Question 1

SEA Ltd.is a Canadian-controlled private corporation, operating a small gift store in Kelowna.The company has a December 31st year-end.SEA's financial statements reported net income before taxes of $210,000 in 2020.
Financial information relating to 2020 is as follows:
Land adjacent to the gift shop was purchased with a $75,000 bank loan during the year to allow for an outdoor sales area during warm weather.Interest expense on the loan for the year was $9,600, and the appraisal fee to finance the loan was $1,000.Both the interest and the appraisal fee were expensed by SEA in 2020.
The company hired a contractor to landscape the land.The $5,000 bill for the landscaping was paid in full during the year and capitalized on SEA's Balance Sheet.
During the year, a new display case worth $2,000 was purchased and expensed on the books.
Amortization expense of $21,000 was deducted during the year.Total CCA (following any adjustments) for the year was $16,000 and is not reflected in the financial statements.
The following were also expensed during the year:

On December 30th, SEA's president announced a bonus to be paid to the company's key employee in the amount of $5,000, which was expensed on the books that day.The employee will receive the bonus in 2021 in equal payments of $2,500, to be issued on January 30th and July 30th.
Required:
Determine SEA Ltd.'s net income for tax purposes for 2020.

Accepted Answer

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Question 2

Employers can deduct unpaid remuneration for tax purposes&#10;A)if paid within 180 days of the taxation year.&#10;B)if paid within 365 days of the taxation year.&#10;C)if paid within 60 days of the taxation year.&#10;D)if paid within two years of the taxation year.

Accepted Answer

Employers can deduct unpaid remuneration for tax purposes if it is paid within 180 days of the end of the taxation year. This allows for some flexibility in accounting for wages or salaries that were earned but not paid out by the end of the tax year.

Question 3

Jaylen Abbas runs a small proprietorship.You have been provided with the following financial information pertaining to his business:

(All closing inventory is valued at market value.)
Required:

A) Calculate the net income for tax purposes for Jaylen's proprietorship.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Jaylen had valued the inventory at cost.

Accepted Answer

A)&#10; &#10;B) Omitted items:&#10;Advertising in an American newspaper is not deductible when the targeted market is Canadian. S.19&#10;Half of the meals and entertainment are not deductible. S 67.1&#10;Property taxes on vacant land is only deductible to the extent that income is earned. S.18(2), (3) The amount can be added to the cost base of the land.&#10;Recreational fees are not permitted as deductions. S.18(1)(l)&#10;The convention is not within the territorial scope of the organization hosting the conference, therefore, it is not an allowable deduction. S.20(10)&#10;&#10;C) The Income Tax Act requires that closing inventories be valued at either:&#10;1) the lower of cost or market value of each item, or&#9; &#10;2) the market value of all items of inventory.&#9; &#10;Jaylen would need to value the inventory as per these provisions, which could affect both cost of goods sold and net income for tax purpose&#10;&#10;&#10;

Question 4

Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act?&#10;A)Maintenance fees on a yacht at Yellow Yacht Leasing Inc.&#10;B)Legal and accounting fees incurred during the construction of a building.&#10;C)Advertising costs in a non-Canadian newspaper directed at an American market.&#10;D)Work space in a home used as a taxpayer's principal place of business.

Accepted Answer

The answer of Which of the following expenses would be...

Question 5

Sari ran a proprietorship that generated $75,000 in profits in 2020.Included in these profits were: a) $10,000 - amortization expense; b) $5,000 - reasonable bad debt expense; c) $55,000 - cost of goods sold (closing inventory at market value); and $8,000 - meals and entertainment with clients.The business' capital cost allowance has been accurately calculated at $8,500 for the year.How much is Sari's business net income for tax purposes?

A)$73,500
B)$75,000
C)$80,500
D)$89,000

Accepted Answer

To calculate Sari's business net income for tax purposes, we need to subtract the deductible expenses from the profits generated. The deductible expenses include amortization, bad debt, cost of goods sold, capital cost allowance, and other reasonable business expenses. Therefore, Sari's business net income for tax purposes is:
$75,000 - $10,000 - $5,000 - $55,000 - $8,000 - $8,500 = $80,500
Thus, the best choice is C.

Question 6

Blue Co.was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its annual tax return.Which of the following general limitations to business profit determination best describes the reason for the CRA's decision?

A)Exempt-income test
B)Personal-expense test
C)Insurance proceeds exemption
D)Reserve test

Accepted Answer

The exempt-income test applies because the life insurance proceeds are generally exempt from tax, and therefore, the premiums paid for such policies are not deductible as they relate to generating exempt income.

Question 7

Which of the following is not an example of a qualified expenditure for scientific research and experimental development?&#10;A)Engineering and design work&#10;B)Market research and sales promotion&#10;C)Operations research and mathematical analysis&#10;D)Computer programming and data collection

Accepted Answer

Market research and sales promotion are not considered qualified expenditures for scientific research and experimental development. The other options listed (engineering and design work, operations research and mathematical analysis, computer programming and data collection) are considered qualified expenditures for these purposes.

Question 8

Hansa invested in a piece of land seven years ago when real estate prices were rising in his area and land values were expected to double within five years.The land remained vacant and was only used in 2018 when Hansa was approached to rent the land for two weeks for a local carnival for a fee of $1,000.It is now 2020 and Hansa has been offered a significant sum of money for the land in response to an advertisement in a local newspaper.Based on Hansa's primary intention for the land, the gain on the sale would be classified as

A)business income.
B)property income.
C)a capital gain.
D)exempt income.

Accepted Answer

The answer of Hansa invested in a piece of land...

Question 9

A taxpayer recognized a $40,000 loss in 2020 from a small farm (which was a secondary activity to a full-time job as a dentist).What is the maximum deduction that would be allowed from the farm loss for the 2020 tax year?

A)$0
B)$17,500.
C)$21,250.
D)$40,000.

Accepted Answer

The maximum deduction for a farm loss in 2020, when the farming activity is not the taxpayer's primary occupation, is limited to $25,000. However, for taxpayers whose adjusted gross income (AGI) exceeds $150,000, the maximum deductible amount is reduced. The reduction is $0.50 for every dollar of AGI over $150,000. Assuming the dentist's AGI is high enough to trigger this phase-out, the maximum deduction they could claim would be reduced, but without specific AGI information, the closest standard option provided is $17,500. This reflects a scenario where the deduction limit is applied considering a high AGI.

Deck 5: Income From Business