Question

Boxing and Martial Arts Co. (BMA) is a medium-sized, private sports promotion based in Canada. The company holds one large boxing or martial arts event per quarter. In just its third year of operation the promotion has already begun to develop a strong international reputation.

 

The owner, Daniel Green, has asked your team to review the company’s business transactions in the previous year, in order to assist the company in filing its taxes.

The company has three key employees: Daniel Green who acts as the manager; Daniel’s wife, Mary Green, takes on the responsibilities of treasurer and human resources; and Timo Steven who is in charge of marketing and administration. Exhibit A shows the compensation structure of BMA, which includes a fixed salary and insurance plans for all the employees.

 

Upon examining the company documents you discover that the company paid $31,019 totally to rent the arena for the events last year. The events brought in attendance revenue of $697,010 and merchandise sales of $64,300. The merchandise had cost BMA $22,100 to purchase. Finally, the company shares sponsorship revenue with a local television station. As part of this deal, BMA received $85,000 and will receive the remainder for the events, $34,500 in the next fiscal year.

Exhibit B shows the Public Payroll Filing that BMA had to file with the Athletic Commission. Upon examination, you notice that the Japanese martial artist brought in for the events (Shinya Takaya) was paid significantly less than their domestic counterparts. Upon conversing with Mr. Green, he informs you that cash payments are commonly practiced in this industry. The foreign athletes (“fighters”) on the card were each paid $25,000 in cash signing bonuses (which was not disclosed to the Athletic Commission).

Additional information provided includes flights and hotel room accommodations for Mr. Green, the six fighters on the card, two employees of BMA as well as two of Mr. Green’s friends, totaling $11,000. The company also paid $3,300 for all meals for the aforementioned individuals on the day of the event. Lastly, to promote the event the company paid $6,000 for advertising on a local television station.

 

A laptop (class 50 - CCA rate 55%) was purchased for $2,400 two years ago for Mary to do the office work. The undepreciated capital cost of the laptop at the beginning of last year was $1,600. 

 

Required:

 

Prepare a memo for Daniel Green detailing the income recognition and tax deductions related to the business transactions.

Exhibit A: Compensation of Boxing and Martial Arts Co. Employees

Daniel Green: Salary of $75,000 + $500,000 life insurance policy (premium paid by the company at $100 per month, the company is the beneficiary).

Mary Green: Salary of $32,000 + group term life insurance (premium paid by the company at $20 per month).

Timo Steven: Salary of $58,000 + group term life insurance (premium paid by the company at $20 per month).

 

Exhibit B: Public Payroll Filing

The Athletic Commission received the following payroll information from Boxing and Martial Arts Co.:

The full list of payouts include:

Jordan Smith: $100,000
defeated Greg Conway: $50,000

Shinya Takaya: $2,500
defeated Casey Diaz: $30,000

Marcus Kuziw: $60,000
defeated Michael Thornton: $25,000

Disclaimer: The figures do not include deductions for items such as insurance, licenses and taxes. Additionally, the figures do not include money paid by sponsors or any other special bonuses.