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 practise 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 below and on the next pages. Required: (a) Determine Charlottes 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 part (a), calculate Charlottes federal income tax for the 2020 taxation year. (c) Why did the CRA deny the deduction of Charlottes 2018 convention expenses? Can she obtain a deduction for the proposed 2021 convention? If so, why? Exhibit I: 1. Charlottes salary to June 30 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 Charlottes portion of the private group medical insurance premium. An additional premium of $400 was paid by Roadhouse. Also, Roadhouse paid the $800 premium for Charlottes group term life insurance coverage of $100,000. 2. On June 30, Charlotte returned the company car that Roadhouse had provided her. The car had a cost of $32,000, and Roadhouses 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. 3. Charlotte travelled by air when working for Roadhouse. Charlotte used her personal credit card and accumulated frequent flyer points. She was reimbursed by Roadhouse for travel costs. In March, she and her partner 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 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 CRAs prescribed interest rate was 3% throughout 2020. Charlotte repaid the loan on June 30 when her employment ended. 5. On June 30, Charlotte sold 500 shares of Roadhouse Ltd. for $20 per share to the companys controlling shareholder. Roadhouse had issued the shares to Charlotte at $10 in 2017. At that time, the shares were appraised at $12. Work at Roadhouse and Law Practice (2020) 410 PART 2: AN OVERVIEW OF INCOME DETERMINATION AND TAX FOR THE TWO PRIMARY ENTITIES Roadhouse Ltd. is a Canadian-controlled private corporation. At the time of the share sale, all of Roadhouses assets were being used in an active business. 6. Charlotte began practising law from her home office on July 1 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, Charlotte 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, 2020, the financial statements of Charlottes law practice showed a profit of $164,000. The gross revenue of $194,000 consisted of the following: Fees billed and received $170,000 Fees billed but not received at year end 24,000 $194,000 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 1,800 Promotion: client lunches 400 Secretarial services 12,000 Computer software: word processing and billing program 900 10. 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 $ 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: 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. Other Financial Information (2020) CHAPTER 10: INDIVIDUALS: DETERMINATION OF TAXABLE INCOME AND TAXES PAYABLE 411 2. 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. 3. The following additional receipts and disbursements occurred during the year: Paid dental fees $2,900 Paid contributions to a registered federal political party 1,400 Paid interest on late payment of 2019 income tax 240 Received cash dividends (non-eligible) on Roadhouse shares 1,000 Received proceeds from the sale of a silver tea set (original cost: $1,600) 1,100 4. 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 years 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. 5. Charlottes spouse earned $110,000 in 2020. 6. 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 practising law, she will attend the 2021 convention to upgrade her skills. 7. A review of Charlottes 2019 tax return showed the following: Maximum RRSP deduction available in 2020 $ 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