Mr. Swindex

THE DEDUCTIBLES Negar Dastjerdi Rachel Abourbih Sri Charan Sunkara Nadim Shamseddine Steven Yasmine

INTRODUCTION & FINANCES

Sales Cost of Sales

Gross Margin Other Expenses

Operating Income Before Taxes Other Income & Losses

Income Before Taxes

$ 3,000,000 ($ 1,570,000)

$ 1,430,000 ($ 955,000)

$ 475,000 $ 75,000

$ 550,000

Mr. Swindex

CEO & 100% shareholder

Glass cleaner for Cars

PART A: ANALYSIS

Landscaping $10,000 capitalized

Although this is a capital item, it is specifically allowed as a deduction in the year paid

Bond discount amortization $500

Permitted expense considered an interest expense

Interest on deficient corporate tax instalments

Interest paid to CRA on late payments cannot be deducted

ADD BACK

PART A: ANALYSIS

Reserve for inventory declines $26,300

Fails Reserve Test and cannot be deducted

Interest paid on bonds issued $22,000

Interest paid is generally deductible

Broker fees to obtain bond financing $5,000

Financing expenses are a permitted expense as a deduction in equal portions over 5 years

No effect

PART A: ANALYSIS

Advertising in magazine distributed only in US $22,000

Deductible if ads are directed primarily at Americans

Sponsoring local hockey team $3,200

Permitted expense if it satisfies 6 conditions found in the Income Tax Act

Attending Hockey Games with customers $2,000 (including meals and drinks)

50% of meals and entertainment is deductible as long as incurred for the purpose of earning an income

No effect

No effect

PART A: ANALYSIS

Membership fees for golf club $7,000

Denied expense

Convention expenses $30,000

Permitted expense

Damages paid for breach of contract $18,000

Damages are deductible since they were incurred to generate or produce an income

No effect

No effect

PART A: ANALYSIS

Loss from theft by an employee $2,800

Losses of inventory through theft of an employee are considered inherent risk in carrying on business and are therefore deductible CRA

Political donation $2,000

Denied expense

Advertising circulars (1/2 distributed) $15,000

Portion of undistributed circulars (1/2) are considered deferred charges and are not deductible in this period

No effect

PART A: ANALYSIS

Net Income per Financial Statement

Add:

Deduct:

NET INCOME FOR TAX PURPOSES

$ 550,000

$ 590,000

$500

1,700

Bond discount amortization

Interest on deficient corporate taxes 26,300

Reserve for inventory decline

($ 10,000)

Landscaping

Hockey games with customers

1,000

Golf club dues Political contribution

7,000

Broker fees for bond financing

4,000

2,000

Undistributed advertising circulars 7,500

PART B: ANALYSIS

Issue: Swindex Inc. sold land and earned a profit of $100,000. Should this profit be considered business income or a capital gain?

After purchase, Swindex Inc. began plans to develop properties into shopping plazas.

Demonstrates companys intention to derive long-term benefit from properties.

Land should be treated as capital property and when sold results in capital gain ($50,000 taxable).

EFFECT ON TAX IN YEAR 2014

$100,000 0.25 = $25,000

($100,000 0.5 ) 0.25 = $12,500

$ 12,500

What they paid:

What they SHOULD HAVE paid:

What they get as tax credit:

RULE OF THUMB TO REDUCE TAX LIABILITY

Sell your capitals when you are on higher tax bracket

Make use of more deductible expenses when you expect your income to be about $500,000

Ensure evidence is kept at least for three years

Do not exceed convention expense when you are in high tax bracket