PROBLEM TWO (40 marks)

TR Ltd. is a Canadian-controlled private corporation operating a franchised retail and mail-order business in Vancouver. Denver Chan, the company's president, owns 100% of the corporation's share capital. The corporation was created on December 1, 20X5. For the year ended November 30, 20X6, TR Ltd.'s financial statement reported income before income taxes of $$157,090.

You have been retained to help prepare the company's first tax return and to advise on other tax-related matters. Financial information relating to the 20X6 taxation year and to the corporation's financial statement is summarized below.

TR Ltd. - Selected Financial Information

1. The following properties were purchased for the new business:

Franchise

$ 40,000

Land

30,000

Building

270,000

Delivery truck

40,000

The franchise, purchased on December 1, 20X5, permits the corporation to operate under the TR name for a period of 15 years. A renewable period of another 15 years is available, subject to satisfactory performance.

The land cost of $30,000 consists of the purchase price of $20,000, $7,000 for permanent landscaping, and $3,000 for water and sewer connections. The building was constructed after March 18, 2007.

On October, 15, 20X6, the truck was involved in an accident. The damage was not repairable, and TR immediately signed an agreement with the insurance company to settle the claim for $31,000. The cash was received on December 10, 20X6. Another truck was obtained under a lease arrangement. Amortization expense of $28,000 has been deducted from income.

2. Legal expense includes the following costs:

Preparing annual corporate minutes

$ 300

Incorporation costs for TR Ltd.

1,500

Negotiation of franchise agreement

2,000

3. Repairs and maintenance expense includes the following items:

Paving the parking lot

$8,000

Cleaning and supplies

1,400

Replacing a broken window

1,000

Small tools costing less than $500

1,200

4. Advertising expense includes a cost of $7,000 to acquire a permanent mailing list for the mail-order business. The list has an expected life of six years. Other advertising items are listed below:

Cost of making a television commercial

$25,000

Travel costs for Chan to attend a franchiser convention. Chan's

spouse travelled with him and attended a social function

(her expenses were $1,500)

3,000

Charitable donations

2,000

Meals and beverage costs for entertaining suppliers

1,800

Costs of leasing and maintaining a pleasure boat to entertain

suppliers and employees

2,600

Television advertising

Vancouver station

11,000

Seattle station directed at the Vancouver market

6,000

5. A contingent reserve for possible defective products of $5,000 was recorded as a charge against cost of sales. During the year, $3,000 of products were returned.

6. On May 31, 20X6, TR invested $40,000 in a one-year bank certificate earning annual interest of 7%. TR intends to recognize the interest revenue upon receipt at its one-year anniversary date.

7. Interest expense includes $14,000 on the building mortgage and $700 from a temporary bank loan of $12,000. The bank loan funds were, in turn, loaned, without interest, to Y Ltd., a corporation owned by Chan's brother. Y Ltd. used all of its assets to operate an active business but declared bankruptcy in November 20X6.

8. TR is planning to sell a new product in 20X7a bracelet with a charm depicting a popular cartoon character. The bracelet and charm will be ordered from separate suppliers, and TR's staff will assemble the two pieces and package them in a specially designed box.

Required:

1. Under Part I of the Income Tax Act, determine the minimum income for tax purposes and taxable income for TR Ltd. for the 20X6 taxation year.

2. Based on your answer to 1, calculate TR's minimum Part I federal income tax for the 20X6 taxation year. Assume the 20X6 taxation year began after 2018.