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Case 1 Michelle and William

It is March of 2016 and Michelle and William have come to discuss their tax situation with you.
They predict that Michelle will not have to pay taxes for the 2015 year, which, they believe, will
allow William to claim the non-refundable spousal tax credit. They have provided you with the
following information, including the statements from their respective companies (see Exhibits I
and II) which they have prepared themselves.

Facts

William and Michelle have been married for 10 years. They are both 39 years old, and they have
3 children under the age of 6. The children attended daycare 4 mornings a week during 2015
while their parents worked. The total cost of the daycare was $2,300 for the year. William and
Michelle receive all children care benefits for which they qualify.

Michelle

Michelle began part-time employment at Design Inc. in 2015, and earned a gross salary of
$15,000.

Michelle received free use of the owners cottage for two weeks in May, which is typically
rented out for $500 per week.

Michelle began a small home-based proprietorship Michelles Design in 2010, which


generated $250 a month in profits in 2015. The business operates from a 200 square foot
room in the familys 2000 square foot home, and is used exclusively for the business.

Michelle did not file a tax return in 2014 since her company lost money and she had no other
income.

Michelle contributed $4,000 to her TFSA in 2015.

1
Exhibit II Michelles Design Company

The 2014 and 2015 annual financial statements for the business (prepared by Michelle) are as
follows:
2014 2015

Revenue $13,400 $22,050


Administrative expenses* 12,550 14,000
Owners salary 2,400 3,600
Work space in the home (Note1) 1,450 1,450
Net income (loss) ($ 3,000) $ 3,000

Note 1: The total housing costs include utilities of $2,400, mortgage interest of $8,400, property
taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary
to allow for the deduction of home-based business expenses.)

*All of the administrative expenses are compliant with the rules of the Income Tax Act.

Required:

a. Michelles tax situation

i. Verify Michelles taxable income, if any, in 2014 (use the ABCD format).

ii. Is there any benefit for Michelle to file her 2014 tax return? Explain your answer.

iii. Calculate Michelles taxable income in 2015.

iv. Determine whether Michelles business made a positive contribution to her


income. Explain your answer.

Hint: Adjustments will need to be made for business income, child care benefits and childcare
expenses. If multi-step calculations are required to arrive at a specific figure to be entered in the
ABCD table, show these detailed steps separately as note at the bottom of the table.