Solution Manual for Canadian Income Taxation 2019/2020 , 22nd Edition

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Buckwold, Kitunen and Roman, Canadian Income Taxation,2019-2020 Ed.Chapter One1CHAPTER 1TAXATION―ITS ROLE IN BUSINESS DECISIONMAKINGReview Questions1.If income tax is imposed after profits have been determined, why is taxation relevant tobusinessdecisionmaking?2.Most business decisions involve the evaluation of alternative courses of action. Forexample,amarketingmanagermayberesponsibleforchoosingastrategyforestablishing sales in new geographical territories. Briefly explain how the tax factor canbean integral part of this decision.3.What are the fundamental variables of the income tax system that decision makers shouldbe familiar with so that they can apply tax issues to their areas of responsibility?4.What is an “after-tax” approach to decision making?

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Buckwold, Kitunen and Roman, Canadian Income Taxation,2019-2020 Ed.Chapter One2Solutions to Review QuestionsR1-1Once profit is determined, the amount of income tax that results is determined by theIncome Tax Act. However, at all levels of management, alternative courses of action areevaluated and decided upon. In many cases, the choice of one alternative over the othermay affect both the amount and the timing of future taxes on income generated from thatactivity. Therefore, the person making those decisions has a direct input into future after-taxcash flow. Obviously,decisions that reduce or postpone the paymentof tax affect theultimate return on investment and, in turn, the value of the enterprise. Including the taxvariable as a part of the formal decision process will ultimately lead to improved after-taxcash flow.R1-2Expansioncanbeachievedinnewgeographicareasthroughdirectselling,orbyestablishing a formal presence in the new territory with a branch office or a separatecorporation. The new territories may also cross provincial or international boundaries.Provincial income tax rates vary amongst the provinces. The amount of income that issubject to tax in the new province will be different for each of the three alternativesmentioned above. For example, with direct selling,none of the income is taxedin the newprovince, but with a separate corporation,all of the income is taxed in the new province.Because the tax cost is different in each case, taxation is a relevant part of the decision andmust be included in any cost-benefit analysis that compares the three alternatives[Reg.400-402.1].R1-3A basic understanding of the following variables will significantly strengthen adecisionmaker's ability to apply tax issues to their area of responsibility.Types of Income-Employment,Business,Property,CapitalgainsTaxableEntities-Individuals,Corporations,TrustsAlternative Business-Corporation,Proprietorship,Partnership,LimitedStructurespartnership,Jointarrangement,IncometrustTax Jurisdictions-Federal,Provincial,ForeignR1-4Allcash flowdecisions, whetherrelatedto revenues, expenses, asset acquisitions ordivestitures, or debt and equity restructuring, will impact the amount and timing of the taxcost. Therefore, cash flow exists only on anafter-taxbasis,and, thetaximpactswhetherornottheultimateresultofthedecisionissuccessful.Anafter-taxapproachtodecision-making requires each decision-maker to think "after-tax" for every decision at thetime the decision is being made,and,to consider alternative courses of action to minimizethe tax cost, in the same way that decisions are made regarding other types of costs.Failure to apply an after-tax approach at the time decisions are made mayprovideinaccurate information for evaluation, and,result in a permanently inefficient taxstructure.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two1CHAPTER 2FUNDAMENTALS OF TAX PLANNINGReviewQuestions1.“Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.2.What distinguishes tax evasion from tax avoidance and tax planning?3.DoesCanada Revenue Agency deal with all tax avoidance activities in the same way?Explain.4.The purpose of tax planning is to reduce or defer the tax costs associated with financialtransactions. What are the general types of tax planningactivities? Briefly explain howeach of them may reduce or defer the tax cost.5.“It is always better to pay tax later rather than sooner.” Is this statement true? Explain.6.When corporate tax rates are13% and tax rates for individuals are 40%,is it always betterfor the individual to transfer his or her business to a corporation?7.“As long as all of the income tax rules are known, a tax plan can be developed withcertainty.” Is this statement true? Explain.8.What basic skills are required to develop a good tax plan?9.An entrepreneur is developing a new business venture and is planning to raise equitycapital from individual investors. Heradviserindicates that the venture could be structuredas a corporation (i.e., shares are issued to the investors) or as a limited partnership (i.e.,partnership units are sold). Both structures provide limited liability for the investors. Shouldthe entrepreneurconsider the tax positions of the individual investors? Explain. Withoutdealing with specific tax rules, what general tax factors should an investor consider beforemaking an investment?10.What is a tax avoidance transaction?11.“If a transaction (or a series of transactions) that results in a tax benefit was not undertakenprimarily for bona fide business,investment, or family purposes,the general anti-avoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two2Solutions toReviewQuestionsR2-1There is a distinction between tax planning and tax avoidance. Tax planning is the processof arranging financial transactions in a manner that reduces or defers the tax cost and thatarrangement is clearly provided for in theIncome Tax Actor is not specifically prohibited.In other words, the arrangement is chosen from a reasonably clear set of options within theAct.In contrast, tax avoidance involves a transaction or series of transactions,the main purposeof which is to avoid or reduce the tax otherwise payable. While each transaction in theprocess may be legal by itself, the series of transactions cause a result that was notintended by thetaxsystem.R2-2Both tax planning and tax avoidance activities clearly present the full facts of eachtransaction, allowing them to be scrutinized byCRA. In comparison, tax evasion involvesknowingly excluding or altering the facts with the intention to deceive. Failing to report anamount of revenue when it is known to exist or deducting a false expense are examples oftax evasion.R2-3CRAdoes not deal with all tax avoidance transactions in the same way. In general terms,CRAattempts to divide tax avoidance transactions between those that are an abuse of thetax systemand those that are not. When an action is considered to be abusive,CRAwillattempt to deny the resulting benefits by applying one oftheanti-avoidance rules in theIncome Tax Act.R2-4There are three general types of tax planning activities:•Shifting income from one time period to another.•Transferring income to another entity.•Converting the nature of income from one type to another.Shifting income to another time period can be abenefitif it results in a lower rate of taxapplying to the income. Even if a lower rate of tax is not achieved, abenefit may be gainedfrom delaying the payment of tax to a future time period.Shifting income to an alternate taxpayer (for example, from an individual toacorporation),the amount and timing of the tax may be beneficially altered.There are several types of income within the tax system such as employment income,business income, capital gains and so on. Each type of income is governed by a differentset of rules. For some types of income,the timing,the amount of income recognized, andthe effective tax rateis different from other types. By converting one type of income toanother,abenefitmaybegainedifthetimingofincomerecognition,theamountrecognized,and/orthe effective tax rateis favorable.R2-5The statement is not true. Paying tax later may be an advantage because it delays the taxcost and frees up cash for other purposes. However, the delay may result in a higher rateof tax in the future year compared to the current year. In such circumstances there is atrade-off between the timing of the tax and the amount of tax payable.R2-6Thereis not always an advantage to transfer income to a corporation whenthe corporatetax rate is lower than that of the individual shareholder. While an immediate lower tax rateresults, remember that the corporation may be required to distribute some or all of its

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two3after-tax income to the shareholder which causes asecond level oftax. Whether or not anadvantage is achieved depends on the amount of that second level of tax and when itoccurs. Other factors may also be relevant such as the tax treatment of a possible businessfailure or sale.R2-7The statement is not true. Knowing the tax rules is, of course, a major element in the taxplanning process,but,it does not guarantee the expected outcome. Planning means thatcertain steps are taken now in preparation for certain activities that may occur in the future.However, those anticipated activities might not occur and the desired tax result may not beachieved. Tax planning also requires that one must anticipate and speculate on possiblefuture scenarios and relate them to the current taxplanning steps. Those scenarios arenever certain.R2-8To develop a good tax plan, one must be able to:•Understand the fundamentals of the income tax system.•Anticipate the complete cycle of transactions.•Develop optional methods of achieving the desired business result and analyzeeach oftheir tax implications.•Speculate on possible future scenarios and assesstheir likelihood.•Measure the time value of money.•Place the tax issue in perspective by applying common sense and sound businessjudgement.•Understand the tax position of other parties involved in the transaction.R2-9Yes, theentrepreneur should consider the tax position of the potential investors. They willbe taking a risk in accepting the investment. If the entrepreneur knows the tax effect on theinvestors,of each alternative organization structure,the entrepreneurcan choose the onethat providesinvestorsthe most favorable tax treatment(i.e.,one that reduces their after-tax loss if the investment fails,or increases their after-tax income if it succeeds). Beforemaking the investment the investor should determine thetax impact on:•income earned by the venture,•income distributed to the investor,•lossesincurred by the venture,•the loss of the investment if the venture fails, and•thegain on theinvestment when it is eventually sold.R2-10A taxavoidance transaction is a term used within the general anti-avoidance rule(GAAR)of theIncome Tax Act. An avoidance transaction is a transaction or series of transactionsthat results in a tax benefit and was not undertaken primarily for bona fide business,investment or family purposes[ITA245].R2-11The statement is not true. In order for the tax benefit to be denied under the general anti-avoidance rule(GAAR), the transaction, in addition to not being primarily forbona fidebusiness, investment or family purposes, must be considered to be a misuse or abuse ofthe income tax system as a whole. What constitutes a misuse or abuse is not always clear.However, certain avoidance transactions are permitted and others are not[ITA245(3), IC88-2].___________________________________________________________

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two4Key ConceptQuestionsQUESTION ONETheIncome Tax Actcontains a general anti-avoidance rule (GAAR) in section 245.Considereach of the following situations and determine whether theGAAR will likelyapply.Income taxreference: ITA 245(1),(2),(3),(4); IC 88-2.1.Chris transferred her consulting business to a corporation primarily to obtain the benefitofthe low corporate tax rate.2.Paul owns 100% of the shares of P Ltd.Paul provides services to P Ltd. In the currentyearhe received no remuneration for his services because the payment of a salary toPaul wouldincrease the amount of the loss that P Ltd. will incur in the year.3.A Canadian-controlled private corporation pays its shareholder/manager a bonus thatwillreduce the corporation’s income to the amount eligible for the low tax rate.Thebonus is notin excess of a reasonable amount.4.AprofitableCanadiancorporationhasawhollyownedCanadiansubsidiarythatissustaininglosses and needs additional capital to carry on its business.The subsidiary couldborrow the funds from its bank but could not obtain any tax saving in the current yearbydeducting the interest expense due to its loss situation.Therefore, the parent corporationborrows the funds from its bank and subscribes for additional commonshares of thesubsidiary.The parent corporation reduces its taxable income by deductingthe interestexpense.The subsidiary uses the funds to earn income from its business.QUESTION TWOJohn has owned all of the shares of Corporation A and Corporation B since their inception.Inthecurrent year, John had Corporation A transfer, on a tax-deferred basis,propertyused in itsbusiness to Corporation B.The reason for the transfer is to enable CorporationB to apply theincome earned on the transferred assets against its non-capital losses.Will the GAAR in ITA 245(2) apply to disallow the tax benefit?Income tax reference: ITA245(1),(2),(3),(4);IC 88-2.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two5Solutions toKeyConceptQuestionsKC2-1[ITA: 245(2)–GAAR]The GAAR provision inITA245(2) is to be used when specific anti-avoidance provisions do notsuffice. For the GAAR to apply, the following four conditions must be met:1)A tax benefit results from a transaction or part of a series of transactions[ITA 245(1)–“tax benefit” definition],2)The transaction is an avoidance transaction, in that,it was not undertaken primarily forbona fidepurposes other than to obtain the tax benefit[ITA 245(3)–“Avoidancetransaction” definition],3)No other provision of the Act stops the taxpayer from achieving the intended taxadvantage,and4)Thetransaction is an abusive transaction, in that,itcan reasonably be concluded that thetax benefit would result in a misuse or abuse of the Act, read as a whole[ITA 245(4)].The transactions described in each of the four situations:•A tax benefitresults in each case,•The transactions have been undertaken primarily to obtain a tax benefit and are,for that reason, avoidance transactions,and•Are not subject to any other anti-avoidance rule in the Act,Therefore, the issue to be determined is whether the tax benefit would result in amisuse or abuseof the Act, read as a whole.Situation 1: There is nothing in the Act that prohibits Chris from incorporating herbusiness. Theincorporation is consistent with the Act read as a whole and, therefore, the GAAR would not apply.Situation 2:There is no provision in the Act requiring a salary to be paid to Paul and the failureto pay a salary is,therefore,not contrary to the scheme of the Act read as a whole. The GAARwould not apply to deem a salary to be paid by P Ltd. or received by Paul.Situation 3: The Act recognizes the deductibility of reasonable business expenses which includebonuses.The payment of the bonus is not an abusive transaction and, therefore, the GAARshould not apply to the payment.Situation 4:The borrowing by the parent corporation is for the purpose ofgaining or producingincome as required by paragraph 20(1)(c) of the Act. The GAAR should, therefore, not apply.Infact, CRA has indicated, in comfort letters, thatwhere one corporation (A Ltd.) borrows from afinancial institution to invest in shares of another corporation (B Ltd.) and B Ltd. re-loans the fundsback to A Ltd. and charges interest at a reasonable rate, thus, shifting income from A Ltd. to BLtd.,thetransactions arepermissible and will not be challenged.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Two6KC2-2[ITA: 245(2)–GAAR]The GAAR provision inITA245(2) is to be used when specific anti-avoidance provisions do notsuffice. For the GAAR to apply, the following four conditions must be met:1)A tax benefit results from a transaction or part of a series of transactions,2)The transaction is an avoidance transaction, in that,it was not undertaken primarily forbona fidepurposes other than to obtain the tax benefit,3)No other provision of the Act stops the taxpayer from achieving the intended taxadvantage,and4)The transaction is an abusive transaction,in that,it can reasonably be concluded that thetax benefit would result in a misuse or abuse of the Act, read as a whole.In the case of John and his two corporations:•The transaction does result in a tax benefit as using the losses will reduce tax,•It appears that the transaction was undertaken primarily for the tax benefit, and•There is no provision in theIncome Tax Actprohibiting the transfer of the property on atax-deferred basis to a related corporation nor the deduction of the losses byCorporationB,So, the question that remains is whether the transaction is an abusive transaction.Since the Act contains specific provisions permitting the transfer of losses between relatedcorporations, the transfer in question is consistent with the scheme of the Act and, therefore, isnot an abusive transaction. Thus,the GAAR should not apply.However, had the transfer of a property been undertaken to avoid a specific rule, such as a ruledesigned to preclude the deduction of losses after the acquisition of control of a corporation byan arm's length person, such a transfer would be a misuse ofthe provisions of the Act and besubject to the GAAR [IC88-2].Where the GAAR applies, the tax benefit that results from an avoidance transaction will be denied.In order to determine the amount of the tax benefit that will be denied, the provision indicates thatthe tax consequences of the transaction to a person will be determined as is reasonable in thecircumstances.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three1CHAPTER 3LIABILITY FOR TAX, INCOME DETERMINATION, AND ADMINISTRATION OF THEINCOME TAX SYSTEMReview Questions1.Which of the following entities are subject to income tax?(a)proprietorship(b)individual(c)joint venture(d)trust(e)limited partnership(f)corporation(g)partnership2.Describe how the income earned by any of the non-taxable entities listed above is includedin the Canadian tax system.3.How and when does income earned by a corporation affect the tax position ofan individualwho is ashareholder?4.In describing who is liable for tax in Canada, theIncome Tax Actsimply states, “An incometax shall be paid,as requiredby this Act,on the taxable income for each taxation year ofevery person resident in Canada at any time in the year.” Accepting that “person” includesan individual and a corporation, briefly discuss the meaning and ramifications of thisstatement.5.In what circumstances are non-residents subject to Canadian income tax?6.Can a Canadian resident be subject to tax in Canada as well as in a foreign country onthe same earned income? If yes, explain how. Also, what mechanism is available tominimize double taxation?7.Explain the difference betweennet income for tax purposesandtaxable incomefor thetaxable entities.8.Explain what is meant by the statutory scheme, and describe the scheme’s relevance tothe Canadian income tax system.9.For tax purposes, would you prefer that a financial loss be a capital loss or a businessloss? Explain.10.Explain the difference betweenincome from propertyanda gain on the sale of capitalproperty.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three211.One often hears that “corporations are entitled to more deductions for tax purposes thanindividuals.” Based on your reading of Chapter 3, is this statement true? Explain.12.If an individual earns a living as a lawyer, what possible categories of income, for taxpurposes, maythe persongenerate? Describe the circumstances for each possibleclassification.13.What types of income for tax purposes may result when a profit is achieved on the sale ofproperty (e.g., land)?14.Individual A, a Canadian resident, owns and operates aprofitable small farm in NorthDakota, U.S.A. He also has a large amount of money earning interest in an Americanbank. Individual B, also a Canadian resident, owns 100% of the shares of an Americancorporation that operates a profitable small farm in North Dakota. The corporation alsohas a large amount of money earning interest in an American bank.Describe and compare the tax positions of these two individuals who conduct the sameactivities but use different organizational structures.15.Jane Q owned an apple orchard for 20 years. During that time, she had cultivated a uniquebrand of apple that was popular with health food fans. Toward the end of the 20X0 growingseason, Q became seriously ill and put the orchard up for sale. Q’s neighbour agreed topurchase the entire orchard for $250,000. It upset Q to have to sell at that time of yearbecause that year’s crop was of high quality and in three weeks would have been ripe forpicking.What types of property might have been included in the total purchase price of $250,000?For tax purposes, what types of income might have been generated from the sale of theorchard? Explain your answer.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three3Solutions to Review QuestionsR3-1Of the seven entities listed the following are subject to tax:•individuals•corporations•trustsR3-2Proprietorships, partnerships, joint ventures and limited partnerships can all earn incomeas separate entities. However, for tax purposes the income is allocated annually to theowners of the entities and included in their income for taxpurposes. The owners arenormally one of the taxable entities, individuals, corporations or trusts.R3-3A corporation is a separate legal entity distinct from its owners-the shareholders.Consequently a corporation is taxed on its income earned in each taxation year. However,the after-tax corporate profits may be distributed as a dividend to the individual shareholder.Upon receipt of the dividend the individual shareholder has earned property income (returnon the share capital) and is subject to tax consequences at that time[ITA12(1)(j),(k)].Alternatively, if the corporation does not distribute the after-tax profits but retains them forcorporate use, the value of the shares owned by the shareholder will increase in value. Ifand when the shareholder disposes of the shares a capital gain mayresult due to theincreased share value caused by the corporate earnings retained[ITA40(1)(a)(i)].R3-4This statement is important because it establishes the basic framework of the income taxsystem, who is liable for tax, and on what income.The statement indicates thattax iscalculated on the taxable income of residentpersons for each taxation year. By definingeach of therelevant terms in the statement the general scope of the tax system is apparent.It is,therefore,necessary to define the termsperson, resident, taxable income, andtaxationyear[ITA2(1)].As stated in the question, both individuals and corporations are considered to be personsfor tax purposes. Therefore,resident individuals and resident corporations are liableforCanadian tax[ITA248(1)].Individuals are resident of Canada if they maintain a continuing state of relationship withthe country. Whether or not an individual has a continuing state of relationship is a questionof fact determined from the facts of each situation. To establish this relationship the courtsconsider the time spent in Canada, motives for being present or absent, the maintenanceof a dwelling place, the origin and background of the individual, the routine of life, and theexistence of social and financial connections.If an individual does not have a continuingstate of relationship,theindividualmay be deemed to be a resident if theindividual ispresent in Canada for 183 days or more in a particular year[ITA250(1)(a)].A corporation is a residentof Canadaif it has been incorporated in Canada[ITA250(4)].Taxable income is defined as the person's net income for tax purposes minus a limitednumber ofdeductions. Net income for tax purposes consists of world income derived from

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three4five specificsources: employment, business, property, capital gains, and other sources.These sources are combined in a basic formula known as the statutory scheme. If incomedoes not fit one of the above five categories, it is not taxable. Both individuals andcorporationsdetermine net income for tax purposes using the same set of rules.Tax is calculated on taxable income for each taxation year. The taxation year of anindividual is the calendar year. The taxation year for a corporation is the fiscal periodchosen by the corporation, which cannot exceed one year, 53 weeks to be exact [ITA249(1), 249.1(1)].Professional corporations (a corporation that carries on the professionalpractice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor[ITA248(1)]) are required to have a fiscal period that coincides with the calendar yearif theprofessional corporation carries on business as a member of a professional partnership[ITA 249.1(1)(b)].R3-5A non-resident individual or corporation is subject to Canadian income taxin a mannersimilar to a Canadian residenton taxable income earned in Canada if they are employedin Canada, carry on business in Canada, or dispose of taxable Canadian property[ITA2(3)].In addition, a non-resident who does not have any of the above activities in Canada maybe subject to a special withholding tax(a flat tax)on income which has its source in Canada[ITA212].(For example, dividends, rents royalties, certain management fees,and so on.)R3-6Yes. The resident of Canada is taxed on world incomeandthe foreign country, which is thesource of that income, may also impose tax. For example, a Canadian corporation whichoperates a business branch location in a foreign country will be taxable on the branch profitsin both countries. In order to avoid double taxation, the Canadian tax calculation permits areduction of Canadian taxes for foreign taxes paid on the same income[ITA126(1), (2)].R3-7Netincomefortaxpurposesconsistsofataxpayer’scombinednetincomefromemployment, business, property, capital gains and other sources. The separate sources ofincome are combined in accordance with an aggregating formula which takes into accountany losses from the above sources. Net income for tax purposes is determined by the sameset of rules for individuals and corporations.Taxable income is the base amount upon which the rates of tax are applied, and isdetermined by reducing a taxpayer's net income for tax purposes (above) by a limitednumber of specific deductions. While individuals and corporations use the same formulafordetermining net income, the calculation of taxable incomeisdifferent. Deductions forindividuals include a capital gainsdeduction onqualifiedproperties, and unused losses ofother years. Deductions for corporations include charitable donations, dividends fromCanadian corporations and foreign affiliates, and unused losses of other years.R3-8The statutory scheme is the fundamental base of the income tax system. It is simply anaggregating formula which establishes the concept of a taxpayer's income for tax purposesin comparison to other concepts of income. The formula defines what types ofincome aresubject to tax and how any related losses affect a taxpayer's income. As the formula isrestricted to five basic types of income activities, the scope of the tax system is established.

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three5The formula establishes that, although a taxpayer may carry on several separate activities,each separate type of income is not taxed separately but rather forms part of a total conceptof income. As a result, with the exception of capital losses, a loss from one activity within aspecified time period may be offset against the income derived from other activities.In spite of the fact that the formula combines severaltypes of income into a single incomeamount, each type ofincome is determined in accordance with its own sets of rules. Theformula then binds them together and establishes their relationships.R3-9A taxpayer would normally prefer that a loss incurred be a business loss as opposed to acapital loss. In accordance with theaggregating formula for computing net income, abusiness loss can be deducted from any other source of income which increases theopportunity to reduce taxes payable as soon as possible. A capital loss, on the other hand,can only be deducted against a capital gain and,therefore,its ability to reduce taxespayable is considerably restricted. In addition, only one-half of a capital loss is included aspart of the aggregating formula[ITA3(b)].For example, a taxpayer who has employment income of $30,000 and a business loss of$30,000 has no net income under the aggregating formula and,therefore,no tax liability.However, if the same taxpayer has employment income of $30,000 and a capital loss of$30,000, a tax liability would be incurred because the net income for tax purposes wouldbe $30,000 (from employment) and the capital loss would remainunused.R3-10Income from property is the return that is earned on invested capital. For example,dividends earned on shares of a corporation are property income because they representthe return from the ownership of capital property (the shares). On the other hand, againderived from the sale of capital property is considered to be a capital gain. Using theprevious example, if the shares were sold at a profit the gain from that property would be acapital gain and not property income.R3-11Based on the determination of net income for tax purposes, the statement is not true. Bothindividuals and corporations determine net income for tax purposes in accordance with thesameaggregatingformula.Inaddition,anindividualwhoearnsbusinessincomedetermines that income in accordance with the same set of rules as a corporation that earnsbusiness income.With respect to the conversion of net income for tax purposes to taxable income, individualsare entitled to a capital gainsdeduction whereas a corporation is not. In this context anindividual receives preferentialtreatment. In arriving at taxable income, a corporation canreduce its net incomeby dividends received fromother Canadian corporations,whereas,individuals cannot. However, corporate income is ultimatelydistributed to shareholders whoare individuals and,therefore,this corporate advantage is temporary[ITA110.6, 112(1)].R3-12Working as a lawyer, an individual may earn either employment income or business income.If the lawyer provides services to a law firm as an employee in return for a salary, bonus,and fringe benefits,the income would constitute employment income. If thelawyer

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three6independently provides services directly to clients on a fee-for-service basis, the incomederived is business income[ITA5(1), 9(1)].R3-13A profit derived from the sale of property may be classified as either business income orcapital gain. Using the example of property that is land, business income will occur if theland was acquired for thepurpose of reselling it at a profit. Alternatively, if the land wasacquired, not for resale, but for long term use to generate income or for personal enjoyment,the profit on the sale willbeacapital gain.R3-14All Canadian residents are taxed on their world income. The world income of individual Aincludes the business profits from the U.S. farm plus the interest earned from the U.S. bankaccount. These amounts are,therefore,taxable in Canada in the year earned. The incomewould also be taxable in the U.S. but Canadian taxes may be reduced by U.S. taxes on thatincome.In comparison, individual B's world income does not include the U.S. farm profits and theU.S. interest. This income belongs to the U.S. corporation and is,therefore,taxed only inthe U.S. The foreign corporation is not a resident of Canada and is not subject to Canadiantax. The after-tax profits of the foreign corporation may be distributed to individual B in theform of dividends at some future time. Such foreign dividends would then be part of B'sworld income and taxed a second time.Although both A and B conduct the same activities, the organization structure alters theamount and the timing of the related taxes on the income.R3-15The sale of the entire orchard for a total price of $250,000 may include the followingseparate properties:•land•the permanent stock of trees•the almost mature crop of apples(The student may also recognize the possibility ofincluding equipment and goodwill.)The sale of the land may result in a capital gain because it is property that was acquiredand used to generate income. Similarly the sale of the trees is capital property because thetreesare used to produce a regular crop of apples.The profit on the sale of apples would constitute business income because theapplesarebeing produced for the purpose of resale at a profit. Even though the apples are not mature,they represent inventory in process.___________________________________________________________

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Buckwold,Kitunenand Roman, Canadian Income Taxation,2019-2020Ed.Chapter Three7Key Concept QuestionsQUESTION ONEDetermine the Canadian residency status for the current year for each of the followingtaxpayers.Income tax reference: ITA 250(1), (4);Folio S5-F1-C1.a)Paula was born and lived her life to date in Canada. On November 1st of the currentyearshe left Canada permanently.b)Al spent the current year in Belgium on temporary workassignment. His family andfriendsare looking forward to his return to Canada in June of next year.c)Kimberley lives in Ireland. In the current year she was in Canada throughout themonths ofFebruary through May and again throughout the months August throughOctober caring forasickfriend.d)102864 Limited was incorporated in Canada five years ago.The corporation has alwayscarried on business exclusively in Bermuda since incorporation.e)Navy Ltd. was incorporated in the United States. In the current year Navy Ltd.carriedonbusiness in Canada as well as in the United States.QUESTION TWOBill isnota resident of Canada. For the current year Bill has worldwide income of$120,000,including $15,000 of employment income earned in Canada and $2,000 ofinterest received onCanada savings bonds.The remainder of his income was from sourcesoutside of Canada.What amount of income must be reported on Bill’s Canadian personal income tax returnfor thecurrent year?Income tax reference: ITA2(3).QUESTION THREEA Ltd. is resident in Canada for tax purposes. In the current year A Ltd. earned interestincome of$4,000 in Canada, $6,000 in England, and $8,000 in Bermuda.What amount of interest income must be reported on A Ltd.’s Canadian corporateincome taxreturn for the current year?Income tax reference: ITA 2(1), 3(a).QUESTION FOURThe Canadian income tax system includes five specific categories of income. Identify the incomecategory to which each of the following pertains:1.Interest earned on a bond investment2.Pension income3.Consulting fees

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