Handy Appliances Ltd. (HANDY) is a Canadian controlled private corporation which imports and sells kitchen appliances. The following is the trial balance of HANDY for the year ended December 31, 2022: 

Debit Credit 

Accounts receivable $365,000 

Inventory 300,000 

Investments 225,000 

Loan receivable - shareholder 35,000 

Land 100,000 

Equipment 300,000 

Accumulated depreciation $150,000 

Goodwill 60,000 

Suspense 24,000 

Bank (overdraft) 30,000 

Bank loan 100,000 

Accounts payable 225,000 

Income Tax instalments 20,000 

Mortgages payable re land 50,000 

Capital Stock 10,000 

Retained earnings 621,000 

Sales 2,500,000 

Cost of Sales 1,950,000 

Interest on Bonds 10,000 

Dividend from Canadian company 20,000 

Expenses 385,000 

$3,740,000 $3,740,000 

The following information pertains to the company: 

1. Suspense consists of $24,000 of net proceeds received on sale of office equipment. The original cost of the equipment sold was $25,000. Assume that class 8 has a UCC balance of $154,000 at the beginning of the year. 

2. The land was held, but not used in the kitchen appliance business. No income was earned in respect to the land. Interest expense and property taxes in the amount of $5,000 relating to the land were capitalized for accounting purposes and not expensed. 

3. The goodwill in the amount of $60,000 consists of a client list which was purchased during the year from a competitor who ceased business operations. 

4. Dividend income is from Iron Rulers Ltd., a connected corporation in which HANDY owns a 60% common share interest. Iron Rulers Ltd. has both active business income and investment income. As Iron Rulers Ltd. paid dividends, a dividend refund of $6,000 was received. 

5. Expenses reflected on the trial balances consist of the following: 

Advertising expenses paid to Bellingham, Washington State TV Station $32,000* 

Charitable donations 20,000 

Entertainment 10,000 

Interest expense 35,000 

Office expense 8,000 

Professional fees 15,000 

Other 40,000 

Bonus (Paid on July 1st of the following year) 125,000

Wages and benefits 90,000 ©Grant Lee, 2023 

170 

 

Depreciation & Amortization 1 0,000 

$385,000 

* Of the various invoices comprised the total, one invoice in the amount of $5,000 related to advertising broadcasted primarily into the Canadian market; all the other invoices related to advertising broadcasted into the Bellingham and US market. 

6. Professional fees include an accrual of $3,500 of estimated losses arising from a lawsuit from one of HANDY'S suppliers. It cannot be said with certainty whether the lawsuit will be won or lost. Legal fees were also accrued in connection with this lawsuit in the amount of $1,000. 

7. Interest expense includes $9,000 paid on a bank loan of $100,000 made in order to help finance the acquisition of Iron Rulers Ltd. 

8. Professional fees include $3,000 of legal fees for reorganizing share capital. 

9. During the year, the company sold 100 shares of a public company and incurred a capital gain of $82,500. The accounting gain of $35,000 is included in sales. 

10. HANDY had a net capital loss carry forward of $35,000 incurred in the 1985 taxation year (capital gain inclusion rate in 1986 was 50%). 

11. Handy paid a non-eligible dividend in the amount of $60,000 on December 28th of the year to its shareholder. This amount was not recorded in the company's trial balance which was presented. 

12. The company found out there was an error in its accounts payable program and that $1,433 of expenses paid for in the following year were not accrued and recorded in the current year. 

REQUIRED: 

(a) Calculate the minimum amount of net income for tax purposes and the minimum amount of taxable income of Handy Appliances Ltd. for the year. Show all calculations. Note that Net income per financial statements will be the last 5 lines of the trial balance. 

(b) Calculate net federal and B.C. income taxes payable of HANDY for the year. Assume net income and taxable income are $229,100 and $147,850 respectively. (Non active income is to be determined from the information given). Further assume that for purposes of the small business deduction, Handy shares the business limit with Iron Rulers Ltd which is an associated corporation. Handy's allocated business limit is $100,000.