Deck 5: Income From Business

Question 1

Joe invested in a piece of land seven years ago when real estate prices were rising in his area, and he hoped that the land would double in value within five years. The land remained vacant and was only used in 20X0 when Joe was approached by a
Businessman to rent the land for two weeks for a local carnival for a fee of $1,000. It is now 20X2 and Joe has been offered a significant sum of money for his land in response to an advertisement he placed in a local newspaper. Based on Joe's primary intention for the land, the gain on the sale would be classified as:

A) exempt income.
B) business income.
C) property income.
D) a capital gain.

Answer 1

B

Question 2

Sam runs a proprietorship that generated $75,000 in profits in 20X0. Included in these profits are: a) $10,000 of amortization expense; b) $5,000 bad debt expense; c) $55,000 cost of goods sold; and $8,000 meals and entertainment with clients. Sam's capital cost allowance has been accurately calculated at $8,500 for the year. How much is Sam's business net income for tax purposes?

A) $75,000
B) $80,500
C) $73,500
D) $89,000

Answer 2

B

Question 3

KM Ltd. is a Canadian-controlled private corporation, operating a small gift
store in Vancouver. The company has a December 31st year-end. KM's financial statements reported net income before taxes of $210,000 in 20X0.
Financial information relating to 20X0 is as follows:
Land adjacent to the gift shop was purchased with a $75,000 bank loan during
the year to allow for an outdoor sales area during warm weather. Interest expense on the loan for the year was $9,600, and the appraisal fees to finance the loan wa
$1,000. Both the interest and the appraisal fees were expensed by KM.
The company hired a contractor to landscape the land. The $5,000 bill for the
landscaping was paid in full during the year and capitalized on the Balance Sheet Amortization expense of $21,000 was deducted during the year. Total CCA for
the year of $16,000 was accurately recorded in the tax accounts, but was not transferred to the financial statements.
During the year, a new display case worth $2,000 was purchased and expensed on the books.
The following were also expensed during the year:
On December 30th, KM's president announced a bonus to be paid to the
company's key employee in the amount of $5,000, which was expensed that day. The employee will receive the bonus in 20X1 in equal payments of $2,500, to be issued on January 30th and July 30th.
Required:
Determine KM Ltd.'s net income for tax purposes for 20X0.

Answer 3

Question 4

Which of the following regarding farming income is TRUE?

A) A taxpayer who earns a full-time income as a corporate lawyer recognized a $40,000 loss this year from her small farm. The maximum deduction allowed this year from the farm loss is $21,250.
B) A taxpayer who earns a full-time income as a corporate lawyer recognized a $40,000 loss this year from her small farm. The maximum deduction allowed this year from the farm loss is $40,000.
C) A taxpayer who earns a full-time income as a corporate lawyer recognized a $40,000 loss this year from her small farm. The maximum deduction allowed this year from the farm loss is $17,500.
D) Farming income must be calculated on an accrual basis.

Question 5

List the six general limitations to business profit determination and give an example for three of the items

Question 6

Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act?

A) Legal and accounting fees incurred during the construction of a building.
B) Work space in a home used as a taxpayer's principal place of business.
C) Advertising costs in a non-Canadian newspaper directed at an American market.
D) Maintenance fees on a yacht at Yellow Yacht Leasing Inc.

Question 7

Determine whether the transactions concerning the following assets (shown in italics) would be classified as a) income from capital for tax purposes, b)
business income for tax purposes, or c) neither; and briefly explain the reason for your decision.

Question 8

Alice Smith has provided you with the following information pertaining to her
20X0 taxes:
· The financial statements for Alice's dental practice reported a net income of
$110,000.
· $35,000 of the business revenues is from unbilled work in progress. There was no unbilled work in progress in the prior year. Alice has made a Section 34
election.
· Amortization of $15,000 was reported in the business' expenses.
Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements.
· Alice conducted scientific research and experimental development (SR&ED) in 20X0. She met with a CRA agent who verified that $40,000 of her expenditures were qualified SR&ED activities. These costs were treated as capital items on he financial statements.
· Alice raises sheep on her land at her home in the country. She had a farming loss of $9,000 in 20X0.
Required:
Calculate Alice's minimum net income for tax purposes for 20X0.

Question 9

TriStar Industries was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on the annual tax return. Which of the following general limitations to business profit determination best describes the reason for the Canada Revenue Agency's decision?

A) insurance proceeds exemption
B) exempt-income test
C) reserve test
D) personal-expense test