Reference no: EM132178876

ASSIGNMENT

You have just been hired as a tax analyst specializing in Business Tax by Diodati, Kerrio and Pietrangelo LLP ("DKP") a major Canadian accounting firm.

As part of interview process DKP required you to complete a knowledge-based interview with specific tax concepts and rules. Jim was particularly impressed with your immediate understanding on how to prepare a corporate tax return (T2) and compute corporate income taxes. Jim Diodati, CPA, CA is the head tax partner at DKP and is excited to have you on board.

You have now completed your new hire orientation at DKP and Jim sends you an email to meet him in the firm's boardroom. You meet with Jim and he mentions that he wants to put you on the file of Angie's Amazing Getups Incorporated ("client"). This is a new client to the firm and Jim has negotiated a tax return preparation fee of $25,000.

Jim did some initial information gathering and found out the following:

The client incorporated on January 4, 2014, the address of the company is 1234 Fanshawe St, London Ontario, L2Y 4W3. The contact person and signing officer of the client is Angela Q. Snodgrass and her telephone number is 519-222-2222. The business number of the company is 1234567 RC 0001. The total amount of federal instalments in the current year were $205,000. Jim left the rest of the corporation information gathering for you to complete.

Prior to leaving the meeting Jim says he requires the following completed by Dec 5th, 2018 at 11:59pm. Can you complete the corporate tax return for the Client. In addition to the tax return I would like a memorandum explaining the adjustments, explanations or assumptions taken on the tax return (including Income Tax Act or other resource references) so it makes it easy for me to review over the Holidays. Lastly I would like for you to complete a client transmittal letter.

You are extremely eager and excited to get started on this engagement and you really want to impress Jim. You contact the client Angela Q. Snodgrass to gather more information. You and Angela had a great meeting, you wrote down all the notes from the meeting. The notes of your meeting can be found on pages 667-670 of the Byrd and Chen textbook (AP 13-8).

Required:

1) Prepare the 2017 corporate tax return for Angie's Amazing Getups Incorporated using Tax Profile software

2) Complete a memorandum that explains the adjustments, explanations or assumptions used in the corporate tax return. Where applicable use income tax act or other applicable references.

3) Complete a client transmittal letter addressed to the client.

Assignment Problem

(Comprehensive Corporate Tax Payable)

Angie's Amazing Getups Incorporated is a Canadian controlled private corporation with a head office in London, Ontario. The company is a manufacturer of high end custom costumes and makeup used in movie and theatre productions with sales in Canada and the U.S.

The company started in business in 2015 when the sole shareholder, Angela Q. Snodgrass, was photographed by the paparazzi after a particularly enthusiastic night of partying. When Angela saw herself on the front page of every tabloid newspaper the next day, she knew that fame was not for her. Since Angela was a highly trained clothing designer and makeup artist, she felt she would be able to use those skills to start her own business and keep out of the limelight.

In November, 2018, after discovering that her bookkeeper, Ponzi Madoff, had been defrauding her, Angela fired him and took over the bookkeeping responsibilities herself, despite having a limited knowledge of accounting. She has produced the following Income Statement and miscellaneous financial information for the year ended December 31, 2018 and needs your help.

Angie's Amazing Getups Incorporated
Income Statement
Year Ending December 31, 2018

Sales Cost Of Goods Sold	(	$7,578,903 5,468,752)
Gross profit Expenses: General And Administrative Expenses          ($852,000)		$2,110,151
Amortization Expense            ( 550,000)
Interest            (           8,500)	(	1,410,500)
Operating Income		699,651
Other Income:
Loss On Disposal Of Limited Life Licence	(	17,000)
Interest Income		110,532
Income Before Income Taxes		$          793,183
Income Taxes
Current            ($182,000) Future  (           35,000)	(	217,000)
Net Income		$          576,183

During your review of Angela's work and last year's tax return for the corporation, you have made the following notes.

1. In the accounting records, the Allowance For Doubtful Accounts was $25,000 at December 31, 2018, and $20,000 at December 31, 2017. During 2018, the company had actual write-offs of $11,750. As a result, the accounting Bad Debt Expense was $16,750. This amount is included in General and Administrative Expenses on the Income Statement.

A review of the listing of receivables (for tax purposes), indicates that the actual items that may be uncollectible total $15,000 at December 31, 2018. In 2017, the company deducted a reserve for bad debts of $13,000 for tax purposes.

2. General And Administrative Expenses include:
Donations To Registered Charities $ 27,000
Accrued Bonuses - Accrued September 1, 2018, Paid June 15, 2019 78,000

Meals And Entertainment Costs: $1,000 Per Month For Premium Membership At Golf Club For Angie $200 Per Month For Memberships At Golf Club For Salespeople $32,000 For Meals While Entertaining Clients $5,000 In Food Costs For Angie's Personal Chef For Her Meals At Home $6,000 For Annual Summer BBQ For All Staff Sponsorship Of Various Theatre Productions That Use Angie's Costumes Advertising In A U.S. Theatre Magazine Directed At U.S. Clients New Software Purchased October 1, 2018 ($13,000 For Applications And $25,000 For Systems) Accounting And Legal Fees For Amended Articles Of Incorporation Costs To Attend Annual Convention Of Costume Designers Held In Thailand

12,000 2,400 32,000 5,000 6,000 100,000 15,000 38,000 6,000 17,000

3. Interest Expense consists of the following:
Interest Expense - Operations $5,000
Penalty And Interest For Late And Insufficient Instalment Payments 2,000
Interest On Late Payment Of Municipal Property Taxes 1,500

4. Travel costs (included in General and Administrative costs) include both air travel and travel reimbursement to employees for business travel. The company policy is to reim¬burse employees $0.59 per kilometer for the business use of their automobiles. During the year, seven employees each drove 4,000 kilometers on employment related activities and one employee drove 7,500 kilometers. None of the kilometer based allowances are required to be included in the income of the employees.

5. Maximum CCA has always been taken on all assets. The undepreciated capital cost balances at January 1, 2018 were as follows:

Class 1 (4%)    $650,000

Class 8 95,000

Class 10.1        17,850

Class 14           68,000

Class 14.1        Nil

Class 44           65,000

Class 53           135,000

6. During 2018, a limited life licence to produce costumes based on a popular theme park was sold for $63,000. The original cost of this licence was $95,000 and its net book value at the time of sale was $80,000. The licence was the only asset in Class 14.

7. Purchases and sales of equipment and other capital assets made during 2018 were as follows (note: some items are discussed in other sections of this problem). All amounts were capitalized for accounting purposes:
a. The company purchased land and constructed a new building on it during the year. The building will be used 95% for manufacturing and processing. The cost of the land was $350,000, and the building cost $475,000 to construct.
b. The company purchased a new set of furniture for the reception area for $1,200.
c. Some outdated desks used by the finance department with a cost of $5,000 were sold for proceeds of $3,500.
d. Landscaping of the grounds around the new building cost $35,000. This amount was capitalized for accounting purposes.
e. A company car for use by the president of the company was purchased for $90,000. This car replaced the only other existing company car, which was purchased in 2016 for $95,000. The old car was sold for $60,000.
f. A fence around the new building, high enough to prevent the paparazzi from taking pictures of Angela while she was at the office cost $52,000.

8. The company sold some shares that had been purchased several years ago. The capital gain on these shares was $152,708. Angela didn't know how to account for this, so she credited the entire amount to retained earnings.

9. Included in the financial statement income is income earned in the United States. The amounts reported in the financial statements are net of the tax paid, because Angela was unsure of the appropriate accounting treatment. All amounts are reported in Canadian dollars. The foreign income consisted of:
a. Foreign business income of $70,000. US tax returns have been filed, and the US taxes paid on this amount totals $6,000.
b. Foreign portfolio dividend income of $15,000. Foreign taxes of $2,000 have been paid on this dividend income.

10. The Investment Income account balance on the Income Statement consists of the foreign dividend income (point 10) and the following Canadian source investment income:

Interest on long term investments       56,532

Eligible dividends on bank shares      $ 16,000

Non-eligible dividend from Snodgrass Ltd.   $ 25,000

Angie's Amazing Getups Incorporated owns 8 percent of the shares of Snodgrass Ltd., a very profitable CCPC owned by Angela's mother. Snodgrass Ltd. received no dividend refund from the payment of dividends in 2018.

11. Except for the investment income noted in points 10 and 11, and any additional invest¬ment income you may calculate, all income is Canadian Active Business Income.

12. Included in the income of the company are manufacturing and processing profits. It has been determined that manufacturing and processing profits as determined under the Income Tax Regulations are $65,000.

13. The corporation has permanent establishments in Ontario and the United States. Its gross revenue and salary and wages information is as follows:

                Gross Revenue         Salary and Wages

Ontario        73.8%                         89.1%

United States  26.2%                      10.9%

14. As Angela did not know how to deal with the dividends paid to her personally by Angie's Amazing Getups Incorporated, she included them in General And Administrative Expenses. A total of $60,000 in non-eligible dividends were paid to her during 2018.

15. The balances in the tax accounts on December 31, 2017 were as follows:

Charitable donation carry forward             $3,500
Non-capital loss carry forward                    52,500
Net capital loss carry forward ff1/2)($17,666) 8,833

Refundable dividend tax on hand                  40,500
Dividend refund for 2017                             9,500
GRIP                                                       76,500
None of the dividends paid in 2017 were designated eligible.

Required: Show all of the calculations used to provide the following required information, including those for which the result is nil. Ignore GST/HST/PST implications.

Determine Angie's Amazing Getups Incorporated's:

A. Minimum Net Income For Tax Purposes and Taxable Income for the year ending December 31, 2018.

B. Part I Tax Payable for the year ending December 31, 2018. Any percentages used in your calculations should be rounded to one decimal point. For the purposes of dealing with any foreign tax credits that the company is eligible for, assume that the foreign tax credit is equal to the foreign tax paid when determining the amount of the small business deduc¬tion and the manufacturing and processing profits deduction.

C. December 31, 2018 balance in the Refundable Dividend Tax On Hand account.

D. Minimum federal Tax Payable for the year ending December 31, 2018. This should include both Part I and Part IV Tax Payable, net of any dividend refund. Actual foreign tax credits should be calculated in order to determine the final balance of taxes owing by the company.

E. December 31, 2018 balance in the GRIP account.