Sandra Dumont is a lawyer. For five years, until June 30, 20X5, she had been employed by Calco Ltd., a national restaurant company. On July 1, 20X5, she began to practice law as a sole proprietor from an office in her home. Dumont has asked you to prepare her 20X5 income tax return. At a recent meeting, you gathered the information provided in Exhibits I and II.

Required: a.Determine Dumont's minimum income for tax purposes in accordance with the aggregating formula of section 3 of the Income Tax Act and her minimum taxable income for the 20X5 taxation year.

b.Based on your answer to question 1, calculate Dumont's federal income tax for the 20X5 taxation year.

c.Why did the CRA deny the deduction of Dumont's 20X3 convention expenses? Can she obtain a deduction for the proposed 20X6 convention? If so, why?

EXHIBIT I Sandra Dumont Information Regarding Work at Calco and Law Practice

1.Dumont's salary to June 30, 20X5, was $60,000. From this, Calco deducted CPP and EI of $3,452, income tax of $16,000, and $300 for Dumont's portion of the private group medical insurance premium. An additional premium of $300 was paid by Calco. Also, Calco paid the $200 premium for Dumont's group term life insurance coverage of $50,000.

2.On June 30, 20X5, Dumont returned the company car that Calco had provided her. The car had a cost of $32,000, and Calco's undepreciated balance was $18,000. Calco also had paid the operating costs for the car, which amounted to $2,100. Dumont had driven her car 16,000 km, of which 12,000 km were for business use.

3.Dumont travelled by air when working for Calco. Dumont used her personal credit card and accumulated frequent-flyer points.She submitted monthly expense reports and was reimbursed by Calco for the travel costs.In March 20X5, she and her husband used some of her accumulated frequent-flyer points to obtain free airline tickets for a vacation. As a result, they each saved the $800 airfare.

4.In 20X3, Dumont borrowed $20,000 from Calco. She has paid interest at 5% on the loan. Dumont used the borrowed funds for the down payment to purchase a rental property. The CRA's prescribed interest rate was 9% in 20X5. Dumont repaid the loan on June 30, 20X5.

5.On June 30, 20X5, Dumont sold 500 shares of Calco Ltd. for $20 per share to the company's controlling shareholder. Calco had issued the shares to Dumont at $10 in 20X2. At that time, the shares were appraised at $12. Calco Ltd. is a Canadiancontrolled private corporation. At the time of the share sale, all of Calco's assets were being used in an active business.

6.Dumont began practising law from her home office on July 1, 20X5 and registered for HST. She purchased the client list and files of a retiring lawyer for $50,000. She also purchased a computer for $4,000 and a legal library for $5,600.

7.On July 4, 20X5, Dumont purchased an automobile for $34,000, plus HST. She used the car 60% of the time for her law practice.

8.For the six months ended December 31, 20X5, the financial statements of Dumont's law practice showed a profit of $164,000. The gross revenue of $211,000 consisted of the following:

Fees billed and received$170,000 Fees billed but unpaid at the year end24,000 Work in progressnot billed17,000$211,000

Dumont indicated that she wanted to elect under section 34 of the Income Tax Act.

9.Operating expenses for the law practice included the following:

Liability insurance$ 2,200 Depreciation and amortization9,100 Reserve for bad debts1,200 Golf club dueswhile attending the club, clients areentertained approximately 30% of the time 1,600 Charitable donations1,800 Promotionclient lunches400 Secretarial services12,000 Computer softwareword processing and billing program900

10. Dumont uses 12 square metres of her house exclusively as an office for her law practice. Expenses for the entire 80-square-metre home for all of 20X5 consist of the following:

Insurance$700 Mortgage interest9,000 Property taxes2,300 Utilities3,000$15,000The financial statements do not include the home-office costs.