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	60,000	240,000
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)	110,000	230,000
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

1. 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.
2. 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.
3. Office expenses include the purchase of a computer, on January 15 of the current year, for $5,000.
4. 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)

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

1. 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)