Question

QuesTION 1

In order to supplement his income working in a craft store, Mr. John Collins has decided to start a home-based business that will specialize in selling used vintage records. Mr. Collins has always been passionate about music.

The business will be run out of space that he has set aside in his residence. This space involves 25 percent of the total floor space in the residence.

The residence was acquired on January 1, 2017 at a total cost of $345,000. It is estimated that $95,000 of this total value can be attributed to the land on which the residence is situated. For the year ending December 31, 2018, Mr. Collins has the following costs that can be associated with this residence:

Utilities for Home (Heat, Light, And Water)	$2580
Mortgage Interest Paid	$8410
House Insurance	$600
Property Taxes	$3800
Repairs and Maintenance for Home	$3100
Total	$18,490

The business begins operations on March 1, 2018. On that date, Mr. Collins acquires the following assets to be used in his new business:

Office Furniture and Storage Racks	$12,000
Computer	$1650
Accounting Software	$750

In addition, he has a separate telephone line installed for dealing exclusively with the mail order business. The telephone charge includes charges for a toll-free number and a long-distance package.

During the period March 1, 2018 through December 31, 2018, his mail order sales total $118,000. Costs associated with these sales are as follows:

Cost of Merchandise Sold	$64,000
Unsold Merchandise (Lower of Cost and Market)	$11,500
Packaging Materials	$3600
Shipping Costs	$5800
Miscellaneous Office Supplies	$660
Telephone (Total Charge for The Period)	$1350
Printing of Posters and Brochures Distributed	$680

Required:

1. Can Mr. Collins deduct workspace in the home costs? Briefly explain your conclusion. (3 marks)
2. Compute the minimum net business income or loss that Mr. Collins must report in his 2018 personal income tax return. (17 marks)

Note Mr. Collins does not want to claim CCA on his personal residence.

Answer 1

Yes, mr collins can deduct workspace in home costs. If premises for business was rented then also mr collins would have got deduction of expenses for business, so it is logical to take deduction of workspace in the home costs.

Computation of business income of mr collins

Sales 118000

Add:unsold merchandise 11500

129500

Less: cost of goods sold $64000

Packaging Materials	$3600
Shipping Costs	$5800
Miscellaneous Office Supplies	$660
Telephone (Total Charge for The Period)	$1350
Printing of Posters and Brochures Distributed	$680

share of total residence cost (18490*25%) $4623   

Depreciation:

on furniture(12000*10%) $1200

on computer(1650*40%) $660

on accounting software(750*40%) $300

Total Expenses 82873

Net Business Income $46627