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Mr.

Swindex

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

INTRODUCTION & FINANCES


Mr. Swindex
CEO & 100% shareholder
Glass cleaner for Cars

Sales
Cost of Sales
Gross Margin
Other Expenses

$ 3,000,000
($ 1,570,000)
$ 1,430,000
($ 955,000)

Operating Income Before Taxes


Other Income & Losses

$ 475,000
$ 75,000

Income Before Taxes

$ 550,000

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

ADD BACK

Permitted expense considered an interest expense

Interest on deficient corporate tax instalments


Interest paid to CRA on late payments cannot be
deducted

PART A: ANALYSIS
Reserve for inventory declines $26,300
Fails Reserve Test and cannot be deducted

Interest paid on bonds issued $22,000

No effect

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

PART A: ANALYSIS
Advertising in magazine distributed only in US
$22,000

No effect

Deductible if ads are directed primarily at Americans

Sponsoring local hockey team $3,200

No effect

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

PART A: ANALYSIS
Membership fees for golf club $7,000
Denied expense

Convention expenses $30,000

No effect

Permitted expense

Damages paid for breach of contract $18,000

No effect

Damages are deductible since they were incurred to


generate or produce an income

PART A: ANALYSIS
Loss from theft by an employee $2,800

No effect

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

PART A: ANALYSIS
Net Income per Financial Statement
Add:Bond discount amortization
Interest on deficient corporate taxes
Reserve for inventory decline
Broker fees for bond financing
Hockey games with customers
Undistributed advertising circulars
Golf club dues
Political contribution

$ 550,000
$500
1,700

26,300
4,000
1,000
7,500
7,000
2,000

Deduct:
Landscaping

NET INCOME FOR TAX PURPOSES

($ 10,000)

$ 590,000

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


What they paid:

$100,000 0.25 = $25,000

What they
SHOULD HAVE
paid:

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

What they get as tax credit:

$ 12,500

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