Charlotte Martin is a lawyer. For five years, until June 30, 2020, she had been employed by Roadhouse Ltd., a national hotel chain. On July 1, 2020, she began to practice law as a sole proprietor from an office in her home. Charlotte has asked you to prepare her 2020 income tax return. At a recent meeting, you gathered the information provided in Exhibits I and II. Required: a. Determine Charlotte'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 2020 taxation year. b. Based on your answer to question 1, calculate Charlotte's federal income tax for the 2020 taxation year. C. Why did the CRA deny the deduction of Charlotte's 2018 convention expenses? Can she obtain a deduction for the proposed 2021 convention? If so, why? EXHIBITI Work at Roadhouse and Law Practice (2020) 1. 2. 3. 4. 5. Charlotte's salary to June 30th, was $70,000. From this, Roadhouse deducted EI and CPP of $3,754 (includes CPP enhanced contributions of $166), income tax of $11,000, and $400 for Charlotte's portion of the private group medical insurance premium. An additional premium of $400 was paid by Roadhouse. Also, Roadhouse paid the $800 premium for Charlotte's group term life insurance coverage of $100,000. On June 30th, Charlotte returned the company car that Roadhouse had provided her. The car had a cost of $32,000, and Roadhouse's undepreciated balance was $18,000. Roadhouse also had paid the operating costs for the car, which amounted to $2,100. Charlotte had driven her car 16,000 kilometres, of which 12,000 kilometres were for business use. Charlotte travelled by air when working for Roadhouse. Charlotte used her personal credit card and accumulated frequent-flyer points. She submitted monthly expense reports and was reimbursed by Roadhouse for the travel costs. In March, 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. In 2018, Charlotte borrowed $60,000 from Roadhouse. She has paid interest at 1% on the loan. Charlotte used the borrowed funds for the down payment to purchase a rental property. The CRA's prescribed interest rate was 3% throughout 2020. Charlotte repaid the loan on June 30th when her cademy 9 employment ended. On June 30th, Charlotte sold 500 shares of Roadhouse Ltd. for $20 per share to the company's controlling shareholder. Roadhouse had issued the shares to Charlotte at $10 in 2017. At that time, the shares were appraised at $12. Roadhouse Ltd. is a Canadian-controlled private corporation. At the time of the share sale, all of Roadhouse's assets were being used in an active business. 6. '6' 7. 8. Charlotte began practising law from her home office on July 1st 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. On July 4, Charlotte purchased an automobile for $34,000, plus HST. She used the car 60% of the time for her law practice. For the six months ended December 31, 2020, the financial statements of Charlotte's law practice showed a profit of $164,000. The gross revenue of $194,000 consisted of the following: Fees billed and received Fees billed but received at the year end $170,000 24.000 $194,000 9. aderoy Xwe Operating expenses for the law practice included the following: Liability insurance Depreciation and amortization Reserve for bad debts Golf club dues-while attending the club, clients are entertained approximately 30% of the time Charitable donations Promotion-client lunches Secretarial services EZ A Computer software-word processing and billing program 10. EZ $2,200 9,100 1,200 1,600 1,800 400 12,000 900 Charlotte 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 2020 consist of the following: Insurance Mortgage interest Property taxes Utilities The financial statements do not include the home-office costs. $ 700 9,000 2,300 3,000 $15,000 Yen EXHIBIT II Other Financial Information (2020) 1. Charlotte owns a residential rental property, which she had purchased in 2018. Details of the rent and expenses in 2020 are as follows: Rental $6,000 Repairs and maintenance $1,200 Property tax 900 Interest on first mortgage 3.300 (5,400) $ 600 As of December 31, there were no unpaid rents from the tenant. 2. 2 Academy Charlotte contributed $11,000 to her RRSP and another $1,000 to a spousal RRSP during the year. She has contributed the same amount to the spousal plan for the past four years. On December 20, her spouse withdrew $4,000 from this spousal account. Paid dental fees 3. The following additional receipts and disbursements occurred during the year: $2,900 1,400 240 1,000 Paid contributions to a registered federal political party Paid interest on late payment of 2019 income tax Received cash dividends (Non-eligible) on Roadhouse shares EEZA Received proceeds from the sale of a silver tea set (original cost-$1,600) 4. 5. 7. 1,100 Charlotte received 100 shares of TXE Ltd., a public corporation. The shares were a stock dividend (Eligible) on the 2,000 shares she had purchased at $4 per share five year ago. At the time of the stock dividend, the shares were trading at $8. She sold the 100 stock dividend shares in December, at $7. Charlotte's spouse earned $110,000 in 2020. In 2018, while employed at Roadhouse, Charlotte attended a national law convention. She deducted her expenses of $2,300 on her 2018 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 2020, Charlotte received a reassessment notice from the CRA disallowing the entire convention expense deduction. Now that Charlotte is practicing law, she will attend the 2021 convention to upgrade her skills. 8. A review of Charlotte's 2019 tax return showed the following: Maximum RRSP deduction available in 2020 Capital gain deductions claimed in past years Net income from real estate rentals (after deducting a reserve for uncollectible rents of $500) Undepreciated capital cost-class 1 (rental property) Reserve for unpaid rents $10,500 75,000 860 52,000 500