Question

Designers Ltd. is a Canadian controlled private corporation with its head office in Vancouver, B.C. The company manufactures clothes and sells to Canada and the United States.

Designers Ltd. was incorporated in 2013 and has a sole shareholder, Amanda Anderson. Amanda Anderson, a fashion expert, also prepared the accounting records for Designers Ltd.

Designers' Ltd. Income Statement For the Year Ended December 31, 2016
Sales		$10,000,000
Cost Of Goods Sold		(4,500,000)
Gross Profit		$5,500,000
Expenses:
General & Administration	(900,000)
Amortization	(300,000)
Interest	(25,000)	(1,225,000)
Operating Income		$4,275,000
Gain on Disposition of Tangible Assets		83,000
Interest Income		300,000
Income Before Income Taxes		$4,658,000
Income Taxes		(320,000)
Net Income		$4,338,000

During your review of Amanda Anderson’s accounting and income tax work, you noted the following:

1. The Allowance for Doubtful Accounts, in the accounting records, was $ 40,000 at December 31, 2016 and was $ 35,000 at December 31, 2015. During 2016, Designers Ltd. had actual write-offs of $ 18,000. Consequently, the 2016 accounting Bad Debts Expense was $ 23,000. That amount was in included in General & Administrative Expense.

A review of the Accounts Receivable listing (for income tax purposes) indicated that the actual items that may be uncollectible totaled $ 28,000 at December 31, 2016. In 2015, Designers Ltd. deducted, for income tax purposes, a reserve for bad debts of $ 12,000.

General & Administrative Expense included the following:

Donations to Registered Charities	$40,000
Accrued Bonuses - Accrued November 01, 2016, paid on July 31, 2017	65,000
Meals & Entertainment Costs included the following:
$2,000 monthly membership fees at a Gold Club for Amanda	24,000
$1,000 monthly membership fees at a squash club for sales staff	12,000
Meals for entertaining clients	60,000
Food costs for Amanda’s personal chef at Amanda's home	20,000
Annual staff Christmas party	17,000
Sponsorship of local community’s soccer team	16,000
Advertising in a U.S. newspaper directed at U.S. clients	15,000
Software purchased on July 15, 2016 ($20,000 for Applications and $25,000 for hardware)	45,000
Legal & accounting fees for amending articles of incorporation	16,000
Annual Finland convention costs	30,000

Interest Expense was comprised of the following:

Interest & Penalty for Late and Insufficient Instalment Payments to CRA	8,000
Interest on Late Payment of Municipal Property Taxes	7,000
Interest Expense - Operations	10,000
Total	25,000

Travel costs (included in General & Administrative Expense) included both air travel and travel reimbursement to employees for business travel. Designers Ltd.’s policy was to reimburse employees $ 0.95 per kilometer for the business use of the employees’ automobiles. During 2016, seven employees drove 7,000 kilometres each on employment-related activities. None of the reimbursements were required to be included in the employees’ income.

The Gain on Disposition of Tangible Assets consisted of the following

Cash	105,000
Accumulated Amortization	25,000
		Gain on Disposal of Tangible Assets	83,000
		Equipment	47,000

Designers Ltd. purchased a $ 150,000 Mercedes for Amanda Anderson’s personal use. The Mercedes replaced the only other existing company car, a $ 95,000 BMW, which was purchased in 2014. The BMW, which was sold for $ 75,000, was used solely by Amanda Anderson. The BMW was never amortized by Designers Ltd. Designers Ltd. reported the above transactions as follows:

Mercedes		150,000
Cash			150,000
Cash		75,000
Loss on Sale of BMW		20,000
BMW			95,000

The $ 20,000 Loss on Sale of BMW was included in General & Administration Expense.

Designers Ltd. purchased shares in 2013 for a cost of $ 25,000; in 2016, Designers Ltd. sold those shares for $ 85,000. The capital gain on these shares was $ 60,000 and Amanda Anderson credited the capital gain to retained earnings.

Required:

Determine Designers Ltd.’s minimum net income for tax purposes for the year ended December 31, 2016, excluding CCA deduction. Ignore GST/PST/HST implications

Answer 1