Canadian Income Taxation : Planning And Decision Making, 2013-2014 Edition Test Bank

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Canadian Income Taxation: Planning and Decision Making- 2013-2014 EditionChapter OneMultiple Choice1. Which of the following entities is not taxed directly on its income?A) IndividualsB) ProprietorshipsC) CorporationsD) TrustsAns: BDifficulty: Knowledge recallPage Ref: 52. 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 product costsand selling costs.D) All managers should own a copy of the Income Tax Act.Ans: CDifficulty: ComprehensionPage Ref: 33. Which of the following statements is true?A) Payment of the return on equity is deductible by the corporation and is a form of propertyincome for the individual.B) Payment of the return on equity is deductible by the corporation and is a form of businessincome for the individual.C) Payment of the return on equity is not deductible by the corporation and is a form of businessincome for the individual.D) Payment of the return on equity is not deductible by the corporation and is a form of propertyincome for the individual.Ans: DDifficulty: KnowledgePage Ref: 54. When assessing the value of a corporation, the most relevant information that decision-makersnormally consider isA) the potential for before-tax profits.

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B) the potential for after-tax profits.C) the current rate of corporate tax.D) cash flow before-tax.Ans: BDifficulty: ComprehensionPage Ref: 45. 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 internationalAns: CDifficulty: ComprehensionPage Ref: 56. Two investor corporations maynotenter jointly into which of the following?A) Joint ventureB) PartnershipC) Separate corporationD) ProprietorshipAns: DDifficulty: KnowledgePage Ref: 57. Which of the following statements is false?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.Ans: BDifficulty: Knowledge and ComprehensionPage Ref: 2Problems8. The text book lists four fundamental tax variables that a manager needs to consider whenmaking business decisions. These variables are: 1) primary types of income; 2) entities subjectto taxation on income; 3) alternative forms of business and investing structures used by taxableentities structure; and 4) tax jurisdictions. List the relevant variables within these fourcategories.

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Ans:Income: Business, Property, Employment, Capital GainsEntities: Individuals, Corporations, TrustsForms of business: Proprietorship, Corporation, Partnership, Limited Partnership, Joint Venture,Income TrustsTax Jurisdictions: Provincial, Federal, ForeignDifficulty: KnowledgePage Ref: 59. ABC Corporation is in a 25% income tax bracket. John Adams is an employee at ABC. Heis in a 40% tax bracket. The company has offered John a 10% pay raise. His current salary is$50,000.Required:A) Calculate the actual cost (after-tax) of the raise to the corporation.B) Calculate the actual value (after-tax) of the raise for John.Show all calculations.Ans:A) Actual cost to ABC: ($50,000 x 10%) x (1 - .25) = $3,750B) Actual value for John: ($50,000 x 10%) x (1 - .4) = $3,000Difficulty: Application, ComprehensionPage: 410. Explain what is meant by the principle that tax should be treated as a ‘controllable cost’.Ans:Just as decision makers in business must control costs such as product, occupancy, selling, andmany others, so should tax costs be regarded as controllable. The actions and activities of theorganization must be analyzed at all levels, and across departments, to determine the impact onthe overall tax cost.Difficulty: ComprehensionPage Ref: 2

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Canadian Income Taxation: Planning and Decision Making- 2013-2014 EditionChapter TwoMultiple Choice1. The manager 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 has the manager used?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.Ans: CDifficulty: ComprehensionPage Ref: 102. 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 the handsof 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.Ans: DDifficulty: ComprehensionPage Ref: 193. The manager of Little Company Ltd. has decided to sell a piece of capital equipment after thecompany’s year-end in order to avoid paying tax on capital gains this year. The manager isengaging inA) tax evasion.B) tax planning.C) GAAR.D) a Section 18 restriction.Ans: BDifficulty: KnowledgePage Ref: 84. 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%.

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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 for one year at a rate of return of 14% and is subject to a 45% taxrate, the compounded after-tax value of the investment will be $1,077.Ans: C (12% x [1-.4]) = 7.2% after-tax returnDifficulty: Comprehension, ApplicationPage Ref: 175. Which of the following statements regarding GAAR is false?A) When an avoidance transaction takes place, the anti-avoidance rule is automatically applied.B) A transaction is not seen as an avoidance transaction if it is undertaken primarily for bona-fide business purposes.C) A transaction is not seen as an avoidance transaction if it is undertaken primarily forinvestment purposes.D) A transaction is not seen as an avoidance transaction if it is undertaken primarily for familypurposes.Ans: ADifficulty: ComprehensionPage Ref: 20Problems6. Steven James earned $150,000 this year in profits from his proprietorship, which placed himin a 45% tax bracket. The rate of tax for Canadian-controlled private corporations in hisprovince is 15% on the first $500,000 of income. Personal tax rates (federal plus provincial) inJames’ province are:On the first $43,00024%On the next $44,00032%On the next $48,00040%On income over $135,00045%(All rates are assumed for this question.)Steven requires $3,000 of after-tax withdrawals per month for his personal living expenses. Allremaining profits are used to pay taxes and to expand the business. Steve expects the sameprofits before living expenses next year.Steven is considering incorporating his business next year. If he incorporates, he will payhimself a gross salary of $48,000.Required:

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A.Determine the increase in Steven’s cash flow if he incorporates his company? Showall calculations.B.Name the type of tax planning that Steve would be engaging in if he incorporated hiscompany.Ans:A)Excess cash as a proprietorship:Profits$150,000Tax:24% x 43,000 $10,32032% x 44,00014,08040% x 48,00019,20045% x 15,0006,750(Assumed federal plus provincial rates)(50,350)$ 99,650Living expenses(36,000)Available for expansion$ 63,650Excess cash as a corporation:Profits$150,000Salary(48,000)Corporate business profits102,000Tax:15% x 100,424(15,300)Available for expansion$86,700Excess cash ($86,700 - $63,650)$23,050B) Transferring income to another entityDifficulty: Application/ComprehensionPage Ref: 13-147. List the three key factors of cash flow and three factors that require speculation for decisionmaking in tax planning.Ans:Three key factors of cash flow1. Amount of money coming in2. Amount of money going out3. Timing

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Three factors requiring speculation(Several examples are provided here, and students may list other relevant factors, also.)1. Appropriate discount rate2. Future tax rates3. Available cash on hand4. Predicted rates of growth5. Future environmental conditions6. Future business plansDifficulty: KnowledgePage Ref: 17-198.Andrew has $10,000 to invest. He can put his money into an investment earning an annualrate of 12% interest, which is paid at the end of the year. His annual tax rate is 42%.Required:a)Calculate the 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.Ans:a)($10,000 x .12) x (1-.42) = $696$696 + $10,000 = $10,696b)$10,000 x .12 x .42 = $504Difficulty: ApplicationPage Ref: 189. 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 anapplication that is not 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 fromthe profitable business to the company with losses.Ans:An individual is seeking a beneficial outcome, and therefore, applies an application that isnot specifically prohibited by law.Tax planningA business is seeking a beneficial outcome, and therefore, does not report a portion of

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revenue earned during the year.Tax evasionTwo unrelated companies take steps to become related in order to shift income from theprofitable business to the company with losses.Tax avoidanceDifficulty: ComprehensionPage Ref: 8-1010. For each of the examples listed below, state which of the three categories of tax planning(shifting income from one time period to another; shifting income from one entity to another;shifting income from one type of income to another) has been applied.A. Jack has run a successful proprietorship for the past four years, and has now decided toincorporate his company.B. 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.C. XYZ Corporation has chosen to delay the recognition of a discretionary reserve until thefollowing year.Ans:A. Shifting income to another entityB. Converting income from one type to anotherC. Shifting income from one time period to anotherDifficulty: ComprehensionPage Ref: 10-17

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Canadian Income Taxation: Planning and Decision Making- 2013-2014 EditionChapter ThreeMultiple Choice1. Joe is a Canadian citizen. In March of 20X1, Joe was transferred to the United States with hiscompany. His wife and child moved with him at that time. Joe chose not to sell his house, andinstead, 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 Canadaand stay in their house. Joe did not cancel his country club membership in order that he couldgolf with his friends on his vacations. He did close his bank accounts, however. Which of thefollowing statements is true?A) Joe is a Canadian citizen, and will therefore, automatically be considered a Canadian residentfor 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.Ans: DDifficulty: KnowledgePage Ref: 262. Of the following individuals, which wouldnotbe considered a resident of Canada for theentire 20XX taxation year?A) John had lived in Canada all of his life, prior to moving to Germany in 20XX, 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 20XX. While inCanada, she joined the local fitness club, gained part-time employment, and opened an accountin a Canadian bank.C) Prasham is a citizen of India, where he lived his entire life prior to moving to Canadaon April 30th, 20XX. 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.Ans: CDifficulty: Knowledge and ComprehensionPage Ref: 263. Segment A of the aggregate formula includes which of the following?A) Income from employment, income from property, and income from capital transactions.B) Income from employment, income from property, income from business, and income fromcapital transactions.

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C) Income from business, ‘other’ income, and income from capital transactions.D) Income from employment, income from property, income from business, and ‘other’ income.Ans: DDifficulty: KnowledgePage Ref: 364. 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 paymentsAns: BDifficulty: KnowledgePage Ref: 295. 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) An individual taxpayer can choose any twelve month period as their taxation year.D) A corporation may have a taxation year less than twelve months during a year the corporationis formed, dissolved, or is granted a change in its year end.Ans: DDifficulty: KnowledgePage Ref: 41-42Problems6. 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 the aggregatingformula.B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a taxliability this year.C) How would your answer change in Part A if Mrs. White realized a taxable capital gain of$30,000 in 20XX?

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Ans:A)Segment A:$40,0003,0002,000Segment B:0Segment C:0Segment D:(22,000)(5,000)Net Income for Tax Purposes:$18,000B) Mrs. White does not have a $0 balance for tax purposes as she is unable to use the capital losssince she had no capital gains in the year.C) If Mrs. White had realized a taxable capital gain of $30,000 in 20XX she would have beenable to apply the allowable capital loss of $20,000 ($40,000 x .5). This would add $10,000 toher income, however, resulting in $28,000 in net income for tax purposes.Difficulty: ApplicationPage Ref: 36-407. George and Gina Anderson, (Canadian citizens), moved to Europe on August 15th, 20X1 toopen a café in a small Italian village. The restaurant was called ‘Gina’s Italian Eatery Inc.’.Prior to moving, George earned $65,000 in 20X1 as a computer programmer and Susan earned$67,000 in 20X1 as a registered nurse. They are both in their 60s and plan to retire in Italy,which is Gina’s birthplace. They were able to sell their home in time to invest the proceeds priorto leaving for Europe. As they only expect to return to Canada every second year, they cancelledtheir 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 in20X1 and discuss the Canadian tax treatment, if any, of their personal and business income.Ans:George and Gina would be considered ‘part-time’ residents (or ‘residents until August 15th’)since they severed their ties with Canada prior to leaving. When filing their Canadian taxreturns, they would only be liable for tax on theirCanadianearnings in 20X1.The café is not a Canadian resident. It was not incorporated in Canada, and its central

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management and control is not exercised from within Canada. Therefore, the café is not requiredto file a Canadian tax return. The income would be subject to Italian tax laws.Difficulty: ApplicationPage Ref: 26-278. Allison Hill moved to Canada on April 30thof 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 toDecember of this year from her new employer. Prior to leaving Belgium, Allison earned$10,000. She received $1,000 in dividends in March and $1,000 in dividends in September fromstocks in a European corporation. Allison’s parents sent her a cheque for $2,000 as a gift for her25thbirthday in August.Required:Determine Allison’s residency status for Canadian tax purposes for the current year. How muchincome is Allison required to report on her T1 tax return? Explain why any items have not beenincluded in your calculations.Ans:‘Part-time resident’ or ‘Resident as of April 30th’$45,000 + $1,000 = $46,000The following items have been omitted:•Income from employer in Belgium prior to Allison becoming a Canadian resident•Dividends received prior to becoming a Canadian resident•Birthday gift from parents is not taxableDifficulty: Comprehension, ApplicationPage Ref: 269. Answer the following questions which pertain to the administration of the Canadian IncomeTax system.1. Individuals (who do not carry on a business) must file an income tax return for the mostrecent calendar year by what date?2. Individuals who carry on an unincorporated business must file an income tax return for themost recent calendar year by what date?3. Who is responsible for the filing of a deceased taxpayer's tax return?4. What is the taxation year for an inter vivos trust?5. What is the taxation year for a testamentary trust?6. A trust must file an income tax return within how many days of its taxation year-end?7. What is the taxation year for a corporation (other than a professional corporation)?8. A corporation is required to file an income tax return within how many months of its taxationyear-end?Ans:1. April 302. June 15

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3. The deceased's legal representative4. The calendar year5. A chosen fiscal period6. 90 days7. A chosen fiscal period, not exceeding 53 weeks8. 6 monthsDifficulty: KnowledgePage Ref: 41-4210.ABC Corporation purchased inventory from Galaxy Wholesalers. The cost on the invoicewas $25,000. The inventory was marked up by 35% and sold to a retailer. The retailersubsequently marked the goods up 45% and sold the products to its consumers. (Pre-GST costswere used to calculate marked up prices.)Required:Calculate how much GST was collected and remitted by both the wholesaler and the retailer.Ans:Wholesaler:Sale price to retailer$33,750 ($25,000 x 1.35)x 5% = $1,687.50Cost from manufacturer(25,000)x 5% = (1,250.00)Gain$ 8,750437.50Remitted to CRA437.50GST cost-0-Retailer:Sale price to consumer$48,937.50 ($33,750 x 1.45) x 5% = $2446.88Cost from wholesaler(33,750)x 5% = (1,687.50)Gain$15,187.50$ 759.38Remitted to CRA759.38GST cost-0-Difficulty: Comprehension and ApplicationPage Ref: 48

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Canadian Income Taxation: Planning and Decision Making- 2013-2014 EditionChapter FourMultiple Choice1. Susan was provided with a company car to drive during March to December of the currentyear. The car cost the company $22,000 plus GST and PST totalling 11%. Susan drove the car atotal of 15,000 kilometres during the year. 11,000 kilometres were for business purposes and theother 4,000 kilometres were for personal use. Susan’s employer pays for all of the vehicle’soperating costs which totaled $1,100. What is the minimum amount that Susan can report as hertotaltaxable benefit for the use of the car during the year? (Round your answer.)A) $1,172B) $1,758C) $2,252D) $5,964Ans: BStandby Charge: [($22,000 x 1.11) x .02 x 10] x 4,000/(1,667 x 10) = 1,172Operating Benefit: Lessor of: 4,000 x .27 = 1,080 and 1,172 x .5 = 5861,172 + 586 = 1,758Difficulty: ApplicationPage Ref: 702. Which of the following factors are used by the courts in order to determine a taxpayer’s statusas an employee or a self-employed contractor?A) control test, ownership of tools test, chance of lawsuit, integration testB) control test, employer test, chance of lawsuit, integration testC) control test, ownership of tools test, chance of profit and loss, integration testD) control test, employer test, chance of profit and loss, integration testAns: CDifficulty: KnowledgePage Ref: 643. Cindy works for Sky Manufacturers, a public corporation. In 20X1 she was offered an optionto purchase shares at $15 per share from her employer. The fair market value on that day was$17 per share. The option had a four year exercise time-limit. Cindy exercised her option in20X3 and purchased 500 shares. The fair market value at that time was $21 per share. What isCindy’s tax treatment of this option in the year 20X3?A) $1,000 taxable benefitB) $2,000 taxable benefit

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C) $3,000 taxable benefitD) Not taxable until the shares are sold.Ans: C500 x ($21-$15) = $3,000. The benefit is taxable in the year she exercises her option.Difficulty: Knowledge, ApplicationPage Ref: 74-764. Which of the following, when provided by an employer, is NOT a tax-deferred or tax-freebenefit for the employee?A) Premiums for private health care plans.B) Counselling services to prepare the employee for retirement.C) Contributions to the employee’s registered pension plan.D) A near-cash gift for the employee’s wedding.Ans: DDifficulty: KnowledgePage Ref: 775. Sarah borrowed $25,000 from her employer at a rate of 1% interest. At the time the loan wasmade, the CRA's prescribed rate of interest was 3%. Sarah is in a 40% income tax bracket. Theactual cost of Sarah's loan is which of the following? (Assume there are no fluctuations in theprescribed rate of interest.)A) 1%B) 1.2%C) 1.8%D) 2%Ans: CPrescribed interest$750 ($25,000 x 3%)Actual interest paid250 ($25,000 x 1%)Benefit$500Tax cost$200 ($500 x 40%)Actual interest$250Tax cost200Total cost$450Effective rate1.8% (450/25,000)Difficulty: Comprehension and ApplicationPage Ref: 72

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