LAW 407 TAXATION. Section 2. Professor Sheppard TOTAL MARKS: HOURS

Transcription

1 THIS EXAMINATION CONSISTS OF 5 PAGES PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER THE UNIVERSITY OF BRITISH COLUMBIA FACULTY OF LAW end of the exam before you leave the classroom. THIS EXAMINATION CONSISTS OF THREE (3) QUESTIONS. TOTAL 180 minutes Allocated to general reading: 12 minutes Allocated to questions: 168 minutes Total examination time: 180 minutes allocated according to the marks, and on the following assumptions: 3. Suggested times are given for each question. The times have been alternative legal arguments are reasonably possible, state and discuss between 3.2(a) or (b). do not answer both. if you choose to answer 3.2, there is a further choice 3, subparts (3.1) and (3.2) are alternatives. Answer either 3.1 or 3.2, but them. if you need additional facts to fill in a gap or resolve an ambiguity, state what the facts are and why they are necessary. Give reasons for each answer. Calculations are not required to answer any question. In question 2. Please answer each specific question asked. If, in answering a question, room, and use during the examination your casebook, Act, notes and summaries, but use of library books, textbooks, or materials prepared by someone other than you, is prohibited. NOTE: 1. This is an open book examination. You may bring into the examination *********** 3 HOURS TOTAL MARKS: 100 Professor Sheppard Section 2 TAXATION LAW 407 FINAL EXAMINATION - April 2017 Return this exam question paper to your invigilator at the Page 1 of 5 Write Your Exam Code Here:

2 MARKS Question 1. Snaggletooth. When Dr. Nick applied to register the trade mark, Snaggletooth, a heavy-metal band objected that Snaggletooth was their for the candy bar, and the firm concluded that the bar should be called, Dr. Nick hired a marketing firm and payed it $15,000 to develop a brand name $75,000 in full by Dr. Nick in the same year. Under a contract with Dr. Nick, which Dr. Nick and Frink signed in 2015, Dr. Nick agreed to pay Frink $75,000 on completion of development of the candy bar project plus 1% of future gross sales of the product. In 2016, Frink completed development of the candy bar, billed Dr. Nick and was paid the opportunities. Dr. Nick hired Professor Frink under a written contract to develop a candy bar that could stralghten crooked teeth without dental imposes dismissal on violators. As a result, Professor Frink keeps his side surgery. Professor Frink is a tenured member of the faculty at the Springfield Institute of Technology, but he also moon-lights in the development of healthcare aids. The Institute prohibits moonlighting by faculty members, and line activities secret. 25 (c) (Suggested time: 42 minutes) The enterprising Dr. Nick is always alert to new under the authority of the Health Professions Act (BC), regulates the medical College investigated Dr. Nick s practice, found him in breach of its rules, and $25,000. Advise Dr. Nick about deductibility. profession in the province. At the request of the decedent s family, the required him to pay a penalty of $25,000 for professional misconduct or face termination of his membership in the medical profession. Dr. Nick paid the 5 (b) (Suggested time: 8 minutes) The College of Physicians and Surgeons of BC, Dr. Nick hired a lawyer, who advised Dr. Nick that he had to attend, and suspicious about the death, and asked for a coroner s inquest into the cause. helped him prepare his testimony for the inquest. Dr. Nick was relieved that lawyer sent Dr. Nick a whopping bill for legal services. Advise Dr. Nick away, while under his care. As this was the fourth death so far this year (2017) of a patient under Dr. Nick s care, the decedent s family was about deductibility of the bill from his professional income. the coroner s inquest absolved him of responsibility for the death, but the 5 (a) (Suggested time: 8 minutes) One of Dr. Nick s patients unfortunately passed addition to carrying on the practice of medicine, he develops and markets dubious products and services in the health care field. Dr. Nick Riviera practices discount medicine in Springfield, B.C., and in Page 2 of 5

3 Page 3 of 5 trade-name and logo. Dr. Nick had to pay the band a sum of money ($10,000) to withdraw its objection to registration. Before mass-producing Snaggletooth, Dr. Nick tried to determine the market demand for Snaggletooth and, with great difficulty, only managed to sell 1,000 candy bars at $10 each in 2016, paying Frink $100 (1% of $10 price per bar x 1,000 candy bars). Purchasers complained almost immediately that the product did not achieve the results hoped or claimed for it. Dissatisfied purchasers spread the word that Snaggletooth didn t work. Dr. Nick realized that he should give up on Snaggletooth as it was not viable. Because of the Institute s prohibition on moonlighting Frink did not report either the $75,000 or the $100, in his tax returns, but Dr. Nick deducted the $10,000 he paid to the band and the $75,000 in his 2015 return and the $100 in his 2016 return. The CRA audited Dr. Nick and Frink s tax returns and discovered the discrepancy between them The CRA denied Dr. Nick s deductions for lack of a reasonable expectation of profit. The CRA reassessed Frink on the same amounts as earned income and claimed criminal penalties for tax evasion against him for willfully failing to report income in his returns Advise Dr. Nick about the deductibility of the sums he paid to the band, and to Frink. Advise Frink about the taxability and consequences to him of his non-disclosed amounts. 15 (d) (Suggested time: 25 minutes) The Institute investigated Professor Frink s violation of its prohibition on professorial moonlighting, with a threat of dismissal against him. To represent himself against the Institute, Professor Frink retained a skilled lawyer, who obtained very favourable terms of settlement with the Institute. In return for Professor Frink s resignation from the Institute, for which he had worked full-time since 1980, the Institute agreed to pay him compensation of $37,000 ($1,000 per year for each year of work since 1980 or 37 years). For his emotional distress at by being barred from ever setting foot on the beloved campus of the Institute, it paid Professor Frink another $37,000. The lawyer sent Professor Frink a bill for legal services of $24,000, which he paid. Professor Frink actually received in 2017 only $50,000 ($74,000 minus $24,000). Advise Professor on the tax consequences, but calculations are not required. Question 2 Classified advertisements in The Springfield Shopper (the only newspaper in Springfield) contained many ads seeking child care placements on behalf of working parents with youngsters. Noticing this demand, Patty and Selma Bouvier, though they have never worked in the childcare field, do not have children of their own, and dislike children, thought they could make some easy money by operating a daycare in half of their home, which they ownei, while they continued to reside in the other half. (For the purposes of answering this question, treat Patty and Selma as an individual taxpayer, and do not consider any partnership issues.)

4 Page 4 of 5 5 (a) (Suggested time: 8 minutes) Before starting a daycare facility in Springfield, a proprietor has to obtain a permit from the Springfield city council, headed by corrupt Mayor Quimby. Patty and Selma applied, but the council initially refused their application. Patty and Selma were advised that the only assured way to deal with the council was by first making an undocumented cash donation to Mayor Quimby personally. They made the secret payment to Quimby personally in his office, and it worked wonders. Council reversed its decision at its next meeting, and granted their application. Advise Patty and Selma about the deductibility of the secret payment from the earnings of their daycare operation. 10 (b) (Suggested time: 17 minutes) Before opening the day-care centre, a Springfield building inspector examined Patty and Selma s home, to assess its suitability for operating partly as a daycare. The building inspector identified the mode of construction as wood frame and told Patty and Selma, correctly, that the structure, if used for the purpose of earning income, was depreciable as Class 6 (10%). The building inspector found the back porch, which had no railing was dangerous and required a new railing to protect small children from falling off the porch. The inspector required Patty and Selma to add a new railing. Patty and Selma hired a contractor to build the new railing but delays ensue and the railing will not be completed until Patty and Selma will use the last of their life-savings to pay the construction bills as the work progresses. Advise Patty and Selma about the income tax consequences of constructing the railing. 15 (c) (Suggested time: 25 minutes) Patty and Selma opened the doors of their day care centre, to immediate success, but it was only marginally profitable, and to supplement their meagre earnings from the day-care, Patty decided to take on additional work as a kindergarten supervisor with the Springfield Elementary School. The terms of engagement offered by the school would require Patty, staring in September 2017, to attend in person every school-day after school and to supervise the children at their play indoors or in the playground, until 6:00 p.m., by which time all the children would have gone home. Unlike the teachers, who have offices in the school building, receive monthly pay and benefits for working at the school, Patty would not have an office, would receive a one-time lump sum of $30,000 for the year s work, at the end of the academic year on June 30 th, 2018, without benefits. Patty would be required to have her own car available with her at school in case of emergencies and to drive herself to and from home (containing the day-care centre). Patti would have to pay all her own automobile expenses but the school would pay her an additional $25,000 annually for the use of her car. Patty wants your tax advice about asking the school if she might have an office in the school, to be paid monthly and to receive benefits like the teachers. Advise Patty about the tax consequences of the terms offered by the school and her proposed terms.

5 Springfield s favourite TV news anchor, Kent Brockman, bored to tears and craving excitement, has decided to take a 5-year leave of absence from his current position and to become a freelance TV journalist covering the world s hot spots. For the five years, Kent will travel around the globe staying in hotels temporarily news-networks to offer him assignments to cover events around the world. Kent proposes to deposit his earnings in his account at his local branch of the First news reports about news-worthy events happening abroad. He expects these Bank of Springfield. Kent is a single parent of two adult children who expect to complete high-school and attend Southern Springfield University for the five continue to support them financially while he is abroad. Kent has a pet dog home that he owns and will continue to occupy in Springfield until his departure named Mansbridge that will remain in the house with his children while he is expects to return to Springfield regularly to visit his children and dog during the in May Kent does not charge the children for room and board and will (Suggested time: 35 minutes) on location while he reports to English-language news networks that will buy his years, while living at home in Springfield. The children live with Kent in the abroad. Kent proposes to retain his membership in the Springfield Lawn Bowling Club, but to change his membership status to become an absentee member. FEe five years. After the five years are up, with the concurrence of his employer, which he has already obtained, Kent proposes to return to Springfield and resume Kent does not want to pay Canadian income tax while out of the country. What 3.2(a) Identify one type of non-taxable receipt and one different type of non deductible expenditure, both of which do not receive recognition under the exclusion from Canadian income tax. 3.2(b) Define goodwill of a business for financial and tax purposes and describe its income tax treatment with references in your answer to the course END OF EXAMINATION are the Canadian income tax consequences to Kent? Discuss. his position as local TV anchor. He will move back into his home at that time. Income Tax Act. Describe and evaluate the policy arguments for and against their materials. Question 3 ANSWER EITHER 3.1 OR 3.2(a) or (b) OR EITHER OR Page 5 of 5