Question

Bob Biddle operates a small engineering consulting business in Edmonton, AB (unincorporated business). The current year’s income statement for accounting purposes at December 31 shows: Consulting fees $790,000 Other expenses ($281,000) Net Income $509,000 Income tax ($180,000) Net income $329,000 Included in Other Expenses are the following amounts: (a) A $25,000 bonus declared to Bob’s wife, who is the bookkeeper for the business on December 30 of the current year. Bob did not get around to signing his wife’s bonus cheque until September of the following year. (b) Financing fees paid to acquire a bank loan of $5,000 (c) Life insurance premiums of $5,000 on a life insurance policy for Bob. The life insurance policy was required in order to obtain the bank loan (mentioned above). (d) Interest of $1,000 for filing GST returns late (e) The corporation pays Bob an auto allowance of $1.00 per km, and during the year Bob drove 5,000 kilometres for work purposes. For simplicity, assume that the automobile allowance limit set by tax authorities in the current year is $0.54 per km. (f) Accounting depreciation on furniture and fixtures is $2,000. The UCC in Class 8 is $16,500 (g) Salaries of $221,000 (not including the bonus mentioned above) were paid to Bob and all of the other employees of the corporation. Please note that salaries paid to Bob and his wife are considered reasonable and all other employees are not related to Bob. (h) Advertising costs of $12,000 were paid to an American engineering journal, which is only distributed throughout the United States. Required: Calculate net business income for tax purposes for Bob's business. Explain any items not included in your calculations.

Answer 1

Calculation of Net business Income for Tax Purpose
Particulars	Amount
Consulting Fees	790000
Less: Other Expenses
Bonus to Bob's Wife	0
Financing Fees	5000
Life Insurance Premium	5000
Interest for Filling late GST return	1000
Auto Allowance(5000km*0.54)	2700
Depreciation(16500*20%)	3300
Salaries	221000
Advertising Cost	12000
Total Expenses	250000
Net Business Income for Tax Purpose	540000

Notes:

1) Bonus paid to Bob Wife was not included in calculating the Business Income as bonus was declared in current year but was not paid before the return filing period of the current financial year.

2)Auto allowance @0.54/km is allowed as deduction,hence $2300 {(1-0.54)*5000} is disallowed.

3)Depreciation rate for Class 8 is 20%.