ABC Limited specializes in home renovation and interior design in the Toronto area. Most of the construction and finish carpentry work is subcontracted to self-employed contractors. The following information relates to the corporation's net income for the year ended December 31.

Sales revenue							$ 3,500,000
Direct contracting expenses							$ 2,750,000
Gross profit							$ 750,000
General and administrative expenses:
Salary to President of ABC Ltd.							$ 99,000
Salary to spouse (accounting) (Note 1)							$ 45,000
Meals and entertainment (Note a)							$ 11,000
Advertising expenses (Note b)							$ 3,200
Travelling expense (Note c)							$ 17,500
Interest and bank charges (Note d)							$ 17,000
Amortization (Note e)							$ 7,500
Office expenses							$ 5,500
Total expenses							$ 205,700
Net operating profit							$ 544,300
Other:
Gain on sale of real estate (Note f)							$ 45,000
Sale of design contracts (Note g)							$ 17,000
Net income:							$ 606,300

There was one unrecorded receivable for a renovation project completed on December 31 for $15,000.

Note a: meals and entertainment includes:
	Club dues							$ 1,700
	Promotional meals and season hockey tickets							$ 9,300
	Total							$ 11,000
Note b: advertising expenses include:
	Charitable donations							$ 2,100
	Community promotion							$ 550
	Local advertising and mail outs							$ 550
	Total							$ 3,200
Note c: Travelling includes both air travel and travel reimbursement to employees for business travel.
The company's policy is to reimburse employees 59 cents per kilometer for the business use of their automobiles.
The employees drove less than 5,000 kilometers.
Note d: Interest and bank charges include:
	Interest expense - operations							$ 8,500
	Penalty interest for late filing prior year's corporate tax							$ 7,500
	Bank charges							$ 1,000
	Total							$ 17,000

Note e: The company uses the straight-line method of amortization. The maximum capital cost allowance that may be claimed is: $9,900

Note f: During the year, the company purchased two homes. After the President redecorated, the corporation sold the homes for a profit.

The corporation has sold six homes in the last two years using the same strategy.

Note g: The sale of design contracts resulted from the President's wishes to downscale her involvement in commercial design.

The gain on sale is net of all costs and expenses and is considered to be a capital gain.

Note h: The salary to the President's spouse is considered taxable because he spends most of his working day administering her business.

Given the income statement above, the controller of ABC Ltd. has asked you to make the necessary adjustments to calculate the company's income from a business for tax purposes (Division business B income)

Consider the details in note b on advertising expenses and note g on the design contract. What adjustments need to be made for tax purposes?

Question 1 options:

	Deduct 50% of the profit from the sale of design contracts (as this is a capital gain and is not included in business income), for a total of: ($8,500)
	Add back charitable donations (not incurred for the purpose of earning income and there is a Division C deduction available for this), for a total of: $2,100
	Add back charitable donations (not incurred for the purpose of earning income and there is a Division C deduction available for this) AND deduct the profit from the sale of design contracts (as this is a capital gain and is not included in business income), for a total of: ($14,900)
	Deduct the profit from the sale of design contracts (as this is a capital gain and is not included in business income), for a total of: ($17,000)