Problem 1: Rental Income and Problem 2: Dividend vs. Interest Income

CCA Class 3 1

Problem 1: Rental Income

During 2020, Ms. Jessica Roberts owns two residential rental properties.  Information on these properties is as follows:

                                                            124 Glengarry          436 Rankin

Avenue Avenue

CCA Class 3 1

Capital Cost Of Building $827,000 $947,000

January 1, 2020 UCC $563,086   Nil

Rental receipts and expenses, not including CCA, for year ending December 31, 2020 are as follows:

                                                             124 Glengarry                         436 Rankin

Avenue Avenue

Rental Receipts $50,400 $63,600

Property Taxes ( 12,400) ( 14,205)

Interest Charges ( 24,000) ( 41,300)

Other Expenses

(Not Including CCA) (  5,400) (  3,600)

Net Rental Income (Loss)
Before CCA $ 8,600 $ 4,495

Other Information:

1. During 2020, Ms. Roberts spent $63,000 on improvements to the property at 124 Glengarry Avenue.  While none of the changes were required, the tenant insisted on the changes before he was prepared to renew his lease.  These improvements will also enhance the value of this property.

2. The building at 436 Rankin Avenue was acquired during 2020 for $1,147,000, including an estimated value for the land of $200,000.

Required:  Calculate Ms. Robert’s minimum net rental income for 2020.  You should provide a separate CCA calculation for each property and specify how much CCA should be taken for each building.  

Problem 2: Dividend vs. Interest Income

Betty, Barbra, and Becky Larson are sisters who live in the same city.  Due to disparate life choices, they have experienced varying degrees of economic success.  Because of this, their additional income will be taxed at different rates as follows:

Betty Barbra Becky

Federal Marginal Tax Rate 15% 20.5% 33%

Provincial Marginal Tax Rate 8% 12% 20%

In 2018, the three sisters bought a block of lottery tickets and agreed to an equal sharing of any winnings.  One of the tickets turned out to be a winner, and they shared a $60,000 prize.

They each intend to invest their $20,000 on January 1, 2020 and are considering the following alternatives:

Corporate Bonds  Corporate bonds that provide a 5 percent coupon rate.  These bonds can be purchased at their maturity value.  They mature in 20 years.

Preferred Stock  Preferred shares are available at a price of $25 per share.  These shares pay a non-cumulative dividend of $1.50 per share.

The income from these investments would not move any of the three sisters to a higher federal or provincial tax bracket.  The provincial dividend tax credit on eligible dividends is equal to 27 percent of the dividend gross up.  Each sister has sufficient income to use all of her available tax credits.

Required:  Advise each of the Larson sisters as to which investment they should make.  As part of your recommendation, calculate the after tax income that would be generated for each of the sisters, assuming that they invested their $20,000 in:

A. The corporate bonds.

B. The preferred stock.