Little Pumpkin Photography specializes in photography of newborns and maternity portraits, and is run as a sole proprietorship by Elizabeth Bennett. She has prepared the following income statement for her business for the 2017 calendar year: Sales $213,000 Film development costs 45,000 Gross margin 168,000 Operating Expenses: Advertising and promotion 15,000 Automobile expenses 8,940 Bank charges and interest 1,100 Office expenses 8,000 Photography equipment 16,000 Professional development and networking 6,000 Professional fees 5,000 Rent 7,500 Wages and benefits 32,000 99,540 Operating income $68,460 Notes: 1) The sales amount includes $15,000 of work Elizabeth did for a lower-income group of moms. To help them afford her services, the arrangement was that they only needed to pay $3,750 in 2017, and would pay $3,750 in each of 2018, 2019 and 2020. 2) Advertising and promotion expense includes $600 related to meeting potential clients for coffee to discuss their photoshoot needs. It also includes the payment of $1,500 to the local little theatre organization ($1,000 for printing of advertisement in their programs, and $500 donation). 3) Elizabeth uses her personal vehicle for business purposes, driving to meet clients and to/from the various photoshoot locations. During the year, she drove 18,000km for business-related purposes, and she has Little Pumpkin Photography reimburse her for each kilometre driven. 4) Bank charges and interest include $325 of interest charged on late-paid instalments in 2016. It also includes the $120 annual fee for the business credit card. 5) The photography equipment should be included in Class 8 for tax purposes. Opening UCC balances for 2017 were as follows: Class 8 $19,000 Class 13 9,000 6) The professional development relates to three photography conventions Elizabeth attended during 2017. Each conference cost approximately the same amount. 7) The rent expense includes $2,500 for the January 2017 rent, and $5,000 of lease cancellation costs. Elizabeth realized that clients rarely came to her rented studio space, preferring to do their photoshoots outside or at their own homes. The lease had 2 more full years on it at the time of cancellation (Feb 1, 2017), with 2 renewal periods of 1 year each. As a result of cancelling the lease, Elizabeth abandoned the leasehold improvements she had originally made to the space. From February 2017 onwards, Elizabeth works out of a room in her home, which she turned into an office. The room is 120 square feet, and her house is 1,800 square feet. She incurred the following costs personally for her home during 2017: Mortgage payments (30% interest) $11,700 Utilities 4,800 Insurance 1,400 Property tax 3,100 Repairs & maintenance (to the office) 750 8) The wages and benefits relate to part-time help Elizabeth hires occasionally to assist with photoshoots. Required – a) Calculate the business income for tax purposes which Elizabeth should include on her personal tax return (start with net operating income and adjust). b) Identify the impact of any of the above information on other areas of the tax return (i.e. on other 3(a) items, 3(b), 3(c), 3(d), Division C, non-refundable tax credits)
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