Sandra Dumont is a lawyer. For five years, until June 30, 20X5, she had been employed by Calco Ltd., a national restaurant company. On July 1, 20X5, she began to practise law as a sole proprietor from an office in her home.

Dumont has asked you to prepare her 20X5 income tax return. At a recent meeting, you gathered the information provided in Exhibits I and II.

Required:

1. Determine Dumont’s minimum income for tax purposes in accordance with the aggregating formula of section 3 of the Income Tax Act and her minimum taxable income for the 20X5 taxation year.

2. Based on your answer to question 1, calculate Dumont’s federal income tax for the 20X5 taxation year.

3. Why did the CRA deny the deduction of Dumont’s 20X3 convention expenses? Can she obtain a deduction for the proposed 20X6 convention? If so, why?

EXHIBIT I

Sandra Dumont Information Regarding Work at Calco and Law Practice

1. Dumont’s salary to June 30, 20X5, was $51,200. From this, Calco deducted CPP and EI of $3,275, income tax of $16,000, and $300 for Dumont’s portion of the private group medical insurance premium. An additional premium of $300 was paid by Calco. Also, Calco paid the $200 premium for Dumont’s group term life insurance coverage of $50,000.

2. On June 30, 20X5, Dumont returned the company car that Calco had provided her. The car had a cost of $32,000, and Calco’s undepreciated balance was $18,000. Calco also had paid the operating costs for the car, which amounted to $2,100. Dumont had driven her car 16,000 km, of which 12,000 km were for business use.

3. Dumont travelled by air when working for Calco. Dumont used her personal credit card and accumulated frequent-flyer points. She submitted monthly expense reports and was reimbursed by Calco for the travel costs. In March 20X5, she and her husband used some of her accumulated frequent-flyer points to obtain free airline tickets for a vacation. As a result, they each saved the $800 airfare.

4. In 20X3, Dumont borrowed $20,000 from Calco. She has paid interest at 5% on the loan. Dumont used the borrowed funds for the down payment to purchase a rental property. The CRA’s prescribed interest rate was 9% in 20X5. Dumont repaid the loan on June 30, 20X5.

5. On June 30, 20X5, Dumont sold 500 shares of Calco Ltd. for $20 per share to the company’s controlling shareholder. Calco had issued the shares to Dumont at $10 in 20X2. At that time, the shares were appraised at $12. Calco Ltd. is a Canadian-controlled private corporation. At the time of the share sale, all of Calco’s assets were being used in an active business.

6. Dumont began practising law from her home office on July 1, 20X5 and registered for HST. She purchased the client list and files of a retiring lawyer for $50,000. She also purchased a computer for $4,000 and a legal library for $5,600.

7. On July 4, 20X5, Dumont purchased an automobile for $34,000, plus HST. She used the car 60% of the time for her law practice.

8. For the six months ended December 31, 20X5, the financial statements of Dumont’s law practice showed a profit of $41,000. The gross revenue of $88,000 consisted of the following:

Fees billed and received…………………………..           $47,000

Fees billed but unpaid at the year end ……………    24,000

Work in progress—not billed……………………..          17,000

      ……………………………………………….                        $88,000

Dumont indicated that she wanted to elect under section 34 of the Income Tax Act.

 9.  Operating expenses for the law practice included the following:

Liability insurance……………………	$ 2,200
Depreciation and amortization ………………….	9,100
Reserve for bad debts ………………………………	1,200
Golf club dues—while attending the club, clients are
entertained approximately 30% of the time…………..	1,600
Charitable donations       …………..…………..…………..	800
Promotion—client lunches       …………..…………..…………..	400
Secretarial services       …………..…………..…………..…………..	12,000
Computer software—word processing and billing program…………..	900

10. Dumont uses 12 square metres of her house exclusively as an office for her law practice. Expenses for the entire 80-square-metre home for all of 20X5 consist of the following:

Insurance …………..…………..…………..	$ 700
Mortgage interest …………..…………..…………..	9,000
Property taxes …………..…………..…………..	2,300
Utilities …………..…………..…………..…………..	3,000
…………..…………..…………..…………..…………..…………..	$15,000

The financial statements do not include the home-office costs.

EXHIBIT II

Sandra Dumont Other Financial Information

1. Dumont owns a residential rental property, which she had purchased in 20X3. Details of the rent and expenses in 20X5 are as follows:

As of December 31, 20X5, there were no unpaid rents from the tenant.

2. In 20X3, while employed at Calco, Dumont attended a national law convention. She deducted her expenses of $2,300 on her 20X3 tax return. Her employer willingly gave her the time off from work to attend the convention, even though it was not directly related to her work. In 20X5, Dumont received a reassessment notice from the CRA disallowing the entire convention expense deduction. Now that Dumont is practicing law, she will attend the 20X6 convention to upgrade her skills.

3. In 20X5, Dumont contributed $11,000 to her RRSP and another $1,000 to a spousal RRSP. She has contributed the same amount to the spousal plan for the past four years. On December 20, 20X5, her husband withdrew $4,000 from this spousal account.

4. The following additional receipts and disbursements occurred during 20X5:

Paid dental fees       …………………….	$2,900
Paid contributions to a registered federal political party…………………….	1,400
Paid interest on late payment of 20X4 income tax …………………….	240
Received cash dividends (Non-eligible) on Calco shares …	1,000
Received proceeds from the sale of a silver tea set (original cost—$1,600)…	1,100

5. In 20X5, Dumont received 100 shares of Parla Ltd., a public corporation. The shares were a stock dividend (Eligible) on the 2,000 shares she had purchased in 20X1 at $4 per share. At the time of the stock dividend, the shares were at $8. She sold the 100 stock dividend shares in December 20X5, at $7.

6. Dumont’s husband earned $110,000 in 20X5.

7. A review of Dumont’s 20X4 tax return showed the following:

Maximum RRSP deduction available in 20X5………………	$10,500
Capital gain deductions claimed in past years ………………	75,000
Net income from real estate rentals (after deducting a reserve for
uncollectible rents of $500)          ………………………………	860
Undepreciated capital cost—class 1 (rental property) ………………	52,000
Reserve for unpaid rents ……………………	500

Transcribed Image Text:

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