Coco Hardy is an apprentice with Sepp, a design house in Toronto. In her spare time, during some evenings and on weekends, she operates a sewing service for clothing manufacturers. She has set aside a spare room in her apartment where she keeps her equipment and materials and performs her services. This room occupies approximately 20% of her apartment. She sews for many of the same companies that deal with her employer, Sepp. The demands of her employment with Sepp will continue to prohibit her from expanding her sewing services. Consequently, she has not advertised for additional sewing work. Her sewing billings average approximately $600 per month.
She and the manufacturers mutually agree upon what type of sewing is to be done in order to meet the manufacturers' production deadlines. Her hourly rates are determined by the type of sewing required for a particular manufacturer. At the end of each month, she will issue a bill to the manufacturers bearing her name, home address, and home telephone number. Her clients pay her the gross amount on the invoice which does not include HST.
Ms. Hardy has incurred some direct sewing expenses and has allocated some of her other costs to her sewing services in respect of the past year as follows:
Direct expenses:
Sewing supplies ................................................ $ 2,890
Meals and entertainment for manufacturers.....................500
Sewing machine repairs ............................................425
Long distance telephone calls to manufacturers.................710
Delivery of finished product..................................... 1,500
Total direct expenses............................................ $ 6,025
Allocated costs:
Rent ($1,000 per month)....................................... $12,000
Utilities...............................................................2,100
Insurance...............................................................400
$14,500
Allocation to sewing room............................ x 20% $ 2,900

REQUIRED
(A) Discuss the issues involved in determining whether Ms. Hardy is earning employment income or business income from her sewing service and then reach a conclusion based on the facts.
(B) Compute both income from employment and business, and comment on whether the listed expenses and allocated costs are deductible for income tax purposes under each alternative.

Transcribed Image Text:

Capital cost allowance: Sewing room furniture ....450 Sewing machine . Automoble for deliveries . Total allocated costs . S 4,875 325 1,200 1,975 Total. $10,900