Gloria Edwards is a consultant. For 10 years, until June 30, 2021, she had been employed by IBM Ltd., a national computer company. On July 1, 2021, she began to practise law as a sole proprietor from an office in her home.

Required: Gloria would like you to calculate his Net Income for Tax Purposes (Division B income) for 2021. You should indicate why you did not include any of the above amounts in your answer. Show all your work to get full marks. At a recent meeting, you gathered the information provided in Exhibits I and II.

EXHIBIT I Gloria Edwards Information Regarding Work at IBM and Law Practice

1. Gloria’s salary to June 30, 2021, was $80,750. From this, IBM deducted CPP and EI of $4,056, income tax of $21,000, and $600 for Gloria’s portion of the private group medical insurance premium. An additional premium of $400 was paid by IBM. Also, IBM paid the $700 premium for Gloria’s group term life insurance coverage of $100,000. Gloria also received a pro-rated amount under the company’s profit sharing plan of $2,000.

Gloria also had deducted from her gross salary the following items:

A private extended health and dental plans $350 which her coverage was 25% of the plan while her employer contributed the other 75%.

A registered pension plan: defined contribution 3% $4,700 (which the employer also contributed $4,700).

Dues to maintain her designation as a professional Consultant $1,875 with the Professional Consultant Society of Canada.

2. On June 30, 2021, Gloria returned the company car that IBM had provided her. The car had a cost of $51,980 including HST, and IBM’s undepreciated balance was $17,850. IBM also had paid the operating costs for the car, which amounted to $6,400. Gloria had driven her car 25,000 km, of which 13,000 km were for business use.

3. Gloria travelled by air when working for IBM. Gloria used the IBM company credit card and accumulated frequent-flyer points. She submitted monthly expense reports and was reimbursed by IBM for the travel costs. In March 2021, 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 $1,500 airfare.

4. In 2019, Gloria borrowed $150,000 from IBM. She has paid interest at 2% on the loan. Gloria used the borrowed funds for the down payment to purchase a rental property. The CRA’s prescribed interest rate was 5% in 2021. Gloria repaid the loan on June 30, 2021.

5. On June 30, 2021, Gloria sold 2,500 shares of IBM Ltd. for $25 per share to the company’s controlling shareholder. IBM had issued the shares to Gloria at $16 in 2017. At that time, the shares were appraised at $18. IBM Ltd. is a public corporation. At the time of the share sale, all of IBM’s assets were being used in an active business.

6. Gloria began practising law from her home office on July 1, 2021 and registered for HST. She purchased the client list and files of a retiring consultant for $80,000. She also purchased a computer for $17,000 and a legal library for $18,600.

7. On July 4, 2021, Gloria purchased an automobile for $48,000, plus HST. She used the car 70% of the time for her law practice.

8. For the six months ended December 31, 2021, the financial statements of Gloria’s law practice showed a profit of $52,500. The gross revenue of $125,000 consisted of the following:

Fees billed and received $55,000

Fees billed but unpaid at the year end 42,000

Work in progress—not billed 28,000

$125,000

Gloria indicated that she wanted to elect under section 34 of the Income Tax Act.

9. Operating expenses for the law practice included the following: Liability insurance $ 3,500 Depreciation and amortization 11,600 Reserve for bad debts 4,200 Golf club dues—while attending the club, clients are entertained approximately 30% of the time 4,600 Charitable donations 1,800 Promotion—client lunches 900 Secretarial services 15,000 Computer software—word processing and billing program 2,900 0975 – Taxation for Canadian Business 3

10. Gloria uses 16 square metres of her house exclusively as an office for her law practice. Expenses for the entire 90-square-metre home for all of 2021 consist of the following:

Insurance $1,700

Mortgage interest 8,000

Renovation of Bathroom 6,000

Property taxes 6,300

Utilities 7,000

total $29,000

The financial statements do not include the home-office costs.

EXHIBIT II Gloria Edwards Other Financial Information

1. Gloria owns a residential rental property, which she had purchased in 2019. Details of the rent and expenses in 2021 are as follows:

Rental $28,000

Repairs and maintenance $6,200

Property tax 3,900

Staging cost to attract renters 2,000

interest on first mortgage 7,300. (19,400)

8,600

As of December 31, 2021, there were no unpaid rents from the tenant.

2. The following additional receipts and disbursements occurred during 2021: Paid interest on late payment of 2020 income tax 740 Received cash dividends (Eligible) on IBM shares 5,000 Received proceeds from the sale of a silver tea set (original cost—$1,600) 1,100

3. In 2021, Gloria received 500 shares of Parla Ltd., a Canadian controlled private corporation. The shares were a stock dividend (Non-Eligible) on the 3,000 shares she had purchased in 2014 at $4 per share. At the time of the stock dividend, the shares were at $15. She sold the 500 stock dividend shares in December 2021, at $13.

4. A review of Gloria’s 2020 tax return showed the following:

Net income from real estate rentals (after deducting a reserve for uncollectible rents of $800) 2,860

Undepreciated capital cost—class 1 (rental property) 182,000

Reserve for unpaid rents 800