefirst two quarterly instalments for the current year are each calculated as one-quarter of net tax owing forthe second preceding year. The last two instalments are each one-half of the net tax owing for theimmediately preceding year, reduced by the first two instalments.


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Part A Under ITA 157(1), the Sloan Company would have three alternatives with respect to the calculationof its instalment payments. The alternatives and the relevant calculations are as follows:

Estimated Current Years Taxes Payable The instalment payments could be based on 1/12th ofthe estimated taxes payable calculated at current rates on the estimated Taxable Income for thecurrent year. In this case the resulting instalments would be $12,000 per month ($144,000 12).

Preceding Years Taxes Payable The instalment payments could be based on 1/12th of the taxespayable in the immediately preceding taxation year. The resulting instalments would be $12,750($153,000 12).

Preceding One And Two Years Taxes Payable The third alternative would be to base the firsttwo instalments on 1/12th of the taxes payable in the second preceding year and the remaininginstalments on 1/10th of the taxes payable in the preceding year, less the total amount paid in thefirst two instalments. In this case, the first two instalments would be $14,000 ($168,000 12) andthe remaining 10 instalments would be $12,500 [($153,000 - $28,000) 10].

As the Company has been experiencing a decline in its taxes payable over this three year period, the

payments based on the current years estimated taxes payable would be the most favorable in terms ofminimizing cash outflows.

Part B If the Company failed to make instalment payments towards the 2007 taxes payable, it would beliable for interest from the date each instalment should have been paid to the date of payment. Assumingthe actual 2007 taxes payable are $144,000, it would be the least of the amounts described in ITA 157(1),and interest would be calculated based on this alternative. The rate charged would be the one prescribed inITR 4301 for amounts owed to the Minister, the regular rate plus 4 percentage points.

There is a penalty on large amounts of late or deficient instalments. This penalty is specified in ITA 163.1and is equal to 50 percent of the amount by which the interest owing on the late or deficient instalmentsexceeds the greater of $1,000 and 25 percent of the interest that would be owing if no instalments weremade.

There is no penalty for late payment of taxes, provided a return has been filed. If no return is filed, thepenalty amounts to 5 percent of the tax that was unpaid at the filing date, plus 1 percent per month of theunpaid tax for a maximum period of 12 months. This penalty is in addition to any interest charged. Thepenalty is doubled to 10 percent, plus 2 percent per month for a maximum of 20 months for a secondoffence within a three year period.


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Case A As the individuals net tax owing is expected to exceed $3,000 in 2007 and was more than $3,000in both 2005 and 2006, the payment of instalments is required. The net tax owing in 2007 is estimated tobe $3,500 ($13,500 - $10,000). As this is lower than the 2005 or 2006 net tax owing, instalments should be

based on this amount. The required instalments would be due on March 15, June 15, September 15 andDecember 15 and would equal $875 ($3,500 4) in each quarter.

Case B As the individuals net tax owing is expected to exceed $3,000 in 2007 and was more than $3,000in 2005, the payment of instalments is required. While there is a technical requirement to make instalmentsin 2007, the amount would be nil. This is based on the fact that there was no instalment liability in 2006.

Case C The twelve instalments would be based on the current years taxes payable. They would be due onthe last day of each month and would equal $1,125 ($13,500 12).

Case D The twelve instalments would be based on the previous years taxes payable. They would be dueon the last day of each month and would equal $1,200 ($14,400 12).

While there are alternatives in all Cases, the preceding answers represent the minimum instalments, asrequired in the problem.


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Case One

A. Corporations are required to make instalment payments unless the taxes paid in the preceding taxationyear or the estimated taxes payable for the current year are less than $3,000. In this Case, instalmentswould be required.

B. The best choice would be to base the instalments on the previous years net tax owing. This wouldresult in instalment payments of $1,899 ($22,785 12) to be paid at the end of each month beginningJanuary 31, 2007.

Case Two

A. The net tax owing for the current year is $5,031($64,457 - $59,426). In addition, the net tax owing in2005 was $3,316 ($56,742 - $53,426). As the net tax owing for the current year and one of the twopreceding years exceeds $3,000, instalment payments are required.

B. As the net tax owing for 2006 was nil, using this year as the instalment base would be the best choice.While there is a technical requirement to make instalments in 2007, the amount would be nil. This is

based on the fact that there was no instalment liability in 2006.

Case Three

A. The net tax owing for the current year is $6,409 ($64,457 - $58,048). In addition, the net tax owing in2006 was $3,302 ($22,785 - $19,483). As the net tax owing for the current year and one of the twopreceding years exceeds $3,000, instalment payments are required.

B. The best alternative would be the one used by the CRA in its quarterly Instalment Reminders. Thismeans that the March 15, 2007 and June 15, 2007 payments would each be nil (there was no net taxowing in 2005). The September 15, 2007 and December 15, 2007 payments would each be $1,651[($3,302 - Nil) 2)].

Case Four

A. The taxpayers net tax owing would be $5,682 ($56,742 - $51,060) in 2005, $6,620 ($22,785 -$16,165) in 2006, and $3,985 ($64,457 - $60,472) in 2007. As the net tax owing for the current year

and both of the two preceding years exceeds $3,000, instalment payments are required.

B. The best alternative would be to base instalments on the current year net tax owing. This means thatthe March 15, June 15, September 15, and December 15, 2007 instalments would each be $996($3,985 4).

Case Five

A. Corporations are required to make instalment payments unless the taxes paid in the preceding taxationyear or the estimated taxes payable for the current year are less than $3,000. In this Case, instalmentswould be required.

B. The best choice is to use the current year as the base. This would result in instalment payments of$5,371 ($64,457 12) to be paid at the end of each month beginning January 31, 2007. If 2005 is usedas the base, the first two instalments would be $4,729 ($56,742 12), somewhat less than the $5,371amount required using the current year. However, the remaining 10 instalments would be $6,210{[$71,560 - (2)($4,729)] 10}. Under this alternative the total instalments would be $71,560, over$7,000 higher than the $64,457 total when the current year is used as the instalment base. This largertotal would more than offset the advantage of having the initial payments somewhat smaller under thisapproach.


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Part A Testamentary trusts are permitted to use a non-calendar fiscal year as their taxation year. Incontrast, inter vivos trusts must use the calendar year as their taxation year. Without regard to the type oftrust, its tax return must be filed within 90 days of the end of the taxation year.

Part B Corporations can use a non-calendar fiscal year as their taxation year. The corporate T2 return mustbe filed within six months of the end of the taxation year.

Part C For individuals, the taxation year is always the calendar year. Individuals without business incomeare required to file their tax returns no later than April 30 of the year following the relevant taxation year.For individuals with business income, and their spouse or common-law partner, the filing deadline is

extended to June 15.

Part D The general rules are the same for both deceased and living individuals. That is, the return must befiled no later than April 30 of the year following the year of death. If the deceased individual, or his spouseor common-law partner had business income, the due date is June 15 of the year following the year ofdeath.

However, when death occurs between November 1 of a taxation year and the normal filing date for thatyears return, representatives of the deceased can file the return on the later of the normal filing due date(April 30th or June 15th of the following year) and six months after the date of death.


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The following additional information would be relevant in considering Mr. Simons situation:

A. Determination of when the notice of reassessment was mailed. A notice of objection must be filed

prior to the later of:

90 days from the date of mailing of the assessment or reassessment; and

one year from the due date for the return under assessment or reassessment.

In this case, the later date is clearly 90 days after the mailing of the notice of reassessment.

B. Determination of when the original assessment for the 2003 taxation year was mailed. A three yeartime limit applies from the date the original assessment was mailed. As the original assessment for2003 would normally have been mailed after April, 2004, this reassessment is likely within the threeyear limit.

C. Determination of whether Mr. Simon has signed a waiver of the three year time limit or if he is guiltyof fraud or misrepresentation. If the reassessment is not within the three year time limit, Mr. Simon

would not usually be subject to reassessment. However, if Mr. Simon has signed a waiver of the threeyear time limit, or if fraud or misrepresentation is involved, he becomes subject to reassessment,regardless of the time period involved.

If the preceding determinations indicate that the reassessment is valid and you decide to accept Mr. Simonas a client, the following steps should be taken:

You should have Mr. Simon file a Consent Form, T1013, with the CRA which authorizes you torepresent him in his affairs with the CRA.

A notice of objection should be filed before the expiration of the 90 day time limit.

You should begin discussions of the matter with the relevant assessor at the CRA.


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A. Accountant X is not liable for participating in an understatement of Client As taxes payable becauseAccountant X did not know the expense receipt was personal in nature, and would not be reasonablyexpected to know, but for circumstances amounting to culpable conduct, that this was the case. This is

because X relied in good faith on the information provided by A.

B. Based on these facts, Accountant X would be liable for a third party penalty. However, if AccountantX had determined that there was a reasonable basis upon which the Tax Court decision could beoverturned by a higher court, the penalty would not apply.

C. Based on these facts, if X were to prepare and EFILE Zs return without obtaining the charitabledonation receipt, X would be liable for a third party penalty. Given that the size of the donation is sodisproportionate to Zs apparent income as to defy credibility, to EFILE the return without verifyingthe amount of the receipt would show an indifference as to whether the Act is complied with or wouldshow a wilful, reckless, or wanton disregard of the law.


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chapter two solutions

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