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 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 1

A

Question 2

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 Canada Revenue Agency's decision?

A)Exempt-income test
B)Personal-expense test
C)Insurance proceeds exemption
D)Reserve test

Answer 2

A

Question 3

Ken Gray runs a small proprietorship (Ken's Fish)which specializes in fishing gear.He has provided you with the following information:
(*All closing inventory is valued at market value.)
Required:

A)Calculate the net income for tax purposes for Ken's Fish.
B)Explain why any items have been omitted.
C)Briefly discuss how your answer in A)would change if Ken had valued his inventory at cost.

Answer 3

A)
B)Omitted items:
Advertising in an American newspaper is not deductible when the targeted market is Canadian.S.19
Half of the meals and entertainment are not deductible.S 67.1
Property taxes on vacant land is only deductible to the extent that income is earned.S.18(2),(3)The amount can be added to the cost base of the land.
Recreational fees are not permitted as deductions.S.18(1)(l)
The convention is not within the territorial scope of the organization hosting the conference,therefore,it is not an allowable deduction.S.20(10)
C)The Income Tax Act requires that closing inventories be valued at either:
1)the lower of cost or market value of each item,or
2)market value of all items of inventory.
Ken would need to value his inventory as per these provisions,which could affect the balance of the company's cost of goods sold and net income for tax purposes.

Question 4

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

Question 5

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.
• Amortization of $15,000 was 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.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 her 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 6

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 7

KM Ltd.is a Canadian-controlled private corporation,operating a small gift store in Vancouver.The company has a December 31^st 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 30^th,KM's president announced a bonus to be paid to the company's key employee in the amount of $5,000,which was expensed in the books that day.The employee will receive the bonus in 20x1 in equal payments of $2,500,to be issued on January 30^th and July 30^th.
Required:
Determine KM Ltd.'s net income for tax purposes for 20x0.

Question 8

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 9

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

Question 10

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.