You have been asked to reconcile accounting income to Division B income for tax purposes and to

Fantastic news! We've Found the answer you've been seeking!

Question:

You have been asked to reconcile accounting income to Division B income for tax purposes and to compute taxable income for your client, Waterloo Industries Ltd. The income statement for the year ended December 31, 2019 is shown below:

Waterloo Industries Ltd.

Statement of Income

Year Ended December 31, 2019

Sales	$4,780,000
Cost of sales	3,560,000
Gross profit	$1,220,000

Expenses:
Selling	$ 395,000
General and administrative	305,000
Amortization	230,000
Interest on long-term debt	37,000
Other interest	55,000
	$1,022,000
Other income:
Gain on sale of fixed asset	$ 1,900
Income from other investments	109,000
	$ 110,900
Income before income taxes	$ 308,900

Income taxes:
Current	$ 93,000
Provision for future income taxes	4,500
	$ 97,500
Net income	$ 211,400

During your review of the working paper file and last year’s tax return, you have made the following notes to yourself, because you think that there might be tax implications associated with these items:

1. The December 31, 2019 finished goods inventory is stated net of a reserve for a possible decline in market value of $57,000.

2. Included in general and administrative expenses are the following transactions:

(a)	landscaping	$17,000
(b)	cost associated with the valuation of land	2,800
(c)	donations consisting of $63,000 to registered charities and $1,000 to registered political parties	64,000
(d)	premium for term life insurance policy on the president in which the company is the beneficiary and the policy is used as collateral for a bank operating line of credit	22,200
(e)	memberships in private clubs for senior executives	3,200
(f)	meals and entertainment with clients	12,000
(g)	cost of employee training seminar to teach employees about new provincial workplace safety laws	7,200
(h)	cost of seasonal holiday party to which all employees were invited	17,700
(i)	warranty provision (actual warranty costs: $18,000)	28,000
(j)	reserve for decline in value of marketable securities	13,000
(k)	accrued bonuses, paid July 30, 2020	30,000

3.Included in interest expense on long-term debt and other interest are the following transactions:

(a)

bond interest paid to November 30, 2019

bond interest accrued to December 31, 2019

$10,000

950

(b)

interest on deficient income tax instalments

interest on late municipal property taxes

1,200

500

4.Included in other income are the following transactions:

(a) sale of capital property
	Cost	Proceeds
Truck (not class 10.1)	$ 80,000	$25,000
Class 1 NRB— (purchased Feb 2010)	956,183	650,000
Building Class 1	50,000	37,200
Patent limited life — Class 44*	160,000	50,000
Computer system hardware**	65,000	10,000
* This was the only asset in the class (Purchased 2016)
** No separate class used

(b)the gain on sale of fixed asset arose from the sale of an oil painting hung in the office of the Director of Taxation; the painting cost $18,000 in 2011 and was sold for $19,900

5. The company had the following balances in its tax accounts on January 1, 2019:

Class 1			$225,000
Class 1-NRB			615,048
Class 8			55,000
Class 10			354,000
Class 12			Nil
Class 44			78,750

6. The following purchases of assets were purchased also in February 2019.

office furniture	$ 1,000
computer system — hardware	55,000
— applications software	12,000

Required:

Based on the foregoing information, Compute the income from business for tax purposesfor Waterloo Industries Ltd.for its 2019 fiscal year.

Note Your answer should incude the following.

1. The reasons, Income Tax Act (ITA)section, subsection and paragraph (where applicable) references in order to support your answer to question and for any items omitted from the calculation.

2. Follow the sequence of information given above 1 to 6 to calculate the Net Income for tax purposes.

3. Show the CCA calculations separately.

4. State your assumptions if any