Understanding Income Comparisons: Expense Deductions Explained

School

Fanshawe College**We aren't endorsed by this school

Course

BAA2 7006

Subject

Accounting

Date

Dec 12, 2024

Pages

Uploaded by zahidmahin16

COMPARISON OF INCOMEfor Mr. Peter RajagopalSupportSupport (NOTE A)DifferencesEmployedProprietorHome office:conditions satisfied8(13)conditions satisfied18(12)Utilities 3,1008(1)(i)- Mortgage interest12,0008(1)(f)(v), IT-352R2- House insurance1,1508(1)(f)(v), IT-352R2- Municipal taxes3,0508(1)(f)(v), IT-352R2- Maintenance and repairs 2,7008(1)(i)- CCA on computer1,0358(1)(f)(v)- Interest on computer loan 3208(1)(f)(v)- Rental of photocopier 1,2008(1)(f)(v)- Rental of fax machine2008(1)(f)(v)- Office supplies 7508(1)(i)- Telephone:- Long distance calls 1,0008(1)(i)(iii)- Promotional expenses:- Peter’s meals with clients in Regina2,0008(4)- Meals with clients2,1008(1)(f), 67.1(1)- Theatre 1,2008(1)(f), 67.1(1)- Promotional gifts 1,3008(1)(f)- Country club membership 3,2008(1)(f), 18(1)(l)18(1)(l)- Automobile expenses:- Gas & oil 2,0008(1)(f), or 8(1)(h.1)- Insurance 1,1008(1)(f), or 8(1)(h.1)- Licence 908(1)(f), or 8(1)(h.1)- Repairs 8008(1)(f), or 8(1)(h.1)- Cellular phone airtime 7008(1)(i)(iii)- Parking 3208(1)(f), or 8(1)(h.1)- CCA on car33,3008(1)(j)- Interest on car loan 8008(1)(j)- - Other travel expenses:- Airfare 4,5208(1)(f), or 8(1)(h.1)- Accommodation ($4,960 – $2,400) 2,5608(1)(f), or 8(1)(h.1)- Meals (50% x $2,400) 2,4008(1)(f), or 8(1)(h.1)- Convention (excl. meals) 800no provision for convention20(10)- Meals and entertainment ($3,200 x 50%) 3,2008(1)(f), or 8(1)(h.1)- Total - - 3,995 Limitation00 NoneDeduction- 3,995 NOTES:For business purposes, you should be able to provide a general explanation as to why expenses are deductible. If anything is specifically denied, provide the appropriate provision in the column.Provide the general criteria for deducting business expenses:deductible under GAAPreasonablenot a personal expensegained or incurred for purpose of incurring incomenot capitallimit to commissions but all total less than $35,000

Solution 15Net income per financial statementsAdd:Provision for income taxReserve for decline in inventory values not permittedWarranty reserve not permitted (2015 increase: $85,000 – $76,000)Charitable donations usually not incurred to produce incomeGolf club membership specifically deniedMeals and entertainment (50% of $2,300)Management bonus unpaid on 180th day after Dec. 31/15Accounting fees [financing costs: 80% of ($5K + 2K)]Appraisal fees [financing costs: 80% of ($5K + 2K)]Amortization of bond discount not permittedLegal fees on share purchase a capital expenditureInterest on late income tax instalments specifically deniedLife insurance premiums on policy not required as collateralComputer software is Class 12 depreciable capital propertyAmortizationAmortization of goodwillRecapture of Class 12 CCA (see below)Deduct:Reserve for deposit on goods not deliveredTerminal lossCCA (see below)CECA (see below)Income from business for tax purposes

Note that for recapture in Class 12, the asset does not have to be the last asset in thethe rules are different in that it must be the last asset in the pool in order for it to be a

530000 17,000 9,000 8,000 1,600 1,150 27,000 4,000 1,600 7000 7500 90 4200 750 66,000 2,500 1,250 8,200 24,768 122,125 CECA 7% of ($40,000 − ¾ × $48,000) = 280 Omitted from calculations:Loss from theft8,000 Management bonus of65,000 Seasonal holiday banquet10,000 Damages38,000 Interest on funds21,000 Business interruption insurance3,100

e pool. The moment the balance becomes negative for the UCC balance at Decema terminal loss.

900,000 ss 9(1)2s. 18(1)(e)0s. 18(1)(e)3s. 18(1)(e)3s. 18(1)(a)3s. 18(1)(l)3s. 67.1(1)3s. 78(4)3s. 20(1)(e)4s. 20(1)(e)4s. 18(1)(b)0s. 18(1)(b)0s. 18(1)(t)3s. 18(1)(a)0s. 18(1)(b)3s. 18(1)(b)3s. 18(1)(b)3139,940 s. 13(1)2s. 20(1)(m)3s. 20(16)3s. 20(1)(a)2155,373 s. 20(1)(b)5884,567 Loss from theft a normal risk of business (Cassidy's case and IT-185) ($8,000) 3Management bonus of $65,000 ($92K − 27K) paid before 180th day from Dec. 31/15 3Seasonal holiday banquet available to all employees; not limited by s. 67.1(2)(e) ($10,003Damages a normal risk of business (IT-467R) ($38,000) 3Interest on funds borrowed to buy equipment incurred to produce income (s. 20(1)(c)) ($3Business interruption insurance premium incurred to protect source of income (s. 18(1)(a37341 114

mber 31, 2014, the negative balance turns into recapture. Note that for terminal losses

CAPITAL C123456ClassUndepreciatedCost ofNet adjustmentsProceeds ofUndepreciatedNumbercapital costacquisitions(show negativedispositionscapital costat the beginningduring the yearamounts induring the yearof the yearbrackets)(amount not toexceed thecapital cost)1 - NRB7500007500003170232195000-24768640000400008600002000050007500010800004500075001175001250007507000-125013187500210002085001725000250004390000090000lesser of:225,000/545000225,0000/(6+3)25000lesser of:21,000/5420021,000/(4+3)3000Note 1 The net cost of acquisitions is the cost of acquisitions plus or minus certain adjustmfrom column 4.Note 2 If the taxation year is shorter than 365 days, prorate the CCA claim.(column 2 pluscolumn 3 plusorminuscolumn 4minuscolumn 5)Note that for recapture in Class 12, the asset does not have to be the last asset in the pool. The moment the balance becomes negative for the UCC balance at December 31, 2014, the negative balance turns into recapture. Note that for terminal losses the rules are different in that it must be the last asset in the pool in order for it to be a terminal loss.

SCHEDULE 8COST ALLOWANCE7891011121350% ruleReducedCCARecaptureTerminal lossCapital costUndepreciated(1/2 of the amount,undepreciatedrateof capital costallowancecapital costif any, by whichcapital cost%allowance(column 8at the endthe net cost ofof the yearacquisitionscolumn 7)column 9; or aexceeds column 5)lower amount)column 12)See note 1 belowSee note 2 below3750003750006%225007275000-247685%2476800200002000010%20003800075006750020%1350061500187509875030%2962587875-1250100%125000208500 SL2650018200012500125008%1000240009000030%2700063000250001/2 year rule1500TotalsmentsThe total of column 10 is added to income.The total of column 11 is deducted from income.The total of column 12 is deductible from income.(column 6 minusmultiplied by(column 6 minus

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