Net Business Income Calculations

Sam Skip is the sole shareholder of Skip Consulting Ltd$.,$ which provides management consulting services. The corporation has been in operation for several years, but the corporate head office continues to be located in Sam$$s home. The fiscal year$-$end for the corporation is December $31$st

For the corporation$$s current year$-$end Sam provides you with the following information:

Revenue $$200,000$

Operating Expenses:

Advertising and promotion $($note $7)8,000$

Depreciation $($note $1)10,000$

Accounting & legal $($note $2)3,500$

Bad debts $($note $3)7,500$

Dues and fees $($note $4)5,000$

Insurance $($note $5)2,500$

Office expenses $($note $6)2,500$

Travel $($note $9)7,000$

Wages & benefits $($note $8)43,000$

$95,000$

Net Income $($per financial statements$)$ $$105,000$

Notes to financial statements:

Note $1$: Depreciation for office equipment and the business vehicles.

Note $2$: Accounting & legal includes legal fees pertaining to the purchase of the family cottage in the year in the amount of $$1,500.$

Note $3$: An allowance for doubtful accounts is set up each year, based on a review of the outstanding accounts and assessing which accounts are doubtful for collection.

Note $4$: Membership dues to the Royal Glencoe Club $($$$2,000)$ are included; as the sole shareholder for this management consulting business, Sam takes clients to the club regularly.

Note $5$: Life insurance premiums $($$$1,500)$ paid for a life insurance policy for Sam Skip. There is no indication that the life insurance is required for financing purposes.

Note $6$: Office expenses include the cost of a new laptop computer purchased in October this year $($$$1,500).$

Note $7$: Advertising and promotion includes:

Meals for promotional purposes $=$ $$2,000$

Foreign media advertising $=$ $$3,000($paid to a U$.$S$.$ television station, which is directed to

the Canadian population in several major Canadian cities$)$

Note $8$: Wages and benefits include:

$$40,000$ in wages

$$3,000$ for auto allowance paid to the sole employee, Jack Jones. This allowance was calculated as $$1$ per km for $3,000$ kms$.$ driven by the employee. The government auto deduction limit is $$0\mathrm{.}59$ for the first $5,000$ kilometres and $$0\mathrm{.}53$ for any additional kilometres.

Note $9$: Travel expenses include $$4,000$ of travel meals.

Note $10$: The principal place of business for Skip Consulting Ltd$.$ is in Sam Skip$$s home. Sam advises you that the office space is $150$ Sq$.$ Ft$.$ and the total area of his home is $1,500$ sq$.$ ft$.$ Sam provides you with the following expenses for his home:

$$ Property taxes $=$ $$2,000$

$$ Insurance $=$ $$600$

$$ Mortgage interest $=$ $$2,400$

$$ Heat $=$ $$1,800$

$$ Electricity $=$ $$1,500$

$$ Snow clearing for six months of the year $=$ $$400$

$$ Replacement of the furnace $=$ $$5,000$

$$ General repairs to the home $=$ $$300$

Note $11$: Carry$-$forward information provided from the prior year$$s tax return for Sam Skip:

UCC, Class $8=$ $$10,000$

UCC, Class $10=$ $$20,000$

Requirements

$1.$ Calculate the Net Business Income for Skip Consulting Ltd$.$ for the current year.

$2.$ With reference to Section $3$ of the ITA, how is the business income $($loss$)$ reported for the proprietorship?

$3.$ Sam Skip has asked why certain business deductions are allowed while others are not. Describe the tax implications of ITA $18$ and ITA $20$ to Sam Skip. You should also explain the tax implications of ITA $78(4)$ and any tax planning opportunities that should be considered.

Feel free to use Excel to support your calculations. The format should be starting from:

Net Income from Financial Statements XXXXXX

Add back expenses:

$-$ Expense $1$ XXXXX $($explanation for why add back$)$

$-$ Expense $2$ XXXXX $($explanation for why add back

Deduction:

$-$ Deduction $1$ XXXXX $($explanation for why$)$

$-$ Deduction $2$ XXXXX $($explanation for why$)$

Net Business Income for Tax Purposes XXXXXXX