esigners Ltd. is a Canadian controlled private corporation with its head office in Vancouver, B.C. The company manufactures clothes and sells to Canada and the United States.

Designers Ltd. was incorporated in 2013 and has a sole shareholder, Amanda Anderson. Amanda Anderson, a fashion expert, also prepared the accounting records for Designers Ltd.

Designers' Ltd.

Income Statement

For the Year Ended December 31, 2016

Sales$10,000,000Cost Of Goods Sold(4,500,000)Gross Profit$5,500,000Expenses:General & Administration(900,000)Amortization(300,000)Interest(25,000)(1,225,000)Operating Income$4,275,000Gain on Disposition of Tangible Assets83,000Interest Income300,000Income Before Income Taxes$4,658,000Income Taxes(320,000)Net Income$4,338,000

During your review of Amanda Andersons accounting and income tax work, you noted the following:

1. The Allowance for Doubtful Accounts, in the accounting records, was $ 40,000 at December 31, 2016 and was $ 35,000 at December 31, 2015. During 2016, Designers Ltd. had actual write-offs of $ 18,000. Consequently, the 2016 accounting Bad Debts Expense was $ 23,000. That amount was in included in General & Administrative Expense.

A review of the Accounts Receivable listing (for income tax purposes) indicated that the actual items that may be uncollectible totaled $ 28,000 at December 31, 2016. In 2015, Designers Ltd. deducted, for income tax purposes, a reserve for bad debts of $ 12,000.

General & Administrative Expense included the following:

Donations to Registered Charities$40,000Accrued Bonuses - Accrued November 01, 2016, paid on July 31, 201765,000

Meals & Entertainment Costs included the following:

$2,000 monthly membership fees at a Gold Club for Amanda24,000$1,000 monthly membership fees at a squash club for sales staff12,000Meals for entertaining clients60,000Food costs for Amandas personal chef at Amanda's home20,000Annual staff Christmas party17,000Sponsorship of local communitys soccer team16,000Advertising in a U.S. newspaper directed at U.S. clients15,000Software purchased on July 15, 2016

($20,000 for Applications and $25,000 for hardware)

45,000Legal & accounting fees for amending articles of incorporation16,000Annual Finland convention costs30,000

Interest Expense was comprised of the following:

Interest & Penalty for Late and Insufficient Instalment Payments to CRA8,000Interest on Late Payment of Municipal Property Taxes7,000Interest Expense - Operations10,000Total25,000

Travel costs (included in General & Administrative Expense) included both air travel and travel reimbursement to employees for business travel. Designers Ltd.s policy was to reimburse employees $ 0.95 per kilometer for the business use of the employees automobiles. During 2016, seven employees drove 7,000 kilometres each on employment-related activities. None of the reimbursements were required to be included in the employees income.

The Gain on Disposition of Tangible Assets consisted of the following

Cash105,000Accumulated Amortization25,000Gain on Disposal of Tangible Assets83,000Equipment47,000

Designers Ltd. purchased a $ 150,000 Mercedes for Amanda Andersons personal use. The Mercedes replaced the only other existing company car, a $ 95,000 BMW, which was purchased in 2014. The BMW, which was sold for $ 75,000, was used solely by Amanda Anderson. The BMW was never amortized by Designers Ltd. Designers Ltd. reported the above transactions as follows:

Mercedes150,000Cash150,000Cash75,000Loss on Sale of BMW20,000BMW95,000

The $ 20,000 Loss on Sale of BMW was included in General & Administration Expense.

Designers Ltd. purchased shares in 2013 for a cost of $ 25,000; in 2016, Designers Ltd. sold those shares for $ 85,000. The capital gain on these shares was $ 60,000 and Amanda Anderson credited the capital gain to retained earnings.

Required:

Determine Designers Ltd.s minimum net income for tax purposes for the year ended December 31, 2016, excluding CCA deduction. Ignore GST/PST/HST implications

Question 2 (27 Marks)

Mr. Ben Barns wanted to start a home based business that would specialize in selling t-shirts. The business would be operated from his principal residence. He set aside 20% of the total floor space in the residence for the t-shirt operations.

Mr. Ben Barns principal residence, costing $ 950,000 in total, was acquired on January 01, 2016. It is estimated that $ 350,000 of this total value can be attributed to the land value.

Mr. Ben Barns incurred the following 2016 costs relating to the principal residence:

$ 2,500 Utilities For The Home (Heat, Light, And Water)

$ 7,000 Mortgage Interest Paid

$ 4,500 House Insurance

$ 8,000 Property Taxes

$ 6,000 Repairs & Maintenance For The Home

$28,000 Total Costs

The business commenced operations on March 01, 2016. On that date, Mr. Ben Barns purchased the following assets to be used in his new business:

$30,000 Office Furniture & Storage Shelving

$ 3,000 Computer

$ 1,000 Business Software

In addition, Mr. Ben Barns had a separate telephone line installed for dealing with the mail order business.

During the period March 01, 2016 through December 31, 2016, Mr. Ben Barns mail order sales totaled $ 450,000. Costs associated with these sales included the following:

$250,000 Cost Of Merchandise Sold

$ 50,000 Unsold Merchandise (Lower Of Cost And Fair Market Value)

$ 7,000 Packaging Materials

$ 10,000 Mailing Costs

$ 4,000 Office Supplies

$ 3,000 Telephone Charges

$ 6,000 Printing Of Brochures

Required:

Can Mr. Ben Barns deduct work space in the home costs? Briefly explain your decision.

Calculate Mr. Ben Barns 2016 minimum net business income or loss that he will report on his 2016 income tax return.

Briefly discuss any issues that should be discussed with Mr. Ben Barns regarding the work space in his home and business costs

Question 3 (20 Marks)

Each of the following independent cases involves interest payments and the issue is interest deductibility.

Case A:Abby Brown borrowed $ 250,000 and invested the entire loan proceeds in publicly traded securities. After 5 months, the securities value dropped to $ 150,000. At this point, Abby Brown sold the securities and used the proceeds to reduce the loan to $ 100,000. Since she no longer owns the securities, can Abby Brown deduct the interest on the remaining loan amount of $ 100,000? Explain your conclusion.

Case B:Bob Corner owned securities that had a current fair market value of $ 500,000. Using his margin balance available from his stockbroker, he borrowed $ 55,000 to finance a necklace purchase to give to his mother. During the time period when the margin loan was outstanding, he paid $2,000 interest on it. Can he deduct this interest against the $ 11,000 income earned during this period on his securities? Explain your conclusion.

Case C:Carrie Down borrowed $ 75,000 and used the funds to acquire an income producing property. She then sold the property for $ 190,000. She used the proceeds to acquire two properties: property A cost $ 50,000 and property B cost $ 140,000. How will the $ 75,000 in borrowing be linked to the two properties?

Case D:Donald East borrowed $ 300,000 and used the funds to purchase an income producing property. Later on, he sold the property for $ 140,000. He used the $ 140,000 to acquire two properties: property A cost $ 40,000 and property B cost $ 100,000. How will the $ 300,000 in borrowing be linked to the two properties?

Question 4 (25 Marks)

In April, 2015, John Johnson acquired a four-unit apartment building, for a total cost of $ 850,000. Of this total, it is estimated that the land on which the building is situated is worth $ 270,000. The units in the apartment are similar in size and, for purposes of allocation to a CCA class, the property is considered to be a single asset.

Two of the units will be rented on a furnished basis. Consequently, in 2015, John Johnson acquired furniture at a cost of $ 60,000.

During May, 2015, all of the units were rented for the remainder of the year. For this year, the units generated rents of $ 80,000 and expenses, other than CCA, of $ 40,000 were incurred

In January, 2016, the tenants in both of the furnished units terminated their leases and moved out. Because John Johnson was unable to find tenants who were interested in furnished units, the two units remained empty for four months. Given this situation, John Johnson sold all of the furniture for $ 32,000.

During 2016, the units generated rents of $ 67,000. Expenses for the year, other than CCA, totaled $ 31,000.

John Johnson deducted the maximum CCA allowable in both 2015 and 2016.

Required:

Calculate the Net Rental Income for each of the two years 2015 and 2016 Also, determine John Johnson UCC balances on January 01, 2017. Include in your solution any tax consequences associated with the sale of the furniture.