Source Renovations Ltd. specializes in home renovations and interior design in the Montreal area. Most of the construction and finish carpentry work is subcontracted to self-employed contractors. The following information relates to the corporation's net income for the year ended July 31.
Sales Revenue.................................................... $ 4,100,000
Direct contracting expenses...................................... 3,750,000
Gross profit......................................................... $ 350,000
General and administrative expenses
Salary to Ginny (president) ..................................... $ 110,000
Salary to spouse (accounting) .......................................50, 000
Meals and entertainment (Not a) ....................................12,200
Advertising expenses (Note b).......... ..............................4,900
Travelling expense (Note c )........... ..............................19,500
Interest and bank charges (Note d)... ..............................18,000
Amortization (Note e).................... ..............................8,000
Office expenses..........................................................6,000
Total expenses...................................................... $ 228,600
Other:
Gain on sale of real estate (Note f) .............................. $ 55,000
Rental income............................................................9,600
Sale of design contracts (Note g)...... ..............................19,000
Interest income on operating cash..................................... 1,200
Net income.......................................................... $ 206,200
Ginny informed you that there was one unrecorded receivable of $ 14,500 for a renovation project completed on July 30.
Notes:
(a) Meals and entertainment includes:
Club dues.......................................................... $ 1,800
Promotional meals and season hockey tickets................. 10,400
Total................................................................ $ 4,900
(b) Advertising expenses include:
Charitable donations.......................................... $ 2,200
Community promotion.............................................650
Local advertising and mail outs................................2,050
Total............................................................ $ 4,900
(c) Travelling expense includes both air travel and travel reimbursement to employees for business travel. The company's policy is to reimburse employees 53 cents per kilometre for the business use of their automobiles. The employees drove less than 5,000 kilometres.
(d) Interest and bank charges include:
Interest expense - operations................................ $ 9,400
Penalty interest for late filing prior year's corporate tax...8,100
Bank charges........................................................500
Total............................................................ $ 18,000
(e) The company uses the straight-line method of amortization. The maximum capital cost allowance that may be claimed is $8,900.
(f) During the year, the company purchased two homes. After Ginny redecorated, the corporation sold the homes for a profit. The corporation has sold six homes in the last two years using the same strategy.
(g) The sale of design contracts resulted from Ginny's desire to downscale her involvement in commercial design. The gain on sale is net of all costs and expenses.
(h) The salary to Ginny's spouse is considered reasonable because he spends most of his working day administering her business.
REQUIRED
Calculate Source Renovation Ltd.'s income from a business for tax purposes.