CORPORATE TAX

TR Ltd. is a Canadian-controlled private corporation operating a franchised retail and mail-order
business in Toronto, Ontario. You may use whatever address and postal code you wish. The
business number for TR is 11111-1118 RC0001. Denver Chan, the company’s president, owns
100% of the corporation’s share capital. For the year ended November 30, 2020 (first full year of
operation), TR Ltd.’s financial statement reported income of $157,090 (see exhibit I for detailed
financial statements).
You have been retained to help prepare the company’s first tax return and to advise on other taxrelated matters. Financial information relating to the 2020 taxation year and to the corporation’s
financial statement is summarized below.
TR Ltd. - Selected Financial Information

1. The following properties were purchased for the new business:
   Franchise $ 40,000
   Land 30,000
   Building 270,000
   Delivery truck 40,000
   The franchise, purchased on December 1, 2019, permits the corporation to operate under
   the TR name for a period of 15 years. A renewable period of another 15 years is available,
   subject to satisfactory performance. The land cost of $30,000 consists of the purchase price
   of $20,000, $7,000 for permanent landscaping, and $3,000 for water and sewer
   connections. The building was constructed after March 18, 2007. On October, 15, 2020, the
   truck was involved in an accident. The damage was not repairable, and TR immediately
   signed an agreement with the insurance company to settle the claim for $31,000. The cash
   was received on December 10, 2020. Another truck was obtained under a lease
   arrangement. Amortization expense of $28,000 has been deducted from income.
2. Legal expense includes the following costs:
   Preparing annual corporate minutes $ 300
   Incorporation costs for TR Ltd. 1,500
   Negotiation of franchise agreement 2,000
3. Repairs and maintenance expense includes the following items:
   Paving the parking lot $8,000
   Cleaning and supplies 1,400
   Replacing a broken window 1,000
   Small tools costing less than $500 1,200
4. Advertising expense includes a cost of $7,000 to acquire a permanent mailing list for the
   mail-order business. The list has an expected life of six years. Other advertising items are
   listed below:
   Cost of making a television commercial $25,000
   Travel costs for Denver to attend a franchiser convention. Denver’s
   spouse travelled with him and attended a social function
   (souse’s expenses were $1,500) 3,000
   Charitable donations 2,000
   Meals and beverage costs for entertaining suppliers 1,800
   Costs of leasing and maintaining a pleasure boat to entertain
   suppliers and employees 2,600
   Television advertising
   Toronto station 11,000
   Buffalo USA station directed at the Toronto Canada market 6,000
5. A contingent reserve for possible defective products of $5,000 was recorded as a charge
   against cost of sales. During the year, $3,000 of products were returned.
6. On May 31, 2020, TR invested $40,000 in a one-year bank certificate earning annual
   interest of 7%. TR intends to recognize the interest revenue upon receipt at its one-year
   anniversary date.
7. Interest expense includes $14,000 on the building mortgage and $700 from a temporary
   bank loan of $12,000. The bank loan funds were, in turn, loaned, without interest, to Y
   Ltd., a corporation owned by Denver’s brother. Y Ltd. used all of its assets to operate an
   active business but declared bankruptcy in November 2020.
8. TR is planning to sell a new product in 2021—a bracelet with a charm depicting a popular
   cartoon character. The bracelet and charm will be ordered from separate suppliers, and
   TR’s staff will assemble the two pieces and package them in a specially designed box.
9. Shortly after incorporation, TR acquired 46% of the voting common shares of Q Ltd., a
   Canadian-controlled private corporation that supplies certain products to TR and other
   retailers. On October 31, 2020, TR received a non-eligible dividend of $15,000 from Q Ltd.
   At the time, Q Ltd. had non-eligible RDTOH of $2,000. An opportunity exists for TR to
   purchase an additional 5% of the voting common shares of Q Ltd. early in 2021. A
   decision will be made in January 2021.
10. On November 30, 2020, TR declared and paid a non-eligible dividend of $40,000.