Canadian Income Taxation 2016/2017 Edition Test Bank

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement oranswers the question.1)Which of the following is not considered to be a separate entityfor tax purposes in Canada?1)_______A)ProprietorshipsB)CorporationsC)IndividualsD)Trusts2)Which of the following attitudes and actions will helpdecision-makers develop an efficient approach to taxation?2)_______A)Tax costs to a business should be regarded as controllableexpenses, 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 thetax effects of decisions within their divisions.D)Cash flows should be considered from a before-taxperspective when making decisions.3)Which of the following statements is true?3)_______A)Payment of the return on equity is deductible by thecorporation and is a form of business income for theindividual.B)Payment of the return on equity is not deductible by thecorporation and is a form of business income for theindividual.C)Payment of the return on equity is not deductible by thecorporation and is a form of property income for theindividual.D)Payment of the return on equity is deductible by thecorporation and is a form of property income for theindividual.4)When assessing the value of a corporation, the most relevantinformation that decision-makers normally consider is4)_______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 jurisdictionalgroups?5)_______A)Municipal, provincial, and federalB)Municipal, federal, and internationalC)Municipal, provincial, and internationalD)Provincial, federal, and international6)Two investor corporations maynotenter jointly into which of thefollowing?6)_______A)ProprietorshipB)Partnership

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C)Separate corporationD)Joint venture7)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 ofdoing business.C)Cash flow should be calculated on an after-tax basis.D)The value of an enterprise should not be based on pre-taxcash flow.SHORT ANSWER.Write the word or phrase that best completes each statement or answersthe question.8)The text book lists four fundamental tax variables that amanager needs to consider when making businessdecisions. These variables are: 1) primary types of income;2) entities subject to taxation on income; 3) alternativeforms of business and investing structures used by taxableentities structure; and 4) tax jurisdictions. List the relevantvariables within these four categories.8)_____________9)ABC Corporation is in the 25% income tax bracket. JohnAdams is an employee at ABC and is in the 40% taxbracket. 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 thecorporation.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 betreated as a 'controllable cost''.10)_____________

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1)A2)A3)C4)D5)D6)A7)B8)Income: Business, Property, Employment, Capital GainsEntities: Individuals, Corporations, TrustsForms of business: Proprietorship, Corporation, Partnership, Limited Partnership,Joint Venture, Income TrustsTax Jurisdictions: Provincial, Federal, Foreign9)A) Actual cost to ABC: ($50,000 × 10%) × (1-.25) = $3,750B) Actual value for John: ($50,000 × 10%) × (1-.4) = $3,00010)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. Theactions and activities of the organization must be analyzed at all levels, and acrossdepartments, to determine the impact on the overall tax cost.

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement oranswers the question.1)The manager at Big Company Corporation has decided to sell apiece of capital equipment after the company's year-end in orderto avoid paying capital gains tax this year. Which tax planningmethod 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 taxavoidance scheme?2)_______A)A shareholder owns two corporations and undertakes legalsteps in order to permit loss utilization between the twocompanies.B)Property transferred between arm's-length parties is valued atfair market value.C)A man transfers property to his child at a value less than fairmarket value.D)Dividends received from shares transferred from a wife to herhusband are taxed in the hands of the wife.3)The manager of Little Company Ltd. has decided to sell a piece ofcapital equipment after the company's year-end in order to avoidpaying tax on capital gains this year. The manager is engaging in3)_______A)tax evasion.B)tax planning.C)tax avoidance.D)GAAR.4)Certain skills are necessary for successful tax planning. One ofthese skills is applying the time value of money. Which of thefollowing is FALSE regarding this skill?4)_______A)Applying the time value of money is a tool used for wealthaccumulation.B)If a taxpayer invests $1,000 for one year at a rate of return of14% and is subject to a 45% tax rate, the after-tax value ofthe investment will be $1,077.C)If a taxpayer earns an annual return of 12% and is subject to a40% 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 thefirst 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 littletax as possible will automatically be subject to GAAR.C)The Canada Revenue Agency states that "A transaction will

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not be anavoidancetransaction ifthe taxpayer establishes that it is undertaken primarily forbona fide business, investment or family purposes."D)When an avoidance transaction takes place, theanti-avoidance rule is automatically applied in allcircumstances.SHORT ANSWER.Write the word or phrase that best completes each statement or answersthe question.6)Steven James earned $150,000 this year in profits from hisproprietorship, which placed him in a 45% tax bracket.The rate of tax for Canadian-controlled privatecorporations in his province is 15% on the first $500,000of income. Personal tax rates (federal plus provincial) inJames' province are:On the first $45,00024%On the next $45,00032%On the next $50,00040%On the next $60,00045%On income over $200,00050%(All rates are assumed for this question.)Steven withdraws $3,000 per month for his personal livingexpenses. All remaining profits are used to pay taxes andto expand the business. Steven expects the same businessafter-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 heincorporates his company? Show all calculations.B. Name the type of tax planning that Steve would beengaging 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 assuggested in the textbook.7)_____________8)Andrew has $10,000 to invest. He wants to put his moneyinto an

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investmentearninganannualinterestrate of12%.Andrewis in a42% taxbracket.Required:a)Calculate thevalue ofAndrew'sinvestment,after-tax, at theend ofthe year.b)Calculate theamountof taxesAndrewwillhave topay onhisinvestment.8)_____________9)Match each of the following terms with the most accurateexample. Use each example only once.TERMS:Tax evasionTax planningTax avoidanceEXAMPLES:A. Anindividual isseeking abeneficialoutcome, andtherefore,applies anapplication thatis not

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specificallyprohibited bylaw.B. Abusinessisseekingabeneficialoutcome, andtherefore, doesnotreport aportionofrevenueearnedduringthe year.C. Twounrelatedcompanies takesteps tobecomerelatedin orderto shiftincomefrom theprofitablebusinessto thecompany withlosses.9)_____________10)For each of the examples listed below, state which of thefollowing three categories of tax planning has beenapplied:Shifting income from one time period to anotherShiftingincomefrom one entity toanotherShiftingincome fromone type ofincome to

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another.A. Jackhas runasuccessfulproprietorshipfor thepastfouryears,and hasnowdecidedtoincorporate hiscompany.B.Karenhasdecidednot topayherself adividendfrom hercorporation, (ofwhichshe isthe soleshareholder), buthaschosento sell aportionof hersharesto anassociateinstead.C. XYZCorporation haschosen to delay the recognition of a discretionary reserveuntil the following year.10)_____________

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1)B2)C3)B4)C5)C6)A) Excess cash as a proprietorship:Profits$150,000Tax:24% 45,000 $10,80032% 45,000 14,40040% 50,000 20,00045% 10,000 4,500(Assume federal plus provincial rates)(49,700)$100,300Living expenses(36,000)Available for expansion$64,300Excess cash as a corporation:Profits$150,000Salary(48,000)Corporate business profits192,000Tax:15% / 102,000(15,300)Available for expansion$86,700Excess cash ($86,700-$64,300)$22,400C) Transferring income from one entity to another7)Three key factors of cash flow1. Amount of money coming in2. Amount of money going out3. TimingSix skills required for tax planning1. Anticipation2. Flexibility3. Speculation4. Applying the 8thWonder of the World5. Perspective

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6.Global approach8)a) ($10,000 × 1.12) × (1-.42) = $10,696b) $10,000 × .12 × .42 = $5049)An individual is seeking a beneficial outcome, and therefore, applies an applicationthat is not specifically prohibited by law.TaxplanningA business is seeking a beneficial outcome, and therefore, does not report a portionof revenue earned during the year.TaxevasionTwo unrelated companies take steps to become related in order to shift income fromthe profitable business to the company with losses.Taxavoidance10)A. Shifting income from one entity to anotherB. Shifting income from one type of income to anotherC. Shifting income from one time period to another

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement oranswers the question.1)Joe is a Canadian citizen. In March of 20X1, Joe was transferredto the United States with his company. His wife and child movedwith him at that time. Joe chose not to sell his house, and instead,lends it to his family during the winter months when they visitCanada from overseas. Joe has five weeks of vacation eachsummer, at which time he and his family return to Canada andstay in their house. Joe did not cancel his country clubmembership in order that he could golf with his friends on hisvacations. He did close his bank accounts, however. Which of thefollowing 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 ofrelationship with Canada.C)Joe is a Canadian citizen, and will therefore, automatically beconsidered a Canadian resident for tax purposes.D)Joe is considered a part-time resident of Canada for the fiveweeks he vacations in the country.2)Of the following individuals, which wouldnotbe considered aresident of Canada for the entire 20XX taxation year?2)_______A)Prasham is a citizen of India, where he lived his entire lifeprior to moving to Canada on April 30th, 20XX. Uponarriving in Canada, he began full-time work and purchased ahome.B)Marie is a Swiss citizen who lived in Canada from Februaryto October of 20XX. While in Canada, she joined the localfitness club, gained part-time employment, and opened anaccount in a Canadian bank.C)June moved to Canada three years ago from the UnitedStates, and has maintained her American citizenship.D)John had lived in Canada all of his life, prior to moving toGermany in 20XX, where he was assigned to a seven-monthassignment to set up the international operations for hisCanadian employer. He did not sell his home on VancouverIsland, as his wife and children remained in Canada for workand schooling reasons.3)Segment A of the aggregate formula includes which of thefollowing?3)_______A)Income from business, 'other' income, and income fromcapital transactions.B)Income from employment, income from property, incomefrom business, and income from capital transactions.C)Income from employment, income from property, and

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income fromcapital transactions.D)Income from employment, income from property, incomefrom business, and 'other' income.4)Which of the following type of payment is NOT subject toCanadian withholding tax when paid to a non-resident?4)_______A)Registered retirement income fund paymentsB)DividendsC)Pension benefitsD)Interest paid to an arm's length party5)Regarding taxation years, which of the following statements isTRUE?5)_______A)Corporate taxpayers must use the calendar year as theirtaxation year.B)The taxation year for an individual taxpayer ends on April30th.C)A corporation may have a taxation year less than twelvemonths during a year the corporation is formed, dissolved, oris granted a change in its year end.D)Individual taxpayers may choose any twelve month period astheir taxation year.SHORT ANSWER.Write the word or phrase that best completes each statement or answersthe question.6)Your neighbor, Mrs. White, has heard that you arestudying personal tax. She has come to you with herfinancial information for 20XX. In 20XX, Mrs. White hademployment income of $40,000, property income of$3,000, a business loss of $22,000, an allowable businessinvestment loss of $5,000, income from an RRSPwithdrawal of $2,000, and a capital loss of $40,000 on thesale of shares in a public corporation.Mrs. White hopes that her losses will result in a net incomefor tax purposes of $0.Required:A) Determine Mrs. White's net income for tax purposes inaccordance with the aggregating formula.B) Based on your answer in Part A, explain to Mrs. Whitewhy she will or will not have a tax liability this year,assuming that her taxable income will be equal to her netincome for tax purposes.C) How would your answer change in Part A if Mrs. Whiterealized ataxablecapital gain of $30,000 in 20XX?6)_____________7)George and Gina Anderson, (Canadian citizens), moved toEurope on

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August15th,20X1 toopen acafé in asmallItalianvillage.Therestaurant wascalled'Gina'sItalianEateryInc.'.Prior tomoving,Georgeearned$65,000in 20X1as acomputerprogrammer andSusanearned$67,000in 20X1as aregistered nurse.Theyare bothin their60s andplan toretire inItaly,which isGina'sbirthplace. Theysoldtheirprior tomovingtoEurope. As the couple only expects to return to Canadaevery second year, they cancelled their bank accounts anddriver's licenses. Their café was successful in 20X1 andearned a pre-tax profit of $25,000 by year's end.Required:Determine the residency status of George and Gina andtheir café for Canadian tax purposes in 20X1 and discussthe Canadian tax treatment, if any, of their personal andbusiness income.7)_____________

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8)Allison Hill moved to Canada on April 30thof this year.She was born and raised in Belgium, and moved to Canadato start a career in architecture. She earned $45,000 fromMay to December of this year from her new employer.Prior to leaving Belgium, Allison earned $10,000 ofemployment income. She also received $1,000 individends in March and $1,000 in dividends in Septemberfrom stocks in a European corporation. Allison's parentssent her a cheque for $2,000 as a gift for her 25thbirthdayin August.Required:Determine Allison's residency status for Canadian taxpurposes for the current year. How much income is Allisonrequired to report on her T1 tax return? Explain why anyitems have not been included in your calculations.8)_____________9)Answer the following questions which pertain to theadministration of the Canadian Income Tax system.Individuals (who do not carry on a business) must file anincome tax return for the most recent calendar year bywhat date?Individuals who carry on an unincorporated business mustfile an income tax return for the most recent calendar yearby what date?Who is responsible for the filing of a deceased taxpayer'stax 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 manydays of its taxation year-end?What is the taxation year for a corporation (other than aprofessional corporation)?A corporation is required to file an income tax returnwithin how many months of its taxation year-end?9)_____________10)ABC Corporation purchased inventory from GalaxyWholesalers. The

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cost ontheinvoicewas$25,000.Theinventory wasmarkedup by35%and soldto aretailer.Theretailersubsequentlymarkedthegoodsup 45%and soldtheproductsto itsconsumers.(Pre-GST costswereused tocalculatemarkedupprices.)Required:Calculate howmuchGSTwascollected andremittedby a) thewholesaler, andb) the retailer.10)_____________

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