Accounting Tax- Taxable Income And Tax Payable For Corporations
Case Information: Taylor Knox, a resident of British Columbia, is the sole owner of Knox Appliances Inc (Knox). The company sells and installs household appliances such as dishwashers, built-in vacuums, washers/dryers, etc. in Kelowna, B.C. They also perform warranty and repair service on major brands of appliances. Taylor has provided you with the following information for the company for the fiscal year ended December 31, 2020: $ 772,400 Sales Cost of Goods Sold Opening inventory Purchases Sub-contract costs $ 80,000 296,000 51,000 427,000 905000 332,000 Closing inventory 440,400 Gross Margin Operating Expenses Advertising and promotion (Note1) Bank charges Depreciation (Note 2) Donations (Note 3) Interest on long-term debt Insurance and licenses (Note 4) Office expenses Professional fees (Note 5) Salaries & benefits (Note 6) Utilities Warranty expense (Note 7) 17,300 2,160 21,300 5,500 10,500 6,300 8,890 12,760 145,100 14,640 11.580 256,030 184,370 Income from operations Non-operating: Other income (Note 8) Loss on sale of equipment (Note 9) 25,400 (1,400) 208,370 Income before income taxes (30,000) Income tax expense (Note 10) $ 178,370 Net income and comprehensive income Ayou. Advertising and promotion includes amounts Taylor spent on meals entertaining customers of $1,800. also includes season tickets to the local theatre of $4,000, which are used strictly for customer promotion purposes. Golf club dues of $9,000 are also included in this line item. Taylor has the company pay for the dues as he regularly takes customers to the club. 2. Depreciation represents the depreciation expense for tangible assets ($19,000) and amortization of intangible assets ($2,300). 3. Donations includes donations made to registered Canadian charitable organizations in the amount of $3,250. The rest was spent sponsoring local sports teams and supporting community events. 4. Insurance includes life insurance premiums for Taylor in the amount of $1,800. The life insurance policy is required as collateral for the company's bank loan. 5. Professional fees includes costs for accounting and legal services. During the year, Taylor and his spouse purchased a new house for personal residence. Legal fees associated with the purchase were $2,800. Taylor expensed those fees through the company because he has a home office set up in the house which he uses in the evenings and weekends to conduct business. During regular business hours, he works from the businesses' administrative offices. 6/Salaries and benefits include an auto allowance paid to the sales manager. The sales manager was reimbursed $7,750 (i.e. $1.25 for 6,200 kilometers). 7. The company offers an extended warranty on products sold and installation services. For accounting, the company accrues warranty expense of approximately 1.5% of gross sales. During 2020, the company spent $14,100 on warranty work completed. 8. Other income includes the following: Interest earned from revolving 30-day term deposits at Scotiabank. These deposits are maintained to ensure the company can meet three months payroll for employees involved in the company's regular business. $1,200 Dividends from taxable Canadian corporations held in a portfolio of investments. (ownership does not exceed 1% in any company) 4,700 Equity income (see below) 19,500 $25,400 Knox owns 30% of the shares of Ollie's Appliance Repair Co. (Ollie's and uses the equity method for this investment for accounting purposes. Ollie's did not pay any dividends in the year. The two companies are associated for tax purposes and have agreed that Ollie's will be allocated $60,000 of the small business deduction. Investment income in 2019 was similar to the amounts reported in 2020 and was below $50,000. 9. During the year, the company sold some office furniture. The items were originally purchased several years ago for $12,000 and had a net book value of $5,800 at the time of sale. For taxes, the assets were included in Class 8. Also during the year, the company purchased Class 8 equipment for $15,500 the purchased items qualify for the accelerated investment incentive. 104ncome tax expense on the financial statements represents installments remitted to the Canada Revenue Agency for the 2020 tax year. formation from the 2019 tax return: 1. Closing UCC balances were: UCC Class 8, closing balance = $52,800 UCC Class 10, closing balance = $46,500 UCC Class 14.1, closing balance = $ 3,500 2. Loss carryforwards available: Non-capital loss carryforward = $9,500 Net capital loss carryforward = $6,600 aylor advises you to claim the maximum CCA deductions on the corporate tax return and to utilize the loss arry-forwards as soon as possible. Required: 1. Calculate net income for tax purposes and taxable income for Knox. 2. Provide a brief explanation for Taylor that explains the difference between a non-capital loss carry forward and a net capital loss carry forward and why you did or did not utilize each type of loss in your calculation of taxable income. Include in your explanation the amount of each type of loss that is available for carryforward at the end of 2020, if any. 3. Calculate Knox's active business income for the year and identify any income that would be considered investment income that does not qualify for the small business deduction. Provide a brief explanation to Taylor that indicates why each source of income is included or excluded in active business income. 4. Calculate Part I tax payable for the corporation and advise Taylor whether Knox owes additional tax for the year, or if a refund is expected and the amount. 5. Taylor's brother Thomas also owns and operates a corporation, Logistix Transport Inc. (Logistix), in which Taylor personally owns 20% of the shares. Logistix operates primarily in Canada but in Feb 2020, began to operate in the United States. The corporation paid income taxes in the United States. Taylor has heard that when taxpayers pay foreign taxes, they qualify for a foreign tax credit, however, he does not understand how the credit is calculated or how it reduces taxes payable. Taylor has provided the following information for Logistix's 2020 tax year: $275,000 Net Income for Tax purposes Division C Deductions: Charitable donations Taxable dividends deducted per ITA 112 Net capital loss carryover deducted Taxable income (2,500) (13,000) (6,000) $ 253,500 Net Income for Tax Purposes of $275,000 includes foreign business income of $15,000 (before foreign tax withheld of $2,250, therefore net foreign income received was $12,750) The corporation did not receive any foreign dividends or investment income during the year, therefore there is no foreign non-business income tax credit to compute Logistix is associated with another corporation that is allocated the full business limit for the small business deduction, as such, the full amount of Logistix's taxable income is eligible for the general rate reduction . Calculate the amount of foreign tax credit available to Logistix. Briefly explain to Taylor the purpose of the foreign tax credit and the logic behind the calculation (only for the foreign business tax credit). Case Information: Taylor Knox, a resident of British Columbia, is the sole owner of Knox Appliances Inc (Knox). The company sells and installs household appliances such as dishwashers, built-in vacuums, washers/dryers, etc. in Kelowna, B.C. They also perform warranty and repair service on major brands of appliances. Taylor has provided you with the following information for the company for the fiscal year ended December 31, 2020: $ 772,400 Sales Cost of Goods Sold Opening inventory Purchases Sub-contract costs $ 80,000 296,000 51,000 427,000 905000 332,000 Closing inventory 440,400 Gross Margin Operating Expenses Advertising and promotion (Note1) Bank charges Depreciation (Note 2) Donations (Note 3) Interest on long-term debt Insurance and licenses (Note 4) Office expenses Professional fees (Note 5) Salaries & benefits (Note 6) Utilities Warranty expense (Note 7) 17,300 2,160 21,300 5,500 10,500 6,300 8,890 12,760 145,100 14,640 11.580 256,030 184,370 Income from operations Non-operating: Other income (Note 8) Loss on sale of equipment (Note 9) 25,400 (1,400) 208,370 Income before income taxes (30,000) Income tax expense (Note 10) $ 178,370 Net income and comprehensive income Ayou. Advertising and promotion includes amounts Taylor spent on meals entertaining customers of $1,800. also includes season tickets to the local theatre of $4,000, which are used strictly for customer promotion purposes. Golf club dues of $9,000 are also included in this line item. Taylor has the company pay for the dues as he regularly takes customers to the club. 2. Depreciation represents the depreciation expense for tangible assets ($19,000) and amortization of intangible assets ($2,300). 3. Donations includes donations made to registered Canadian charitable organizations in the amount of $3,250. The rest was spent sponsoring local sports teams and supporting community events. 4. Insurance includes life insurance premiums for Taylor in the amount of $1,800. The life insurance policy is required as collateral for the company's bank loan. 5. Professional fees includes costs for accounting and legal services. During the year, Taylor and his spouse purchased a new house for personal residence. Legal fees associated with the purchase were $2,800. Taylor expensed those fees through the company because he has a home office set up in the house which he uses in the evenings and weekends to conduct business. During regular business hours, he works from the businesses' administrative offices. 6/Salaries and benefits include an auto allowance paid to the sales manager. The sales manager was reimbursed $7,750 (i.e. $1.25 for 6,200 kilometers). 7. The company offers an extended warranty on products sold and installation services. For accounting, the company accrues warranty expense of approximately 1.5% of gross sales. During 2020, the company spent $14,100 on warranty work completed. 8. Other income includes the following: Interest earned from revolving 30-day term deposits at Scotiabank. These deposits are maintained to ensure the company can meet three months payroll for employees involved in the company's regular business. $1,200 Dividends from taxable Canadian corporations held in a portfolio of investments. (ownership does not exceed 1% in any company) 4,700 Equity income (see below) 19,500 $25,400 Knox owns 30% of the shares of Ollie's Appliance Repair Co. (Ollie's and uses the equity method for this investment for accounting purposes. Ollie's did not pay any dividends in the year. The two companies are associated for tax purposes and have agreed that Ollie's will be allocated $60,000 of the small business deduction. Investment income in 2019 was similar to the amounts reported in 2020 and was below $50,000. 9. During the year, the company sold some office furniture. The items were originally purchased several years ago for $12,000 and had a net book value of $5,800 at the time of sale. For taxes, the assets were included in Class 8. Also during the year, the company purchased Class 8 equipment for $15,500 the purchased items qualify for the accelerated investment incentive. 104ncome tax expense on the financial statements represents installments remitted to the Canada Revenue Agency for the 2020 tax year. formation from the 2019 tax return: 1. Closing UCC balances were: UCC Class 8, closing balance = $52,800 UCC Class 10, closing balance = $46,500 UCC Class 14.1, closing balance = $ 3,500 2. Loss carryforwards available: Non-capital loss carryforward = $9,500 Net capital loss carryforward = $6,600 aylor advises you to claim the maximum CCA deductions on the corporate tax return and to utilize the loss arry-forwards as soon as possible. Required: 1. Calculate net income for tax purposes and taxable income for Knox. 2. Provide a brief explanation for Taylor that explains the difference between a non-capital loss carry forward and a net capital loss carry forward and why you did or did not utilize each type of loss in your calculation of taxable income. Include in your explanation the amount of each type of loss that is available for carryforward at the end of 2020, if any. 3. Calculate Knox's active business income for the year and identify any income that would be considered investment income that does not qualify for the small business deduction. Provide a brief explanation to Taylor that indicates why each source of income is included or excluded in active business income. 4. Calculate Part I tax payable for the corporation and advise Taylor whether Knox owes additional tax for the year, or if a refund is expected and the amount. 5. Taylor's brother Thomas also owns and operates a corporation, Logistix Transport Inc. (Logistix), in which Taylor personally owns 20% of the shares. Logistix operates primarily in Canada but in Feb 2020, began to operate in the United States. The corporation paid income taxes in the United States. Taylor has heard that when taxpayers pay foreign taxes, they qualify for a foreign tax credit, however, he does not understand how the credit is calculated or how it reduces taxes payable. Taylor has provided the following information for Logistix's 2020 tax year: $275,000 Net Income for Tax purposes Division C Deductions: Charitable donations Taxable dividends deducted per ITA 112 Net capital loss carryover deducted Taxable income (2,500) (13,000) (6,000) $ 253,500 Net Income for Tax Purposes of $275,000 includes foreign business income of $15,000 (before foreign tax withheld of $2,250, therefore net foreign income received was $12,750) The corporation did not receive any foreign dividends or investment income during the year, therefore there is no foreign non-business income tax credit to compute Logistix is associated with another corporation that is allocated the full business limit for the small business deduction, as such, the full amount of Logistix's taxable income is eligible for the general rate reduction . Calculate the amount of foreign tax credit available to Logistix. Briefly explain to Taylor the purpose of the foreign tax credit and the logic behind the calculation (only for the foreign business tax credit)
