POTI ENTERPRISES LTD$.$ STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER $31($current year$)$

SALES $$600,000$

COST OF SALES: $$50,000$

OPENING INVENTORY $250,000$

PURCHASES $300,000$

CLOSING INVENTORY $60,000240,000$

GROSS PROFIT $360,000$

EXPENSES:

Accounting & Legal $($Note $2)4,000$

Advertising & promotion $($Note $3)5,000$

Depreciation $($Note $4)26,000$

Automobile expenses $7,000$

Bad debts $($Note $5)4,000$

Insurance $($Note $6)7,000$

Interest $19,000$

Office expenses $($Note $7)12,000$

Rent $36,000$

Wages & Benefits $($Note $8)110,000230,000$

NET INCOME FOR THE YEAR $$130,000$

NOTES TO THE ABOVE STATEMENT OF INCOME:

$1.$ Poti Enterprises Ltd$.$ is a small business corporation operated by the sole shareholder, Paul Poti

$2.$ Accounting and legal include legal fees related to Paul$$s dispute in regards to a personal car accident, in the amount of $$2,000.$

$3.$ Advertising and promotion include $$Meals and Entertainment$$ costs in the amount of $$4,250.$

$4.$ Information for Capital Cost Allowance $($CCA$)$ purposes $$ the Undepreciated Capital Cost $($UCC$)$ at December $31$ of the prior year was as follows:

Class $8($Office & General Equipment$)$ $ $45,125$

Class $10($Automotive Equipment$)$ $ $44,875$

$5.$ The company has set up an allowance for doubtful accounts based on a review of the Accounts Receivable at December $31$ of the current year. This is a procedure that the proprietorship follows every year.

$6.$ Insurance includes life insurance premiums for Paul Poti in the amount of $$3,000.$ This life insurance policy is required as collateral for the business bank loan.

$7.$ Office expenses include the purchase of a computer, on January $15$ of the current year, for $$5,000.$

$8.$ Wages and benefits include the club dues$/$membership fees paid to the Royal Oak Club in the amount of $$6,000.$ The club dues are paid for the five managers who take clients to the Royal Oak Club on a regular basis for business purposes.

Require: Answer the following questions: $(100$ pts$)$

$1.$ Calculate the NET BUSINESS INCOME for Poti Enterprises Ltd$.$ for the current year. $(40$ pts$)$

$2.$ With reference to Section $3$ of the ITA, how is the business income $($loss$)$ reported for the corporation? $(20$ pts$)$

$3.$ Paul Poti has asked why certain business deductions are allowed while others are not. Describe the tax implications of ITA $18$ and ITA $20$ to Paul Poti. You should also explain the tax implications of ITA $78(4)$ and any tax planning opportunities that should be considered. $(40$ pts$)$