Canadian Taxation. New CCA rules (Accelerated Investment Incentive) apply

Assignment 1 Fall Taxation 2020

You have been asked to prepare the Schedule 1 (reconciliation of accounting income to income for tax purposes) for Winter Corporation Limited, a Canadian-controlled private Corporation (10% retail and 90% manufacturing business). The following income statement and miscellaneous financial information for the year ended December 31, 2020 has been provided to you for this purpose.

Sales .....................................................................................

$7,600,000

Cost of goods sold ................................................................

2,400,000

Gross profit ..........................................................................

$5,200,000

General and administrative expenses ............$560,000

Amortization .................................................240,000

Interest ..........................................................80,000

880,000

$4,320,000

Gain on disposal of fixed assets ...........................................

145,000

Net income before income taxes ..........................................

$4,465,000

Income taxes

Current .......................................................$600,000

Deferred .....................................................360,000

(960,000)

Net income ....................................................

$3,505,000

During your review of the working paper file and last year's tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items.

'1) The following selected information was taken from the General and Administration expenses:

'a) Advertising in a American magazine distributed in Florida to appeal to Canadians on

Vacation..............................................................................$2,500

'b) Advertising in a Canadian magazine distributed only in Europe to attract Europian

Business only........................................................................$4,000

'c) Legal cost in connection with negetiating for a line of credit............ $5,000

d)Advertising expense to appear in a Canadian magazine in January 2021..$1,000

e)Interest on insufficient municipal tax instalments..............................$2,000

'2) Included in cost of sales is a reserve for a possible decline in the market value of finished goods inventory of $88,000. There is also an obsolescence reserve of $150,000 for some raw materials that were purchased from a supplier and were later found to be defective and worthless. So far, the supplier has refused to allow Winter Limited to return the materials for a refund.

3). The gain on disposal of fixed assets consists of the accounting gain on the sale of some land for $620,000 on May 30, 2020, and the sale of a limited life license for $25,000 on July 15, 2020. Winter Corporation purchased the land on January 15, 2020 for $225,000. The land was purchased with the intention of it being used to expand the manufacturing operation. After purchasing the property, Winter Corporation received some bad publicity and complaints regarding the expansion plans, as the land was relatively close to a new subdivision. The management group at Winter Corporation decided to sell the land and expand its operations at the current location instead. Real estate commissions of $31,000 were paid in relation to the sale. Winter Corporation expanded its manufacturing space by constructing a new building adjacent to its current manufacturing plant. The construction of the new building started March 1, 2020 and was completed June 30, 2020.

The license was purchased for $9,000. It was the only asset left in the CCA class when it was disposed of in July.

0975 - Taxation for Canadian Business

4. General and administrative expenses also include:

(a) Donations of $75,000 to registered charities and $3,300 to registered political parties ....

$78,300

(b) Accrued bonuses ? fully paid July 4, 2021 ......................................................................

65,000

(c) Property taxes:

$1,100 per month for the existing property .......................................................................

13,200

$850 per month for the new building (starting March 1, 2020) .........................................

8,500

$300 per month for land purchased (See 2, above) ........................................................... (d) Accrual for a potential settlement to a former employee for an injury received on the

$1,350

job; Winter Corporation was notified of the pending lawsuit on December 18, 2020 ..

70,000

(e) Utility connection costs for the new building ....................................................................

6,600

(f) Insurance Costs:

$500 per month for the existing property ..........................................................................

6,000

$280 per month for the new building (starting March 1, 2020) .........................................

2,800

(g) New software purchased Nov 1, 2020 ($2,000 for applications and $9,000 for systems) .

11,000

(h) Application to the State of Michigan for an unlimited life license to sell in the state .......

5.Interest includes the following:

Interest on 8% $150,000 Mortgage for land purchased. The mortgage was repaid

8,000

May 30, 2020 on the sale of the property. (See 3, above) ............................................

Interest on 6% $360,000 Mortgage for the construction of the new building taken out April 15, 2020. Interest is payable semi-annually starting October 15, 2020. No

$ 4,471

principal payments were made in 2020 ........................................................................

6. The undepreciated capital cost balances at December 31, 2019 were as follows:

(a) Class 1 ............................................................................ $650,000 (b) Class 8 ............................................................................ 42,000 (c) Class 10.1........................................................................ 12,495 (d) Class 14 .......................................................................... 6,000 (e) Class 53 .......................................................................... 413,750 (f) Class 44 .......................................................................... 18,000

15,344

7. Purchases and sales made during 2020 were as follows:

(a)The cost of constructing the new building was $360,000.

(b)The company purchased a new facsimile machine for $3,200.

(c)Some outdated desks used by the finance department with a cost of $6,000 were sold for proceeds of $4,500.

(d)A 20-year patent to use a manufacturing process was purchased on July 1, 2020 for $160,000.

(e)A company car for use by the president of the company was purchased for $45,000including HST. This car replaced the only other existing company car, which was purchased in 2017 for $40,000. The old car was sold for $16,000.

(f)Dies and moulds for manufacturing equipment were purchased for $89,000 in January 2020.

(g)A customer list with long-term value was purchased for $70,000 from a former sales agent of the company located in Vancouver.

Required:

A.Please prepare the requested reconciliation. State any assumptions made in determining inclusions and omissions. Provide explanations for inclusions if not self explanatory.

0975 - Taxation for Canadian Business

B.Provide a brief explanation for any items omitted from the above calculation.

If] UNIVERSITY OF TORONTO 0975 Taxation for Canadian Business nu En ,.__-_ . , SCHOOL op CONTINUING STUDIES Assignment 1 Fall Taxation 2020 You have been asked to prepare the Schedule 1 (reconciliation of accounting income to income for tax purposes) for Winter Corporation Limited, a Canadian-controlled private Corporation (10% retail and 90% manufacturing business). The following income statement and miscellaneous nancial information for the year ended December 31, 2020 has been provided to you for this purpose. Sales $7,600,000 Cost ofgoods sold 2,400,000 Gross prot .......................................................................... $5,200,000 General and administrative expenses ............ $560,000 Amortization ................................................. 240,000 Interest .......................................................... 80,000 880 000 $4,320,000 Gain on disposal ofxed assets 145 000 Net income before income taxes $4,465,000 Income taxes Current ....................................................... $600,000 Deferred ..................................................... 360 000 1960,0001 Net income .................................................... m During your review of the working paper le and last year's tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items. '1) The following selected information was taken from the General and Administration expenses: 'a) Advertising in a American magazine distributed in Florida to appeal to Canadians on Vacation $2,500 'b) Advertising in a Canadian magazine distributed only in Europe to attract Europian Busmessonly$4000 'c) Legal cost in connection with negetiating for aline of credit $5,000 (1) Advertising expense to appear in a Canadian magazine in January 2021.. $1,000 e)Interest oninsufcientmunicipaltaxinstalments..............................$2,000 '2) Included in cost of sales is a reserve for a possible decline in the market value of nished goods inventory of $88,000. There is also an obsolescence reserve of $150,000 for some raw materials that were purchased from a supplier and were later found to be defective and worthless. So far, the supplier has refused to allow Winter Limited to return the materials for arefund. 3). The gain on disposal of xed assets consists of the accounting gain on the sale of some land for $620,000 on May 30, 2020, and the sale ofa limited life license for $25,000 on July 15, 2020. Winter Corporation purchased the land on January 15, 2020 for $225,000. The land was purchased with the intention of it being used to expand the manufacturing operation. After purchasing the property, Winter Corporation received some bad publicity and complaints regarding the expansion plans, as the land was relatively close to a new subdivision. The management group at Winter Corporation decided to sell the land and expand its operations at the current location instead. Real estate commissions of $31,000 were paid in relation to the sale. Winter Corporation expanded its manufacturing space by constructing a new building adjacent to its current manufacturing plant. The construction of the new building started March 1, 2020 and was completed June 30, 2020. The license was purchased for $9,000. It was the only asset left in the CCA class when it was disposed ofin July. UNIVERSITY OF TORONTO 0975 - Taxation for Canadian Business SCHOOL OF CONTINUING STUDIES 4. General and administrative expenses also include: (a) Donations of $75,000 to registered charities and $3,300 to registered political parties .... $78,300 b) Accrued bonuses - fully paid July 4, 2021..... .. 65,000 (c) Property taxes: $1,100 per month for the existing property ...........:5:5.:........". 13,200 $850 per month for the new building (starting March 1, 2020)....... 8,500 $300 per month for land purchased (See 2, above) ................. $1,350 d) Accrual for a potential settlement to a former employee for an injury received on the job; Winter Corporation was notified of the pending lawsuit on December 18, 2020.. 70,000 e) Utility connection costs for the new building ....... 6,600 f) Insurance Costs: $500 per month for the existing property .................................... ...... 6,000 $280 per month for the new building (starting March 1, 2020)......................"; 2.800 g) New software purchased Nov 1, 2020 ($2,000 for applications and $9,000 for systems). 11,000 h) Application to the State of Michigan for an unlimited life license to sell in the state ....... 8,000 5. Interest includes the following: Interest on 8% $150,000 Mortgage for land purchased. The mortgage was repaid May 30, 2020 on the sale of the property. (See 3, above)............................................ $ 4,471 Interest on 6% $360,000 Mortgage for the construction of the new building taken out April 15, 2020. Interest is payable semi-annually starting October 15, 2020. No principal payments were made in 2020................ 15,344 6. The undepreciated capital cost balances at December 31, 2019 were as follows: (a) Class 1 ..... $650,000 (b) Class 8 ........ 42,000 (c) Class 10.1..... ... ... 12,495 (d) Class 14 ...... ... ... 6,000 Class 53 . ... ... 413,750 Class 44 ....... 18,000 7. Purchases and sales made during 2020 were as follows: (a) The cost of constructing the new building was $360,000. (b) The company purchased a new facsimile machine for $3,200. (c) Some outdated desks used by the finance department with a cost of $6,000 were sold for proceeds of $4,500. (d) A 20-year patent to use a manufacturing process was purchased on July 1, 2020 for $160,000. (e) A company car for use by the president of the company was purchased for $45,000 including HST. This car replaced the only other existing company car, which was purchased in 2017 for $40,000. The old car was sold for $16,000. (f) Dies and moulds for manufacturing equipment were purchased for $89,000 in January 2020. (g) A customer list with long-term value was purchased for $70,000 from a former sales agent of the company located in Vancouver. Required: A. Please prepare the requested reconciliation. State any assumptions made in determining inclusions and omissions. Provide explanations for inclusions if not self explanatory.0975 Taxation for Canadian Business UNIVERSITY OF TORONTO SCHOOL OF CONTINUING STUDIES B. Provide a brief explanation for any items omitted from the above calculation