In November 2019, Lisa was terminated from her employment and moved from Calgary to Vancouver. On July 1, 2020, she purchased a retail store, operating it as a proprietorship. Lisa has requested your assistance in preparing her 2020 income tax and benefit return, and advice on certain other tax matters. Information regarding her financial activities in 2020 is outlined in Exhibit 1.

Required a. Determine Lisas minimum net income for tax purposes in accordance with the format of section 3 of the Income Tax Act.

b. If Lisa proceeds with appealing the recent tax reassessment, will the legal fees incurred be deductible for tax purposes? Briefly explain the reasons for the increase in net income from the 2018 tax reassessment.

EXHIBIT 1 Lisa 2020 Financial Information

1. The retail stores preliminary financial statement for the period from July 1, 2020, to December 31, 2020, reports a profit before income tax of $92,000.

The purchase of the retail store included the following:

Equipment and display fixtures $ 20,000 Leasehold improvements 42,000 Goodwill 60,000 Computers and systems software 25,000

The lease is for 5 years with two options to renew of 2 years each.

Some of the expenses on the financial statement include the following:

Salaries $ 160,000 Rent 18,000 Reserves 16,000 Interest 4,000 Travel 7,500 Draw (Lisa) 80,000 Advertising and promotion 21,000

The reserve expense includes a reserve for doubtful accounts of $5,000, a reserve for expected salary increases of $7,000 and a reserve for merchandise shrinkage of $4,000.

Interest expense is for interest on a bank loan used to acquire the assets of the new business.

The travel expense includes Lisas automobile operating costs of $2,000, business parking of $400, and lease payments of $850 per month. The automobile was driven 11,000 kilometres from July 1, 2020, to December 31, 2020, which includes 6,000 kilometres for business, 1,000 kilometres driving to and from work, and 4,000 kilometres for personal use.

Advertising and promotion includes newspaper advertising of $15,000, meals and entertainment of $4,000 and seasons tickets to professional hockey games of $2,000. 40% of the tickets were used by Lisa and her family, and 60% were given to important customers and suppliers of the retail store.

In August 2020, the retail store initiated the sale of gift coupons that are exchangeable for merchandise. Gift certificates of $3,000 were sold in 2020 and included in revenue. As of December 31, 2020, $700 of the gift certificates had been exchanged for merchandise.

In October 2020, Lisa purchased a delivery van for the store at a cost of $32,500. She made financing arrangements and paid $1,000 in interest in 2020. This amount was unrecorded at the end of the year.

Amortization of $2,500 was deducted on the financial statements.

2. During 2020, Lisa had the following other receipts and disbursements that are not included in the financial statements of the retail store.

Receipts:

Dividend from Canadian public corporation $600 Dividend from a foreign corporation (net of 15% withholding tax) 850 Dividend from a CCPC 1,000 Lottery winnings 2,000 Bonus from previous employer 5,500 EI of $90 and $100 of CPP were withheld Interest earned on daily savings account 525

Disbursements:

Life insurance premium $900 Medical expense 6,000 CPP on self-employed earnings 2,668.05

3. Lisa kept a record of her investment purchases, which included the following:

Lisa purchased a 5-year, 6%, $20,000 GIC on June 30, 2016. Interest compounds annually and is payable at the end of term.

Lisa purchased a 3-year, 5%, $15,000 GIC on September 30, 2019 in her husbands name. The interest compounds annually and is payable at the end of the three year term.

4. Lisa and her husband placed their home on the market prior to leaving Calgary. The home sold in March 2020 for $750,000. They had purchased the home in 2012 for $510,000. Prior to buying their Calgary home, Lisa and her husband had owned a house in Camrose for which they had claimed the principal residence exemption for the years 2005 to 2012.

5. Lisa and her husband decided to invest the proceeds from the sale of their home in a residential rental property. The rental property was purchased on April 1, 2020 for $620,000 and was rented for $1,500 per month from May 1 to December 31, 2020. Prior to renting out the property, Lisa spent $15,000 on a new roof and windows. Since the property was financed with the sale of their principal residence, there were no mortgage payments. Lisa did pay the 2020 property taxes of $3,200 and utilities for the first month of $250. The tenants assumed responsibility for the utilities from May 1st. The real estate agent advised Lisa that the land was worth $100,000 at the time of purchase.

6. In 2020, prior to opening her own business, Lisa was employed at a placement agency. Lisa began work on February 1st and left the day before opening her business. She earned $10,000 per month and had deducted from salary taxes of $9,000, EI of $860.22, CPP of $2,668.05, pension of $2,500 and group medical insurance of $1,750. In addition to her salary, Lisa was provided a company vehicle. The cost of the vehicle was $40,000 and had a net book value of $23,000. Lisa drove the company vehicle a total of 16,000 kilometres of which 9,000 kilometres related to her employment. Lisa reimbursed her employer $1,350 for her personal use of the vehicle.

7. In 2020, Lisa had the following capital gains transactions:

Proceeds from the sale of public corporation shares: L Ltd. (1,000 shares) M Ltd. (100 shares) 50,000 20,000 Sale of camper trailer (original cost $12,000) 8,000 Lisa kept a record of her share purchases. It includes the following entries: Company Number of Shares Cost 2012 M Ltd. 100 $34,000 L Ltd. 500 10,000 N Ltd. 1,000 21,000 2016 L Ltd. 500 8,000 O Ltd. 300 24,000 L Ltd. 500 14,000

8. Her 2018 income was increased by $16,000, as follows:

Interest on investment held by Lisas husband $ 6,500 Taxable capital gains on the sale of the investment above 9,500 Increase to 2018 income for tax purposes $16,000

Lisa does not understand the reason for the reassessment and wants to hire a tax lawyer to file an appeal.