Deck 5: Income From Business

Question 1

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 fee to finance the loan was $1,000. Both the interest and the appraisal fee were expensed by KM in 20x0.
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 KM's Balance Sheet.
During the year, a new display case worth $2,000 was purchased and expensed on the books.
Amortization expense of $21,000 was deducted during the year. Total CCA (following any adjustments) for the year was $16,000 and is not reflected in the financial statements.
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 on the books 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 1

Question 2

Determine whether the sale of the following items would be classified as a) income from capital for tax purposes, b) business income for tax purposes, or c) neither.

Answer 2

Question 3

Joe invested in a piece of land seven years ago when real estate prices were rising in his area and land values were expected to double 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) business income.
B) property income.
C) a capital gain.
D) exempt income.

Answer 3

A

Question 4

TriStar Industries was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its 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) Exempt-income test
B) Personal-expense test
C) Insurance proceeds exemption
D) Reserve test

Question 5

A taxpayer recognized a $40,000 loss in 20x5 from her small farm (which was a secondary activity to her full-time job as a dentist). What is the maximum deduction that would be allowed from the farm loss for the 20x5 tax year?

A) $0
B) $17,500.
C) $21,250.
D) $40,000.

Question 6

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

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

Question 7

Alice Smith has provided you with the following information pertaining to her 20x0 taxes:
- The financial statements for Alice's dental practice report a net income of $110,000.
- Amortization of $15,000 is reported in the 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. $40,000 of her expenditures are qualified SR&ED activities. These costs are currently reported as capital items on the balance sheet.
- Alice raises sheep on her land at her home in the country. She has a farming loss of $9,000 in 20x0.
Required:
Calculate Alice's minimum net income for tax purposes for 20x0.

Question 8

Sam runs a proprietorship that generated $75,000 in profits in 20x0. Included in these profits are: a) $10,000 - amortization expense; b) $5,000 - reasonable bad debt expense; c) $55,000 - cost of goods sold (closing inventory at market value); 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) $73,500
B) $75,000
C) $80,500
D) $89,000