TR Ltd. is a Canadian-controlled private corporation operating a franchised retail and mail-order business in Vancouver. Denver Chan, the company’s president, owns 100% of the corporation’s share capital. The corporation was created on December 1, 20X5. For the year ended November 30, 20X6, TR Ltd.’s financial statement reported income before income taxes of $126,000.

TR Ltd. - Selected Financial Information

1.      The following properties were purchased for the new business:

Franchise………………………..       $ 40,000

Land ………………………..             30,000

Building ………………………..       270,000

Delivery truck ………………………40,000

The franchise, purchased on December 1, 20X5, permits the corporation to operate under the TR name for a period of 15 years. A renewable period of another 15 years is available, subject to satisfactory performance.

The land cost of $30,000 consists of the purchase price of $20,000, $7,000 for permanent landscaping, and $3,000 for water and sewer connections. The building was constructed after March 18, 2007. 

On October, 15, 20X6, the truck was involved in an accident. The damage was not repairable, and TR immediately signed an agreement with the insurance company to settle the claim for $31,000.The cash was received on December 10, 20X6. Another truck was obtained under a lease arrangement. Amortization expense of $28,000 has been deducted from income.

2.      Legal expense includes the following costs:

Preparing annual corporate minutes……………………..	$ 300
Incorporation costs for TR Ltd. ……………………..	1,500
Negotiation of franchise agreement ……………………..	2,000

3.      Repairs and maintenance expense includes the following items:

Paving the parking lot ……………………..	$8,000
Cleaning and supplies ……………………..	1,400
Replacing a broken window ……………………..	1,000
Small tools costing less than $500 ……………………..	1,200

4.      Advertising expense includes a cost of $7,000 to acquire a permanent mailing list for the mail-order business. The list has an expected life of six years. Other advertising items are listed below.

Cost of making a television commercial ………….	$25,000
Travel costs for Chan to attend a franchiser convention. Chan’s
spouse travelled with him and attended a social function
(her expenses were $1,500) ………………………..	3,000
Charitable donations               ……………………..	2,000
Meals and beverage costs for entertaining suppliers   ….	1,800
Costs of leasing and maintaining a pleasure boat to entertain
suppliers and employees   ……………	2,600
Television advertising
Vancouver station             ……………………..	11,000
Seattle station directed at the Vancouver market             ……………………..	6,000

5. A contingent reserve for possible defective products of $5,000 was recorded as a charge against cost of sales. During the year, $3,000 of products were returned.

6. On May 31, 20X6, TR invested $40,000 in a one-year bank certificate earning annual interest of 7%. TR intends to recognize the interest revenue upon receipt at its one-year anniversary date.

7. Interest expense includes $14,000 on the building mortgage and $700 from a temporary bank loan of $12,000. The bank loan funds were, in turn, loaned, without interest, to Y Ltd., a corporation owned by Chan’s brother. Y Ltd. used all of its assets to operate an active business but declared bankruptcy in November 20X6.

8. TR is planning to sell a new product in 20X7—a bracelet with a charm depicting a popular cartoon character. The bracelet and charm will be ordered from separate suppliers, and TR’s staff will assemble the two pieces and package them in a specially designed box.

9. Shortly after incorporation, TR acquired 46% of the voting common shares of Q Ltd., a Canadian-controlled private corporation that supplies certain products to TR and other retailers. On October 31, 20X6, TR received a dividend of $15,000 from Q Ltd. At the time, Q Ltd. had an RDTOH account of $2,000. An opportunity exists for TR to purchase an additional 5% of the voting common shares of Q Ltd. early in 20X7. A decision will be made in January 20X7.

10. On November 30, 20X6, TR declared and paid a taxable dividend of $40,000.

Required:

1. Under Part I of the Income Tax Act, determine the minimum income for tax purposes and taxable income for TR Ltd. for the 20X6 taxation year.

2. Based on your answer to 1, calculate TR’s minimum Part I and Part IV federal income tax for the 20X6 taxation year.

3. Briefly describe the tax consequences, if any, if TR Ltd. purchases the additional 5% of the shares of Q Ltd. in January 20X7.

4. Advise TR Ltd. on the tax implications, if any, of selling its new charm bracelet in the 20X7 year.