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Canadian Income Taxation 2016/2017 Edition Test Bank

Canadian Income Taxation 2016/2017 Edition Test Bank ensures a smooth preparation journey with concise summaries, past questions, and step-by-step solutions.

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    Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is not considered to be a separate entity for tax purposes in Canada? 1) _______ A) Proprietorships B) Corporations C) Individuals D) Trusts 2) Which of the following attitudes and actions will help decision - makers develop an efficient approach to taxation? 2) _______ A) Tax costs to a business should be regarded as controllable expenses, much like product costs and selling costs. B) All managers should own a copy of the Income Tax Act. C) Functional managers should not be held responsible for the tax effects of decisions within their divisions. D) Cash flows should be considered from a before - tax perspective when making decisions. 3) Which of the following statements is true? 3) _______ A) Payment of the return on equity is deductible by the corporation and is a form of business income for the individual. B) Payment of the return on equity is not deductible by the corporation and is a form of business income for the individual. C) Payment of the return on equity is not deductible by the corporation and is a form of property income for the individual. D) Payment of the return on equity is deductible by the corporation and is a form of property income for the individual. 4) When assessing the value of a corporation, the most relevant information that decision - makers normally consider is 4) _______ A) the potential for before - tax profits. B) cash flow before - tax. C) the current rate of corporate tax. D) the potential for after - tax profits. 5) Income tax is calculated for which of the following jurisdictional groups? 5) _______ A) Municipal, provincial, and federal B) Municipal, federal, and international C) Municipal, provincial, and international D) Provincial, federal, and international 6) Two investor corporations may not enter jointly into which of the following? 6) _______ A) Proprietorship B) Partnership

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    C) Separate corporation D) Joint venture 7) Which of the following statements is false? 7) _______ A) Income tax should be considered a controllable cost. B) The tax cost to a business should not be regarded as a cost of doing business. C) Cash flow should be calculated on an after - tax basis. D) The value of an enterprise should not be based on pre - tax cash flow. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 8) The text book lists four fundamental tax variables that a manager needs to consider when making business decisions. These variables are: 1) primary types of income; 2) entities subject to taxation on income; 3) alternative forms of business and investing structures used by taxable entities structure; and 4) tax jurisdictions. List the relevant variables within these four categories. 8) _____________ 9) ABC Corporation is in the 25% income tax bracket. John Adams is an employee at ABC and is in the 40% tax bracket. The company has offered John a 10% pay raise. His current salary is $50,000. Required: A) Calculate the after - tax cost of the raise to the corporation. B) Calculate the after - tax cost of the raise for John. Show all calculations. 9) _____________ 10) Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''. 10) _____________

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    1) A 2) A 3) C 4) D 5) D 6) A 7) B 8) Income: Business, Property, Employment, Capital Gains Entities: Individuals, Corporations, Trusts Forms of business: Proprietorship, Corporation, Partnership, Limited Partnership, Joint Venture, Income Trusts Tax Jurisdictions: Provincial, Federal, Foreign 9) A) Actual cost to ABC: ($50,000 × 10%) × (1 - .25) = $3,750 B) Actual value for John: ($50,000 × 10%) × (1 - .4) = $3,000 10) Just as decision makers in business must control costs such as product, occupancy, selling, and many others, so should tax costs be regarded as controllable. The actions and activities of the organization must be analyzed at all levels, and across departments, to determine the impact on the overall tax cost.

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    Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The manager at Big Company Corporation has decided to sell a piece of capital equipment after the company's year - end in order to avoid paying capital gains tax this year. Which tax planning method will the manager be using? 1) _______ A) This is a form of tax evasion and is not allowed. B) Shifting income from one time period to another. C) Transferring income to another entity. D) Converting the nature of income from one type to another. 2) Which of the following scenarios illustrates a potential tax avoidance scheme? 2) _______ A) A shareholder owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies. B) Property transferred between arm's - length parties is valued at fair market value. C) A man transfers property to his child at a value less than fair market value. D) Dividends received from shares transferred from a wife to her husband are taxed in the hands of the wife. 3) The manager of Little Company Ltd. has decided to sell a piece of capital equipment after the company's year - end in order to avoid paying tax on capital gains this year. The manager is engaging in 3) _______ A) tax evasion. B) tax planning. C) tax avoidance. D) GAAR. 4) Certain skills are necessary for successful tax planning. One of these skills is applying the time value of money. Which of the following is FALSE regarding this skill? 4) _______ A) Applying the time value of money is a tool used for wealth accumulation. B) If a taxpayer invests $1,000 for one year at a rate of return of 14% and is subject to a 45% tax rate, the after - tax value of the investment will be $1,077. C) If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annual after - tax return is 4.8%. D) If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after - tax income on the investment at the end of the first year, the taxpayer's tax rate is 40%. 5) Which of the following statements regarding GAAR is true? 5) _______ A) The purpose of GAAR is to catch tax evaders. B) Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR. C) The Canada Revenue Agency states that "A transaction will

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    not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes." D) When an avoidance transaction takes place, the anti - avoidance rule is automatically applied in all circumstances. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 6) Steven James earned $150,000 this year in profits from his proprietorship, which placed him in a 45% tax bracket. The rate of tax for Canadian - controlled private corporations in his province is 15% on the first $500,000 of income. Personal tax rates (federal plus provincial) in James' province are: On the first $45,000 24% On the next $45,000 32% On the next $50,000 40% On the next $60,000 45% On income over $200,000 50% ( All rates are assumed for this question. ) Steven withdraws $3,000 per month for his personal living expenses. All remaining profits are used to pay taxes and to expand the business. Steven expects the same business after - tax profits next year. Steven is considering incorporating his business next year. If he incorporates, he will pay himself a gross salary of $48,000. Required: A. Determine the increase in Steven's cash flow if he incorporates his company? Show all calculations. B. Name the type of tax planning that Steve would be engaging in if he incorporated his company. 6) _____________ 7) Part A: List the three key factors of cash flow. Part B: List the six skills required for tax planning as suggested in the textbook. 7) _____________ 8) Andrew has $10,000 to invest. He wants to put his money in to an

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    investm ent earning an annual interest rate of 12%. Andrew is in a 42% tax bracket. Require d: a) Calculat e the value of Andrew' s investm ent, after - tax , at the end of the year. b) Calculat e the amount of taxes Andrew will have to pay on his investm ent. 8) __ __ __ __ __ __ _ 9) Match each of the following terms with the most accurate example. Use each example only once. TERMS: Tax evasion Tax planning Tax avoidance E X A M P L E S: A. An individual is seeking a beneficial outcome, and therefore, applies an application that is not

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    specific ally prohibit ed by law. B. A business is seeking a benefici al outcome , and therefor e, does not report a portion of revenue earned during the year. C. Two unrelate d compani es take steps to become related in order to shift income from the profitabl e business to the compan y with losses. 9) __ __ __ __ __ __ _ 10) For each of the examples listed below, state which of the following three categories of tax planning has been applied: Shifting income from one time period to another Shi ftin g inc om e fro m one entity to another Shifting income from one type of income to

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    another. A. Jack has run a successf ul propriet orship for the past four years, and has now decided to incorpor ate his compan y. B. Karen has decided not to pay herself a dividend from her corporat ion, (of which she is the sole sharehol der), but has chosen to sell a portion of her shares to an associat e instead. C. XYZ Corpora tion has chosen to delay the recognition of a discretionary reserve until the following year. 10) _____________

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    1) B 2) C 3) B 4) C 5) C 6) A) Excess cash as a proprietorship: Profits $150,000 Tax: 24% 45,000 $10,800 32% 45,000 14,400 40% 50,000 20,000 45% 10,000 4,500 (Assume federal plus provincial rates) (49,700) $100,300 Living expenses (36,000) Available for expansion $64,300 Excess cash as a corporation: Profits $150,000 Salary (48,000) Corporate business profits 192,000 Tax: 15% / 102,000 (15,300) Available for expansion $86,700 Excess cash ($86,700 - $64,300) $22,400 C) Transferring income from one entity to another 7) Three key factors of cash flow 1. Amount of money coming in 2. Amount of money going out 3. Timing Six skills required for tax planning 1. Anticipation 2. Flexibility 3. Speculation 4. Applying the 8 th Wonder of the World 5. Perspective

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    6. Global approach 8) a) ($10,000 × 1.12) × (1 - .42) = $10,696 b) $10,000 × .12 × .42 = $504 9) An individual is seeking a beneficial outcome, and therefore, applies an application that is not specifically prohibited by law. Tax planning A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned during the year. Tax evasion Two unrelated companies take steps to become related in order to shift income from the profitable business to the company with losses. Tax avoidance 10) A. Shifting income from one entity to another B. Shifting income from one type of income to another C. Shifting income from one time period to another

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    Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Joe is a Canadian citizen. In March of 20X1, Joe was transferred to the United States with his company. His wife and child moved with him at that time. Joe chose not to sell his house, and instead, lends it to his family during the winter months when they visit Canada from overseas. Joe has five weeks of vacation each summer, at which time he and his family return to Canada and stay in their house. Joe did not cancel his country club membership in order that he could golf with his friends on his vacations. He did close his bank accounts, however. Which of the following statements is true? 1) _______ A) Joe no longer resides in Canada, and will therefore, automatically be considered a non - resident of Canada. B) Joe might be considered to have a continuing state of relationship with Canada. C) Joe is a Canadian citizen, and will therefore, automatically be considered a Canadian resident for tax purposes. D) Joe is considered a part - time resident of Canada for the five weeks he vacations in the country. 2) Of the following individuals, which would not be considered a resident of Canada for the entire 20XX taxation year? 2) _______ A) Prasham is a citizen of India, where he lived his entire life prior to moving to Canada on April 30 th , 20XX. Upon arriving in Canada, he began full - time work and purchased a home. B) Marie is a Swiss citizen who lived in Canada from February to October of 20XX. While in Canada, she joined the local fitness club, gained part - time employment, and opened an account in a Canadian bank. C) June moved to Canada three years ago from the United States, and has maintained her American citizenship. D) John had lived in Canada all of his life, prior to moving to Germany in 20XX, where he was assigned to a seven - month assignment to set up the international operations for his Canadian employer. He did not sell his home on Vancouver Island, as his wife and children remained in Canada for work and schooling reasons. 3) Segment A of the aggregate formula includes which of the following? 3) _______ A) Income from business, 'other' income, and income from capital transactions. B) Income from employment, income from property, income from business, and income from capital transactions. C) Income from employment, income from property, and

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    income from capital transactions. D) Income from employment, income from property, income from business, and 'other' income. 4) Which of the following type of payment is NOT subject to Canadian withholding tax when paid to a non - resident? 4) _______ A) Registered retirement income fund payments B) Dividends C) Pension benefits D) Interest paid to an arm's length party 5) Regarding taxation years, which of the following statements is TRUE? 5) _______ A) Corporate taxpayers must use the calendar year as their taxation year. B) The taxation year for an individual taxpayer ends on April 30 th . C) A corporation may have a taxation year less than twelve months during a year the corporation is formed, dissolved, or is granted a change in its year end. D) Individual taxpayers may choose any twelve month period as their taxation year. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 6) Your neighbor, Mrs. White, has heard that you are studying personal tax. She has come to you with her financial information for 20XX. In 20XX, Mrs. White had employment income of $40,000, property income of $3,000, a business loss of $22,000, an allowable business investment loss of $5,000, income from an RRSP withdrawal of $2,000, and a capital loss of $40,000 on the sale of shares in a public corporation. Mrs. White hopes that her losses will result in a net income for tax purposes of $0. Required: A) Determine Mrs. White's net income for tax purposes in accordance with the aggregating formula. B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a tax liability this year, assuming that her taxable income will be equal to her net income for tax purposes. C) How would your answer change in Part A if Mrs. White realized a taxable capital gain of $30,000 in 20XX? 6) _____________ 7) George and Gina Anderson, (Canadian citizens), moved to E urope on

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    August 15 th , 20X1 to open a café in a small Italian village. The restaura nt was called 'Gina's Italian Eatery Inc.'. Prior to moving, George earned $65,000 in 20X1 as a compute r program mer and Susan earned $67,000 in 20X1 as a registere d nurse. They are both in their 60s and plan to retire in Italy, which is Gina's birthpla ce. They sold their prior to moving to Europe. As the couple only expects to return to Canada every second year, they cancelled their bank accounts and driver's licenses. Their café was successful in 20X1 and earned a pre - tax profit of $25,000 by year's end. Required: Determine the residency status of George and Gina and their café for Canadian tax purposes in 20X1 and discuss the Canadian tax treatment, if any, of their personal and business income. 7) _____________

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    8) Allison Hill moved to Canada on April 30 th of this year. She was born and raised in Belgium, and moved to Canada to start a career in architecture. She earned $45,000 from May to December of this year from her new employer. Prior to leaving Belgium, Allison earned $10,000 of employment income. She also received $1,000 in dividends in March and $1,000 in dividends in September from stocks in a European corporation. Allison's parents sent her a cheque for $2,000 as a gift for her 25 th birthday in August. Required: Determine Allison's residency status for Canadian tax purposes for the current year. How much income is Allison required to report on her T1 tax return? Explain why any items have not been included in your calculations. 8) _____________ 9) Answer the following questions which pertain to the administration of the Canadian Income Tax system. Individuals (who do not carry on a business) must file an income tax return for the most recent calendar year by what date? Individuals who carry on an unincorporated business must file an income tax return for the most recent calendar year by what date? Who is responsible for the filing of a deceased taxpayer's tax return? What is the taxation year for an inter vivos trust? What is the taxation year for a testamentary trust? A trust must file an income tax return within how many days of its taxation year - end? What is the taxation year for a corporation (other than a professional corporation)? A corporation is required to file an income tax return within how many months of its taxation year - end? 9) _____________ 10) ABC Corporation purchased inventory from Galaxy W holesalers. The

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    cost on the invoice was $25,000. The inventor y was marked up by 35% and sold to a retailer. The retailer subsequ ently marked the goods up 45% and sold the products to its consum ers. (Pre - GS T costs were used to calculat e marked up prices.) Require d: Calculat e how much GST was collecte d and remitted by a) the wholesaler, and b) the retailer. 10) _____________

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