Canadian Income Taxation, 2018/2019, 21st Edition Test Bank

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Chapter 01-Taxation-Its Role in Decision Making1-1Chapter 01Taxation-Its Role in Decision MakingMultiple Choice Questions1.Which of the following is not considered to be a separate entity for tax purposes inCanada?A.An individualB.A proprietorshipC.A corporationD.A trustAccessibility: Keyboard NavigationBlooms: RememberTopic: 01-04 Fundamental Income Tax Structure and Its Complexity2.Which of the following attitudes and actions will help decision-makers develop an efficientapproach to taxation?A.Cash flows should be considered from a before-tax perspective when making decisions.B.Functional managers should not be held responsible for the tax effects of decisions withintheir divisions.C.Tax costs to a business should be regarded as controllable expenses, much like productcosts and selling costs.D.All managers should own a copy of the Income Tax Act.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 01-02 Taxation-A Controllable Cost

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Chapter 01-Taxation-Its Role in Decision Making1-23.Which of the following statements is true?A.Dividends paid by a corporation are deductible by that corporation and are a form ofproperty income for the recipient.B.Dividends paid by a corporation are deductible by that corporation and are a form ofbusiness income for the recipient.C.Dividends paid by a corporation are not deductible by that corporation and are a form ofbusiness income for the recipient.D.Dividends paid by a corporation are not deductible by that corporation and are a form ofproperty income for the recipient.Accessibility: Keyboard NavigationBlooms: RememberTopic: 01-04 Fundamental Income Tax Structure and Its Complexity4.When assessing the value of a corporation, the most relevant information that decision-makers normally consider isA.the potential for before-tax profits.B.the potential for after-tax profits.C.the current corporate tax rate.D.cash flow before-tax.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 01-03 Cash Flow after Tax5.Income tax is calculated for which of the following jurisdictional groups?A.Municipal, provincial, and federalB.Municipal, federal, and internationalC.Provincial, federal, and internationalD.Municipal, provincial, and internationalAccessibility: Keyboard NavigationBlooms: UnderstandTopic: 01-04 Fundamental Income Tax Structure and Its Complexity

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Chapter 01-Taxation-Its Role in Decision Making1-36.Two investor corporations maynotenter jointly into which of the following?A.Joint ventureB.PartnershipC.Separate corporationD.ProprietorshipAccessibility: Keyboard NavigationBlooms: RememberTopic: 01-04 Fundamental Income Tax Structure and Its Complexity7.Which of the following statements isfalse?A.Cash flow should be calculated on an after-tax basis.B.The tax cost to a business should not be regarded as a cost of doing business.C.Income tax should be considered a controllable cost.D.The value of an enterprise should not be based on pre-tax cash flow.Accessibility: Keyboard NavigationBlooms: RememberBlooms: UnderstandTopic: 01-02 Taxation-A Controllable CostTopic: 01-03 Cash Flow after TaxShort Answer Questions8.The text book lists four fundamental tax variables which a manager needs to consider whenmaking business decisions. These variables are: 1) primary types of income; 2) entitiessubject to taxation on income; 3) alternative forms of business and investing structures usedby taxable entities structure; and 4) tax jurisdictions. List the relevant variables within thesefour categories.Income: Business, Property, Employment, Capital GainsEntities: Individuals, Corporations, TrustsForms of business: Proprietorship, Corporation, Partnership, Limited Partnership, JointVenture, Income TrustsTax Jurisdictions: Provincial, Federal, ForeignAccessibility: Keyboard NavigationBlooms: RememberTopic: 01-04 Fundamental Income Tax Structure and Its Complexity

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Chapter 01-Taxation-Its Role in Decision Making1-49.ABC Corporation is in a 25% income tax bracket. John Adams is an employee at ABC andis in a 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 value of the raise for John.Show all calculations.A) After-tax cost to ABC: ($50,00010%)(1-.25) = $3,750B) After-tax value for John: ($50,00010%)(1-.4) = $3,000Accessibility: Keyboard NavigationBlooms: ApplyBlooms: UnderstandTopic: 01-03 Cash Flow after Tax10.Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''.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 ofthe organization must be analyzed at all levels, and across departments, to determine theimpact on the overall tax cost.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 01-02 Taxation-A Controllable Cost

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Chapter 02-Fundamentals of Tax Planning2-1Chapter 02Fundamentals of Tax PlanningMultiple Choice Questions1.The CEO at Big Company Corporation has decided to sell a piece of capital equipmentafter the company's year-end in order to avoid paying capital gains tax this year. Which taxplanning method will the CEO be using?A.Transferring income to another entity.B.Converting the nature of income from one type to another.C.Shifting income from one time period to another.D.This is a form of tax evasion and is not allowed.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 02-05 Types of Tax PlanningTopic: 02-06 Shifting Income from One Time Period to AnotherTopic: 02-07 Transferring Income to Another EntityTopic: 02-08 Converting Income from One Type to Another2.Which of the following scenarios illustrates a potential tax avoidance scheme?A.Property transferred between arm's-length parties is valued at fair market value.B.Dividends received from shares transferred from a wife to her husband are taxed in thehands of the wife.C.A shareholder owns two corporations and undertakes legal steps in order to permit lossutilization between the two companies.D.A man transfers property to his child at a value less than fair market value.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 02-04 Tax Avoidance

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Chapter 02-Fundamentals of Tax Planning2-23.The controller of Little Company Ltd. has decided to sell a piece of capital equipment afterthe company's year-end in order to avoid paying tax on capital gains this year. The controlleris engaging inA.tax avoidance.B.tax evasion.C.tax planning.D.GAAR.Accessibility: Keyboard NavigationBlooms: RememberTopic: 02-02 Tax Planning Defined4.Certain skills are necessary for successful tax planning. One of these skills is applying thetime value of money. Which of the following is FALSE regarding this skill?A.Applying the time value of money is a tool used for wealth accumulation.B.If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after-tax income on theinvestment at the end of the first year, the taxpayer's tax rate is 40%.C.If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annualafter-tax return is 4.8%.D.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.(12%[1-.4]) = 7.2% after-tax return.Accessibility: Keyboard NavigationBlooms: ApplyBlooms: UnderstandTopic: 02-08 Converting Income from One Type to Another

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Chapter 02-Fundamentals of Tax Planning2-35.Which of the following statements regarding GAAR is true?A.The purpose of GAAR is to catch tax evaders.B.When an avoidance transaction takes place, the anti-avoidance rule is automaticallyapplied in all circumstances.C.Canada Revenue Agency states that "A transaction will not be an avoidance transaction ifthe taxpayer establishes that it is undertaken primarily for bona fide business, investment orfamily purposes."D.Individuals who organize their affairs in order to pay as little tax as possible willautomatically be subject to GAAR.Accessibility: Keyboard NavigationBlooms: UnderstandTopic: 02-11 Specific Anti-Avoidance RulesShort Answer Questions6.Steven James earned $150,000 this year in profits from his proprietorship. The rate of taxfor Canadian-controlled private corporations in his province is 13% on the first $500,000 ofincome. Personal tax rates (federal plus provincial) in James' province are:On the first $47,00024%On the next $47,00032%On the next $51,00040%On the next $61,00045%On income over $206,00050%

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Chapter 02-Fundamentals of Tax Planning2-4(Allratesareassumedforthisquestion.)Steven withdraws $3,000 per month for his personal living expenses. All remaining profits areused to pay taxes and to expand the business. Steven expects the same business after-taxprofits next year.Steven is considering incorporating his business next year. If he incorporates, he will payhimself a gross salary of $48,000.Required:A. Determine the increase in Steven's cash flow if he incorporates his company? Show allcalculations.B. Name the type of tax planning that Steve would be engaging in if he incorporated hiscompany.A) Excess cash as a proprietorship:Pre-tax Profits$150,000Tax:24% 47,000 $11,28032% 47,000 15,04040% 51,000 20,40045% 5,000 2,250(Assume federal plus provincial rates)(48,970)After-tax profits$101,030Living expenses withdrawn(36,000)Available for expansion$65,030Excess cash as a corporation:

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Chapter 02-Fundamentals of Tax Planning2-5Profits before salary$150,000Salary(48,000)Corporate pre-tax profits102,000Tax: 13%×102,000(13,260)After-tax profits (Available for expansion)$88,740Excess cash available for expansion ($88,740-$65,0303)$23,710B) Transferring income from one entity to another (individual to corporation)Accessibility: Keyboard NavigationBlooms: ApplyBlooms: UnderstandTopic: 02-02 Tax Planning DefinedTopic: 02-07 Transferring Income to Another Entity

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Chapter 02-Fundamentals of Tax Planning2-67.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.Part A:Three key factors of cash flow1. Amount of money coming in2. Amount of money going out3. TimingPart B:Six skills required for tax planning1. Anticipation2. Flexibility3. Speculation4. Applying the 8thWonder of the World5. Perspective6. Global approachAccessibility: Keyboard NavigationBlooms: RememberTopic: 02-08 Converting Income from One Type to AnotherTopic: 02-12 The General Anti-Avoidance Rule-GAAR8.Andrew has $10,000 to invest. He wants to put his money in a one-year investment earningan annual interest rate of 12%. Andrew is in a 42% tax bracket.Required:a) Calculate the total value of Andrew's investment, after-tax, at the end of the year.b) Calculate the amount of taxes Andrew will have to pay on his investment.a) $10,000 + ( ($10,00012)(1-.42)) = $10,696b) $10,000.12.42 = $504Accessibility: Keyboard NavigationBlooms: ApplyTopic: 02-08 Converting Income from One Type to Another

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Chapter 02-Fundamentals of Tax Planning2-79.Match each of the following terms with the most accurate example. Use each example onlyonce.TERMS:Tax evasionTax planningTax avoidanceEXAMPLES:A. An individual is seeking a beneficial outcome, and therefore, applies an application that isnot specifically prohibited by law.B. A business is seeking a beneficial outcome, and therefore, does not report a portion ofrevenue earned during the year.C. Two unrelated companies take steps to become related in order to shift income from theprofitable business to the company with losses.An individual is seeking a beneficial outcome, and therefore, applies an application that is notspecifically prohibited by law.TaxplanningA business is seeking a beneficial outcome, and therefore, does not report a portion of revenueearned during the year.TaxevasionTwo unrelated companies take steps to become related in order to shift income from theprofitable business to the company with losses.TaxavoidanceAccessibility: Keyboard NavigationBlooms: UnderstandTopic: 02-03 Tax EvasionTopic: 02-04 Tax AvoidanceTopic: 02-05 Types of Tax Planning

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Chapter 02-Fundamentals of Tax Planning2-810.For each of the three examples listed below (1-3), identify the category of tax planning(A-C) that has been applied.1. Jack has run a successful proprietorship for the past four years, and has now decided toincorporate his company.2. Karen has decided not to pay herself a dividend from her corporation, (of which she is thesole shareholder), but has chosen to sell a portion of her shares to an associate instead.3. XYZ Corporation has chosen to delay the recognition of a discretionary reserve until thefollowing year.A. Shifting income from one time period to anotherB. Shifting income from one entity to anotherC. Shifting income from one type of income to another.1. B. Shifting income from one entity to another2. C. Shifting income from one type of income to another3. A. Shifting income from one time period to anotherAccessibility: Keyboard NavigationBlooms: UnderstandTopic: 02-05 Types of Tax PlanningTopic: 02-06 Shifting Income from One Time Period to AnotherTopic: 02-07 Transferring Income to Another EntityTopic: 02-08 Converting Income from One Type to Another

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Chapter 03-Liability for Tax, Income Determination, and Administration of the Income Tax System3-1Chapter 03Liability for Tax, Income Determination, and Administration of the IncomeTax SystemMultiple Choice Questions1.Joe is a Canadian citizen. In March of 20x1, Joe was transferred to the United States by hisemployer. His wife and child moved with him at that time. Joe chose not to sell his house, andinstead, lends it to his extended family during the winter months when they visit Canada fromoverseas. Joe has five weeks of vacation each summer, at which time he and his wife andchild return to Canada and stay in their house. Joe did not cancel his country club membershipso that he could golf with his friends on his vacations. He did close his bank accounts,however. Which of the following statements is true?A.Joe is a Canadian citizen, and will therefore, automatically be considered a Canadianresident for tax purposes.B.Joe no longer resides in Canada, and will therefore, automatically be considered a non-resident of Canada.C.Joe is considered a part-time resident of Canada for the five weeks he vacations in thecountry.D.Joe might be considered to have a continuing state of relationship with Canada.Accessibility: Keyboard NavigationBlooms: RememberTopic: 03-07 Resident Individuals and Corporations

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Chapter 03-Liability for Tax, Income Determination, and Administration of the Income Tax System3-22.Of the following individuals, which wouldnotbe considered a full-time or deemed residentof Canada for the entire 20x1 taxation year?A.John lived in Canada all of his life prior to moving to Germany in 20x1, where he wasassigned to a seven-month assignment to set up the international operations for his Canadianemployer. He did not sell his home on Vancouver Island, as his wife and children remained inCanada for work and schooling reasons.B.Marie is a Swiss citizen who lived in Canada from February to October of 20x1. While inCanada, she joined the local fitness club, gained part-time employment, and opened anaccount in a Canadian bank.C.Prasham is a citizen of India, where he lived his entire life prior to moving to Canada onApril 30th, 20x1. Upon arriving in Canada, he began full-time work and purchased a home.D.June moved to Canada three years ago from the United States, and has maintained herAmerican citizenship.Accessibility: Keyboard NavigationBlooms: RememberBlooms: UnderstandTopic: 03-07 Resident Individuals and Corporations3.Section 3(a) of the Income Tax Act includes which of the following?A.Income from: employment, property, and capital transactions.B.Income from: employment, property, business, and capital transactions.C.Income from: business, other items, and capital transactions.D.Income from: employment, property, business, and other items.Accessibility: Keyboard NavigationBlooms: RememberTopic: 03-13 Net Income for Tax Purposes--The Aggregating Formula4.Which of the following type of payment is NOT subject to Canadian withholding tax whenpaid to a non-resident?A.DividendsB.Interest paid to an arm's length partyC.Pension benefitsD.Registered retirement income fund paymentsAccessibility: Keyboard NavigationBlooms: RememberTopic: 03-08 Non-Resident Individuals and Corporations

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Chapter 03-Liability for Tax, Income Determination, and Administration of the Income Tax System3-35.Regarding taxation years, which of the following statements is TRUE?A.Corporate taxpayers must use the calendar year as their taxation year.B.The taxation year for an individual taxpayer ends on April 30th.C.Individual taxpayers may choose any twelve month period as their taxation year.D.A corporation may have a taxation year less than twelve months during a year thecorporation is formed, dissolved, or is granted a change in its year end.Accessibility: Keyboard NavigationBlooms: RememberTopic: 03-15 Administration of the Income Tax SystemShort Answer Questions6.Your neighbor, Mrs. White, has heard that you are studying personal tax. She has come toyou 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 businessinvestment 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 Section 3 of theIncome Tax Act.B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a taxliability this year, assuming that her taxable income will be equal to her net income for taxpurposes.C) How would your answer change in Part A if Mrs. White realized ataxablecapital gain of$30,000 in 20xx?A)

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