Paper 3

UFE CANDIDATE NUMBER:

THE INSTITUTES OF CHARTERED ACCOUNTANTS OF CANADA

III

2013 Uniform Evaluation PAPER III

Time: 4 hours

NOTES TO CANDIDATES:

(1)

Simulations that require knowledge of the Income Tax Act, the Income Tax Application Rules 1971, and the Income Tax Regulations are based on the laws enacted at March 31, 2013, or in accordance with the provisions proposed at March 31, 2013. Provincial statutes, statutes, including those those related to municipal municipal matters, are not examinable. examinable.

(2)

To help you budget budget your time time during the evaluation, evaluation, an estimate estimate of the number number of minutes minutes required for each simulation is shown at the beginning beginning of the simulation. simulation.

(3)

Tables of present present values, certain certain capital cost allowance allowance rates, and selected tax information information are provided at the end of the evaluation paper as quick reference tools. These tables may be used in answering any simulation on the paper.

(4)

Answers or parts parts of answers answers to simulations will not be evaluated if if they are recorded on anything anything other than the CICA-provided USB key or the writing paper provided. Rough notes will not be evaluated. You are asked to dispose of them rather than submit them with your response.

****** ****

The Canadian Institute of Chartered Accountants (CICA) and Certified Management Accountants of Canada (CMA) joined together January 1, 2013, to create Chartered Professional Accountants of Canada (CPA) as the national organization to support unification of the Canadian accounting profession under the CPA banner. The Uniform Evaluation (UFE) is still being developed and provided under the direction of CICA until final offerings of the CA program are complete.

 2013

Chartered Professional Accountants of Canada 277 Wellington Street West, West, Toronto, Ontario, Canada M5V 3H2 Printed In Canada

2013 Uniform Evaluation

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SIMULATION 1 (90 minutes)

It is August 15, 2013, and you, CA, are called into the office of Patricia Gonsalves, a partner at Princess & Gonsalves. Patricia begins, “We have started our field work on the audit of Enterprise Technology Systems Inc. (ETS), which operates across the country. ETS is primarily engaged in the sale of software and new and refurbished hardware. “During the audit, the staff person in charge of the engagement left the firm to pursue another opportunity. I want you to look at the work done to date (Exhibit I) to identify additional procedures that need to be performed and issues related to the procedures already done. Please also provide recommendations on any accounting issues you identify in the June 30, 2013 year-end file. “Although ETS has experienced losses in some years, management is expecting to be profitable going forward due to the company’s new line of business selling refurbished servers. ETS has been trading on the TSX-V (stock exchange for small venture companies) for about five years now and reports under International Financial Reporting Standards (IFRS). “Finally, the chief financial officer (CFO) implemented some new IT controls in an effort to make the system more automated (Exhibit II). Please evaluate the effectiveness of the controls and explain how they might affect our audit.”

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SIMULATION 1 (continued) EXHIBIT I

EXCERPTS FROM WORKING PAPER FILE Cash

I have obtained copies of the bank reconciliation and the bank statement as at June 30, 2013. ENTERPRISE TECHNOLOGY SYSTEMS INC. BANK RECONCILIATION As at June 30, 2013

Balance per bank statement Less: outstanding cheques 101008 112233 112244 *112266 *112277 112288 112299 *112310 112321

$ 1,224,300 C

10/15/2012 6/15/2013 6/16/2013 6/16/2013 6/16/2013 6/25/2013 6/25/2013 6/25/2013 6/25/2013

Bank balance per general ledger

(132,694) (8,465) (6,465) (88,729) (23,410) (3,760) (9,383) (145,891) (7,503) $

798,000 

C Agreed to bank confirmation * Vouched to copy of cancelled cheque  Agreed to balance sheet CENTRAL ONTARIO BANK OF MONEY

Receipts Opening balance Payroll – commissions Payroll – regular Cheque 112166 Frank’s Supermarket Receiver General – GST/HST refund Ending balance

Payments $196,771 $566,792 $100,208

$54,233 $78,777

Date 06/21/2013 06/24/2013 06/24/2013 06/27/2013 06/27/2013 06/28/2013 06/30/2013

Balance $1,955,061 $1,758,290 $1,191,498 $1,091,290 $1,145,523 $1,224,300 $1,224,300

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SIMULATION 1 (continued) EXHIBIT I (continued)

EXCERPTS FROM WORKING PAPER FILE Accounts Receivable

I reviewed the aged receivables and sent out confirmations as indicated below. I picked customers that, according to management, would be quick to respond. All confirmations have been returned and no issues were noted. # of Days Outstanding

Customer Name Frank ’s Supermarket

0 – 30

46 – 60

12,456

We Sell Good Stuff Randall Stevens Inc.

31 – 45 50,000

61 – 90

Kay Plumbing 9841236 Inc. Farrow & DeJaegher

36,456

–

18,000

68,000

68,000

–

765,999 No confirmation sent 48,000

1,750,000

48,000

48,000

–

1,750,000 No confirmation sent

280,868

135,678

416,546

416,546

3,250,000

3,250,000 No confirmation sent

499,999

499,999 No confirmation sent 299,000

6,559,322

Difference

36,456

765,999

Tools Tools Tools Total

Balance per Confirmation

24,000

Cupcake Girls Twins Therapeutics

90+

Balance per Listing

349,000

299,000 135,678

42,000

48,000

7,134,000

299,000

–

–



 Agreed to balance sheet Therefore, we have obtained comfort over the existence and valuation of accounts receivable. There is no allowance for doubtful accounts at year end and this appears reasonable. Inventory

ETS buys used or broken point-of-sale items (cash registers, bar code scanners, etc.) , which it then repairs and sells. Any item that requires significant work or new parts is scrapped. Inventory is reclassified from parts to scrap in the accounting records when ETS determines that the problems are not worth fixing.

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EXCERPTS FROM WORKING PAPER FILE

I attended the inventory count on June 30, 2013, and completed test counts from sheet to floor with the following results: Units per Units per ETS Total Cost Test Count Difference Stationary scanners 2,007 $ 404,842 2,009 (2) Broken registers 626 585,934 623 3 Refurbished servers 372 208,994 372 0 Portable scanners 452 214,411 452 0 Debit machines 194 236,187 194 0 Scrap 403 199,101 403 0 Total Inventory

$

1,849,469



 Agreed to balance sheet Given that my tests were relatively close to the figures provided, I concluded that there were no concerns with the inventory. There were some piles of stuf f that I didn’t count, but since they were not on the listing, I assumed they were scrap items that had been written off. Convertible Debt

ETS borrowed $4 million from PIC Investments (PIC), and recorded it as long-term debt on the balance sheet. PIC can convert the debt into 10,000 ETS common shares at any time, which represents a minimal shareholding of ETS. The debt was issued on January 1, 2013, and bears interest at 6%, payable annually. The debt will mature on December 31, 2017. PIC was willing to provide the loan at 7% without the conversion clause. Deferred Income Taxes

Due to the profit generated this year, ETS has recognized an asset related to its existing loss carryforwards. Schedule of estimated deferred tax assets (in thousands of dollars): Net Loss Carryforward for Tax Purposes $ 5,003 7,170 8,485 1,597

Estimated Deferred Tax Assets at 29% $ 1,451 2,079 2,461 463

$

$

22,255

6,454

Expiry Year 2014 2015 2031 2032

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EXCERPTS FROM WORKING PAPER FILE

ETS provided me with the financial projection to support the deferred income tax balance. Management is projecting a 21% annual increase in revenue. They stated that they believe a 3% improvement in gross margin is sustainable. They also indicated that they would keep other expenses under control for the next three years and, as a result, are projecting no increase in expenses. I took the following information from their financial projection: 2012 (audited)

Income (Loss) before tax (in thousands of dollars)

$ (1,665)

2013 (unaudited)

2014 (forecast)

2015 (forecast)

2016 (forecast)

$

$

$ 10,420

$ 17,047

1,316

5,286

New Line of Business

During the year, ETS started selling servers they had refurbished. This new line of business has proven to be very popular and ETS has sold approximately 2,000 servers this year, with revenue totalling about $5 million. Included in the price of the server is a two-year maintenance plan provided by ETS. Similar maintenance plans retail for $500. ETS records the entire revenue when servers are shipped to customers. After delivery, ETS installs the servers and asks the customers to sign an approval form acknowledging that the servers interface properly with their system. On average, ETS spends two weeks installing each server and ensuring it interfaces properly with the customer’s system. ETS requires payment within 30 days of shipment. Collection rates have been strong thus far.

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SIMULATION 1 (continued) EXHIBIT II

SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER Payroll

We used to have an entire team reconciling commissions paid to our sales staff based on their monthly sales, but have now automated this process. We implemented a control to ensure that the 2% commission paid to everyone matches the amounts calculated by the system. If the commission calculated does not match the payroll system, the system will automatically suspend the payment until variances are explained. Here is the May 2013 report. I haven’t had a chance to look into the variance. Sales for the month Commission rate Expected commission Commission per payroll system Variance

$ $ $ $

8,559,322 2% 171,186 196,771 25,585

Result: Difference greater than zero. Do not process commission payment. Purchasing

Only a few employees are authorized to sign cheques. We never found issues because all purchases have to be approved, and accounts payable does a good job of tying invoices to shipping documents, but we used to spend hours signing cheques and reviewing supporting documentation. Now accounts payable uploads all approved invoices into the system and generates a report. I access the report through the system and indicate “Yes” or “No” in the approved colu mn. Once I enter “Yes,” my signature is printed automatically. If I enter “No” in the approved column, the invoice goes unpaid until I change the status. I included an example approval report below. Company Business Equipment Inc. We R Furniture Broken Units Train the Trainer

Date 06/25/2013 06/27/2013 06/28/2013 06/28/2013

Amount 145,891 4,651 1,762 9,414

Invoice # A14a63 B124T 123nht BD1TH6573

Approved No Yes Yes Yes

Comment Invoice not attached

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SIMULATION 1 (continued) EXHIBIT II (continued)

SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER Sales Process Description

We process sales on a system called Sell It. Once a customer places an order, the sales representative enters the relevant information (customer name, address, item code, number of items, and discount, if applicable) into the system. Then, the following automated checks are performed: 





The customer name is checked against the master list to determine if it is a new customer. If new, the system generates an email asking the sales manager to approve the transaction and the addition of the customer to the master list. If a discount is provided to the customer, the system notifies the sales manager and requests their approval. The controller has also started reviewing every discount in detail at month end, and has been noticing an unusually high volume of discounts. If the sale pushes a customer over its approved credit limit, the system automatically denies the sale. Credit limits are stored with the master customer list.

The master customer list is located on the server and its file path is detailed in the IT policy manual. Once the sale has been approved, the system will send a message to the shipping department, which will get the items ready for shipment. After shipment occurs, a shipping number and date are added to the sales record and a notice is sent to the sales representative. This allows the sales representative to inform the customer of the expected delivery date. Sales for shipped orders are run through batch invoicing every Friday, and until then the files are stored on the server in a file folder called “Shipped but not invoiced.” On Friday, the invoicing process extracts the data from the files and generates invoices and the necessary accounting entries. The files are moved to the “Invoiced” folder. The system produces a report that lists the time and date when a file was created or amended. However, the report is so long that we never look at it. All sales staff are made aware of the location of all the folders on the server in case they need to review an invoice. At the end of the month, the new amounts recorded in the “Invoiced” folder are totalled to determine the monthly sales for each sales representative . Sales commission is allocated to “Selling and marketing” for financial statement presentation purposes.

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SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER

One of the benefits of the system is that it lets us track employee performance and update personnel files each month. We keep the master personnel files in the same directory as the master customer list. That way, all the information our controller needs is in one place. We strongly believe that all employees, from clerks to vice presidents, should be treated the same, so we have provided all of our employees with the same server and system access. We ask them to only change data they are responsible for.

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It is September 13, 2013. You, CA, have recently accepted a position as the chief accountant for Rent-a-Bike Inc. (RAB), which is a public bike rental system. RAB offers an alternate means of urban transport through its networks of bike stations located throughout the downtown cores of Toronto, Montreal, Ottawa and, most recently, Halifax. RAB bikes can be rented seven days a week, 24 hours a day. Annual and monthly memberships are available, in addition to a pay-per-use option. Your new boss, the CEO of RAB, Lochlyn Grace, comes into your office. “We’ve experienced strong gr owth since our opening just four years ago and have a number of exciting new projects on which I’m eager to get your input. As you know, our plan is to maintain our momentum. We’re currently debating either expanding in Toronto or breaking into the Vancouver market. We ’ve prepared some financial information and would like your analysis of each alternative (Exhibit I). “We’re also hoping to increase the loyalty of our existing customer base as well as the visibility of our bikes. To do so, we’ve launched two promotions this year. We have a planning meeting with our auditors next week. Please make sure you address the new accounting issues encountered this year, including how to account for the new promotions. Our accounting clerk has compiled a list of the accounting issues (Exhibit II). “There’s one other important thing we need to discuss with the auditors. This summer we received a grant from the Ontario Ministry of Tourism, Culture and Sport to install additional stations and provide extra service during the Canada Games, which took place in Ottawa in June (Exhibit III). I know we are supposed to report our compliance with the grant requirements. Is this covered as part of the regular audit? If not, what do you think the Ministry will require? Please be s pecific, as I’d like to know which potential reports could be prepared and what procedures our auditors would need to perform under each type of report.”

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SIMULATION 2 (continued) EXHIBIT I

RENT-A-BIKE INC. BACKGROUND AND INFORMATION ON EXPANSION ALTERNATIVES Background

Using RAB Bikes RAB bikes are parked in stations that are strategically located around the downtown core. Each station has one pay meter and 10 individual slots for parking and locking bikes. Customers can become members by purchasing annual or monthly memberships. Annual memberships are based on the calendar year (no pro-ration is made for part years). A member is assigned an access code to check out a bike and subsequently check it back into a station at their destination. Non-members can use RAB bikes, but must use a credit card at the pay meter to secure a deposit before receiving the access code. Operational Information RAB headquarters in Toronto is able to monitor in real time the number of bikes parked at every station in Canada. An alert goes out when a station is either below or above the optimum number of bikes, which is eight. Given how important it is to have no stations completely empty or full at any given time, RAB has trucks that roam around each area, prepared to replenish empty stations or pick up bikes from full stations based on either notification received from headquarters or the staff’s own visual inspections. While roaming the RAB areas, the staff also checks on each station on a rotational basis to watch for bikes that need servicing or customers who need assistance. A detailed log of the date and time the staff visits each station is maintained for each truck. The logs are sent to RAB headquarters on a daily basis. In addition to providing alerts to headquarters, the system generates an hourly report providing the number of bikes parked at each station at that point in time. These reports are maintained at headquarters and reviewed on a weekly basis by RAB supervisors.

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RENT-A-BIKE INC. BACKGROUND AND INFORMATION ON EXPANSION ALTERNATIVES Expansion

RAB is currently considering expanding its operations by establishing 60 new bike stations, either in Toronto, to extend northwest of the downtown core, or in Vancouver, to break into a new market. RAB has therefore ordered the manufacture of 60 new stations and enough bikes to support the optimal capacity of eight bikes per station. Toronto There are currently 100 stations located within a nine-square-kilometre area in the downtown core. The additional stations would be spread over a further six square kilometres. RAB’s sales and marketing team has estimated that in the first year these new stations would result in 600 additional monthly memberships each month (rate of $25/month) and 5,000 additional annual memberships (rate of $100/year). The Toronto bikes are available 12 months of the year. RAB’s pay -peruse revenue in Toronto is typically about 50% of total annual and monthly membership fees combined. Since RAB has an advertising agreement in Toronto allowing KingBank to put its logo on the bikes, it would be able to generate an additional $175 per bike each year. Further bike usage growth of 10% is anticipated to occur within one year, but growth beyond this would not be possible because capacity would be reached. In addition to the costs of the bikes and stations, annual costs associated with the new stations would include bike maintenance of $50 per bike; truck operating costs and maintenance of $200,000; wages of $160,000; general and administrative costs of $100,000; and rental of the space for each station of, on average, $100 per month. Vancouver This would be RAB’s first foray into the western Canadian market, so all estimates provided by RAB’s sales and marketing team are considered uncertain. RAB’s team anticipates that the bikes would operate for 12 months of the year in Vancouver. The team has estimated that installing the stations would generate 800 monthly memberships each month (rate of $35/month) and 3,000 annual memberships (rate of $90/year) in the first year. RAB’s pay -per-use revenue in new markets tends to be 75% of annual and monthly memberships combined. In the second year of operations, RAB anticipates that overall revenue would increase by 25%, and then by 10% the third year, but additional investment would be required for further growth. In addition to the costs of the bikes and stations, annual costs associated with the new stations would include bike maintenance of $100 per bike (moisture is tough on bikes); truck operating costs and maintenance of $300,000; wages of $200,000; general and administrative costs of $100,000; and rental of the space for each station of, on average, $50 per month.

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NOTES FROM ACCOUNTING CLERK ON ACCOUNTING ISSUES

In preparation for the December 31, 2013 audit, I have provided information on a number of new promotions and transactions that have occurred (or will occur) this year. I would like your input on how to account for each of the following items in accordance with Accounting Standards for Private Enterprises (ASPE). Promotions

Toronto To increase RAB’s visibility during the winter months, when bike usage typically declines, RAB is offering a new promotion to Toronto members. All annual members who check out a RAB bike more than 75 times in total during December through March will receive a 25% refund of their 2013 annual memberships. RAB anticipates that of the 10,500 annual Toronto members, 20% will attain the goal and be eligible for the rebate. How do we account for this in 2013 and in future years if we continue to offer this promotion? Ottawa To encourage long-term membership, RAB offered anyone purchasing a 2013 annual membership in January 2013 a 50% discount on their 2014 annual membership, if purchased at the same time. Therefore, the customer gets the benefit of a two-year membership for only $120. Annual membership in Ottawa is $80, and 1,050 people took advantage of the promotion. Ministry of Tourism, Culture and Sport Grant

In June 2013, RAB received a payment of $150,000 pertaining to a grant from the Ministry. This funding relates to installing and servicing eight additional stations in the vicinity of the 2013 Canada Games Sports Complex. Costs of $145,000 were incurred to purchase and install the stations and bikes. An additional $10,000 in costs was incurred in relation to the service portion of the agreement. I have simply recorded the $150,000 cash receipt as government grant revenue.

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NOTES FROM ACCOUNTING CLERK ON ACCOUNTING ISSUES RAB 1 Bikes

We own 120 bikes (model RAB 1) currently in use in Toronto that were purchased four years ago. We originally believed these bikes would be used for eight years, but shortly after we bought them, we were able to negotiate a contract with a different manufacturer to create a much less expensive and lighter bike (model RAB 2). The RAB 1 bikes still work fine, but they feel heavier and are not nearly as nice as the newer ones. Last month, our operations manager obtained approval from Lochlyn and the board of directors to sell the entire fleet of RAB 1s and replace them with RAB 2s. Last week, he negotiated a contract to sell all the RAB 1s to a summer camp for $40,000, with the deal closing on June 1, 2014. The camp has agreed to let us continue to use the bikes until then. As of right now, the fleet of bikes has a carrying amount of approximately $45,000. Our cost to transport the bikes to the c amp is estimated at $1,000. Halifax RAB Bikes

Our Halifax RAB bikes have been in operation for just over a year. Our RAB 2 bikes, which cost $90,000, were brought to Halifax last year. We assumed that they would have a useful life of six years, similar to our bikes in Ontario and Quebec. However, after only a year, we’re already starting to see rust on some of the frames, and the wheels need repair much earlier than in other locations. Our operations manager says that he can’t see them lasting longer than three more years. Currently we record straightline depreciation over the life of the asset, assuming minimal salvage value.

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SIMULATION 2 (continued) EXHIBIT III

EXCERPTS FROM MINISTRY GRANT AGREEMENT

The following excerpts have been taken from the agreement between Rent-a- Bike Inc. (“RAB”) and the Ministry of Tourism, Culture and Sport (the “Ministry”) , dated April 12, 2013. 1. RAB will install eight stations at specific locations in Ottawa, as dictated by the Ministry, by June 1, 2013. 2. RAB will maintain a minimum of one bike and a maximum of nine bikes at each station between the hours of 8:00 a.m. and 11:00 p.m. for the period from June 15 to June 30, 2013. Any variations from the established minimum and maximum numbers shall last no more than 15 minutes. 3. RAB will provide a dedicated maintenance/service truck on call for the eight stations between the hours of 8:00 a.m. and 11:00 p.m. for the period from June 15 to June 30, 2013. 4. Effective July 1, 2013, RAB will be permitted to maintain the stations at these locations permanently, without rental charge by the City of Ottawa. 5. The Ministry agrees to provide RAB with a payment of $150,000 on June 1, 2013. 6. The Ministry requires a report from RAB’s auditor supporting that the terms in this agreement have been abided by. This report is due February 14, 2014.

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It is September 16, 2013, and you are just about to sit down at your desk at Geeky and Keener Chartered Accountants when one of the partners, Mr. Keener, says, “CA, I need your help with new clients to our firm, John and Sheila Brown, who are looking for retirement planning advice .” The partner proceeds to tell you that Sheila has health problems, so John is thinking of retiring without waiting any longer. John sat down with the human resources manager at work to discuss his retirement. The manager provided him with information relating to his two pension retirement options (Exhibit I). John and Sheila are leaning towards option 2 because they don’t know if option 1 will provide them with the same amount of cash before tax. Mr. Keener informs you that John and Sheila are in a meeting room down the hall right now. “CA, go meet with them and gather as much information as you can. As I said, they are new to our firm, and it’s important to me that we address any issues they might have.” You proceed to meet with John and Sheila and take notes about their situation (Exhibit II). The next day, Mr. Keener tells you he spoke with John the previous night. He wants you to put together a report addressing which retirement option would be best for John, before tax. As the partner walks away, he says, “John also mentioned they have always prepared and filed their own personal income tax returns. He said they are always paying taxes and don’t k now why. He gave me their most recent tax returns and notices of assessment” (Exhibits III and IV).

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SIMULATION 3 (continued) EXHIBIT I EXCERPTS FROM JOHN’S 2013 ANNUAL PENSION STATEMENT

2013 ANNUAL PENSION STATEMENT

Employee Name: John Brown Work H ard Ltd.

Dear John, We are pleased to provide your annual pension statement. On the following page you will find details about your defined benefit pension plan with the company and the options available to you. We would like to point out that upon advising us of your decision to retire, you will have 90 days to inform us of which retirement option you are choosing. Your retirement date will be January 1 of the year following your notice to retire. A couple of facts about your annual pension: 

Under a defined benefit plan, a set annual pension payment is defined when you retire. This means you won’t have to worry about the state of the economy or fluctuations in the market.



If you die before your spouse, your spouse will receive a one-time payout of $20,000 on your death and will not be entitled to any additional future annual pension payments.

If you have any questions about your retirement, we would be happy to help you. Just give us a call.

Jane Smith Jane Smith Vice President, Human Resources

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E XCERPTS FROM JOHN’S 2013 ANNUAL PENSION STATEMENT

MY RETIREMENT BENEFITS Your Accrued Pension Entitlement to December 31, 2013

Since you have been a member of the plan for 35 years, you are entitled to choose from the two retirement pension options listed below. OPTION 1 If you retire at age 60 or later, your annual pension of $42,997 will be payable for your lifetime starting the year after you give notice of retirement. Should you choose to retire before age 60, your annual pension will be reduced by 20%. This reduction stays in effect throughout your retirement. If you retire before the point at which you choose to begin drawing your Canada Pension Plan (CPP) benefit, you will receive an additional annual payment (bridge benefit) of $10,330 until you begin to draw CPP. OR OPTION 2 If you retire at age 60 or later, you will receive a lump sum payment of $984,100 at the time of retirement. Should you choose to retire before age 60, your lump sum payment will be reduced by 20%. Other Information

Conventional wisdom suggests you need to consider economic uncertainty when making decisions about retirement. Current investment portfolios average 3% growth annually. We recommend using a life expectancy of age 90 for the purpose of financial planning.

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NOTES FROM YOUR MEETING WITH JOHN AND SHEILA BROWN Client Details 

John’s birthday: September 20, 1954 — he is currently 58.



Sheila’s birthday: May 30, 1959 — she is currently 54.



John and Sheila have two kids: o Jane, age 20; attending Carleton University o Harry, age 22; attending Saint Mary’s University (graduate studies) John and Sheila are planning to give each of their children a significant amount of money sometime in the near future to assist with the cost of tuition.



Sheila was diagnosed with multiple sclerosis in 2011. It got progressively worse until she was no longer able to work. Rather than going on long-term disability, Sheila felt that, at her age, retirement was a better option. She retired in June 2012 after working for 15 years as a receptionist. Sheila hopes they can soon purchase a vacation property somewhere exotic, where the weather and lifestyle will be more beneficial to her health. They are thinking of Fiji.



John and Sheila are very excited about retiring. Once retired, John plans to replace his old car with a new high-end convertible. They also showed you a brochure for the big trip they hope to take — a five-month cruise departing in January.



John will begin to draw from the Canada Pension Plan (CPP) at age 65, and his estimated annual CPP income will be $6,500. He will also begin drawing old age security at age 65, for an annual benefit of $6,300.



John and Sheila told me that they don’t have a lot of savings put away, but they are currently able to cover all their annual living expenditures on the after-tax income they earn.

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SIMULATION 3 (continued) EXHIBIT III

SUMMARY 2012 PERSONAL INCOME TAX RETURNS

Employment Other pensions Split-pension amount Taxable dividends Taxable capital gains Total income

Line 101 115 116 120 127 150

John 64,415 0 0 1,120 4,500 70,035

Sheila 18,000 7,000 0 0 0 25,000

RPP (Registered Pension Plan) RRSP Split-pension deduction Net income

207 208 210 236

4,442 1,000 0 64,593

1,800 0 0 23,200

Losses of other years Taxable income

253 260

0 64,593

0 23,200

Basic personal amount Amount for children CPP EI (Employment Insurance) Canada employment amount Pension income amount Disability amount Transfers – disability Transfers – education Medical expenses Subtotal Credits at 15% Donations and gifts Non-refundable tax credits

300 367 308 312 363 314 316 318 324 332 335 338 349 350

10,822 4,382 2,306 840 0 0 0 0 0 0 18,350 2,753 0 2,753

10,822 0 891 311 0 0 0 0 0 0 12,024 1,804 28 1,832

Federal tax 404 Non-refundable tax credits 350 Dividend tax credit 425 406 Net federal tax Income tax deducted 437 Balance owing (refund) Note: Provincial taxes not considered.

11,221 2,753 0 8,468 8,413 55

3,480 1,832 0 1,648 1,101 547

TOTAL TAXES FOR JOHN AND SHEILA

602

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SIMULATION 3 (continued) EXHIBIT IV

EXCERPTS FROM THE NOTICES OF ASSESSMENT (2012) FOR JOHN AND SHEILA Notice of changes and summary of assessment or re-assessment 2012 income tax return — JOHN BROWN

This notice explains the results of our assessment. Based on the information you provided, your elected split-pension amount is $0. As of the date of this notice, you have unused net capital losses from other years of $5,500. However, if you apply this amount to any year other than the current tax year, your unused balance may have to be recalculated. ----------------------------------------------------------Notice of changes and summary of assessment or re-assessment 2012 income tax return — SHEILA BROWN

This notice explains the results of our assessment. Based on the information you provided, your elected split-pension amount is $0. As of the date of this notice, you have unused net capital losses from other years of $0. Based on the information you provided, you have been approved for the Disability Tax Credit for the years 2009 – 2017. As of the date of this notice, you have undeducted Registered Retirement Savings Plan (RRSP) contributions available for use of $500.

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TABLE III A FORMULA FOR CALCULATING THE PRESENT VALUE OF REDUCTIONS IN TAX PAYABLE DUE TO CAPITAL COST ALLOWANCE

Investment Cost

(

×

Rate of Return

Marginal Rate of Income Tax +

×

Rate of Capital Cost Allowance

Rate of Capital Cost Allowance

)

×

×

( (

1+

Rate of Return 2

1+

Rate of Return

) )

MAXIMUM CAPITAL COST ALLOWANCE RATES FOR SELECTED CLASSES

Class 1 ..................................................... 4% Class 8 ..................................................... 20% Class 10 ................................................... 30% Class 10.1 ................................................ 30% Class 12 ................................................... 100% Class 13 ................................................... Original lease period plus one renewal period (minimum 5 years and maximum 40 years) Class 14 ................................................... Length of life of property Class 17 ................................................... 8% Class 29.................................................... 50% straight-line Class 43 ................................................... 30% Class 44 ................................................... 25% Class 50 ................................................... 55% Class 52 ................................................... 100%

SELECTED PRESCRIBED AUTOMOBILE AMOUNTS FOR 2012

Maximum depreciable cost — Class 10.1 $30,000 + GST or HST Maximum monthly deductible lease cost $800 + GST or HST Maximum monthly deductible interest cost $300 Operating cost benefit — employee 26¢ per kilometre of personal use Non-taxable car allowance benefit limits - first 5,000 kilometres 53¢ per kilometre - balance 47¢ per kilometre

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TABLE IV INDIVIDUAL FEDERAL INCOME TAX RATES 2012* Tax Rate

Taxable Income $42,707 or less $42,708 to $85,414 $85,415 to $132,406 $132,407 or more

15% $6,406 + 22% on next $42,707 $15,802 + 26% on next $46,992 $28,020 + 29% on remainder

*

2013 rates increase by an indexing of 2%. SELECTED NON-REFUNDABLE TAX CREDITS PERMITTED TO INDIVIDUALS FOR PURPOSES OF COMPUTING INCOME TAX

The 2012 tax credits are 15% of the following amounts: Basic personal amount Spouse or common-law partner amount Net income threshold for spouse or common-law partner amount Child Age 65 or over in the year Net income threshold for age credit Canada employment amount Disability amount Amount for children under 18 Infirm dependants 18 and over Net income threshold for infirm dependants 18 and over Children’s fitness credit Basic amount for: GST credit Child tax benefit

$10,822 10,822 NIL 2,191 6,720 33,884 up to $1,095 7,546 2,191 6,402 6,420 500 34,561 42,375

CORPORATE FEDERAL INCOME TAX RATE

The tax payable by a corporation on its taxable income under Part I of the Income Tax Act is 38% before any additions and/or deductions. PRESCRIBED INTEREST RATES (base rates)

Year

Jan. 1 - Mar. 31

Apr. 1 - June 30

July 1 - Sep. 30

2013 2012 2011 2010 2009

1 1 1 1 2

1 1 1 1 1

1 1 1 1 1

Oct. 1 - Dec. 31

1 1 1 1

This is the rate used for taxable benefits for employees and shareholders, low-interest loans, and other related-party transactions. The rate is 4 percentage points higher for late or deficient income tax payments and unremitted withholdings. The rate is 2 percentage points higher for tax refunds to taxpayers with the exception of corporations, for which the base rate is used.

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