Canadian Income Taxation 2016/2017 Edition Solution Manual

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual 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 payment of 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,CapitalgainsTaxable Entities-Individuals,Corporations,TrustsAlternative Business-Corporation,Proprietorship,Partnership,LimitedStructurespartnership,Jointventures,IncometrustsTax Jurisdictions-Federal,Provincial,ForeignR1-4Allcash flow decisions, 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, thetaximpactswhether ornottheultimateresultofthedecisionissuccessful.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, inthe 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 tax structure.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two3CHAPTER 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.Doesthe Canada 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 are15% 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. Her advisor indicates 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 entrepreneur consider 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two4Solutions 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two5after-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, the entrepreneur 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 the tax 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 tax avoidance 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two6Key ConceptQuestionsQUESTION ONETheIncome Tax Actcontains a general anti-avoidance rule(GAAR) in section 245.Considereach of the following situations and determine whether the GAAR will likelyapply.Income taxreference: ITA 245(1),(2),(3),(4); IC 88-2.1.Chris transferred her consulting business to a corporation primarily toobtain 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 itstaxable 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 ITA245(2) apply to disallow the tax benefit?Income tax reference: ITA245(1),(2),(3),(4);IC 88-2.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two7Solutions toKeyConceptQuestionsKC2-1[ITA: 245(2)–GAAR]The GAAR provision inITA245(2) is to be used whenspecific 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 theintended taxadvantage,and4)The transaction 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 thefour situations:•A tax benefit results 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 of gaining 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Two8KC2-2[ITA: 245(2)–GAAR]The GAAR provision inITA245(2) is to be used when specific anti-avoidanceprovisions 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 wasundertaken 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 by CorporationB,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 acorporation byan arm's length person, such a transfer would be a misuse of the 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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three9CHAPTER 3LIABILITY FOR TAX, INCOME DETERMINATION, ANDADMINISTRATION OF THE INCOME TAX SYSTEMReviewQuestions1.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 isincluded in the Canadian tax system.3.How and when does income earned by a corporation affect the tax position ofanindividualwho is ashareholder?4.In describing who is liable for tax in Canada, theIncome Tax Actsimply states, “Anincome tax shall be paid,as requiredby this Act,on the taxable income for each taxationyear of every person resident in Canada at any time in the year.” Accepting that “person”includesbothanindividualandacorporation,brieflydiscussthemeaningandramifications of this statement.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 and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three1011.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, may he or she generate? Describe the circumstances for each possibleclassification.13.What types of income for tax purposes may result when a profit is achieved on the saleof property (e.g., land)?14.Individual A, a Canadian resident, owns and operates a profitable small farm inNorthDakota, 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 aunique brand of apple that was popular with health food fans. Toward the end of the20X0 growing season, Q became seriously ill and put the orchard up for sale. Q’sneighbour agreed to purchase the entire orchard for $250,000. It upset Q to have to sellat that time of year because that year’s crop was of high quality and in three weekswould have been ripe for picking.Whattypesofpropertymighthavebeenincludedinthetotalpurchasepriceof$250,000? For tax purposes, what types of income might have been generated from thesale of the orchard? Explain your answer.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three11Solutions toReviewQuestionsR3-1Of 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,theafter-taxcorporateprofitsmaybedistributedasadividendtotheindividualshareholder. Upon receipt of the dividend the individual shareholder has earned propertyincome (return on 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 may result 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 thetaxable income of residentpersons for each taxation year. By definingeach of therelevant terms in the statement the general scope of the tax system isapparent. It is,therefore,necessary to define the termsperson, resident, taxable income,andtaxation year[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 aquestion of fact determined from the facts of each situation. To establish this relationshipthe courts consider the time spent in Canada, motives for being present or absent, themaintenance of a dwelling place, the origin and background of the individual, the routineof life, and the existence of social and financial connections. If an individual does not havea continuing state 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)].

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three12Taxable 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 fromfive 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 andcorporations determine 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)].Professionalcorporations(acorporationthatcarriesontheprofessional practice of an accountant, dentist, lawyer, medical doctor, veterinarian orchiropractor[ITA 248(1)]) are required to have a fiscal period that coincides with thecalendar year [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 incomewhich has its source inCanada[ITA212].(For example, dividends, rents royalties, certain management fees,andso on.)R3-6Yes. The resident of Canada is taxed on world incomeandthe foreign country, which isthe source of that income, may also impose tax. For example, a Canadian corporationwhich operates a business branch location in a foreign country will be taxable on thebranch profits in both countries. In order to avoid double taxation, the Canadian taxcalculation permits a reduction of Canadian taxes for foreign taxes paid on the sameincome[ITA126(1), (2)].R3-7Netincomefortaxpurposesconsistsofataxpayer’scombinednetincomefromemployment, business, property, capital gains and other sources. The separate sources ofincomearecombinedinaccordancewithanaggregatingformulawhichtakesintoaccount any losses from the above sources. Net income for tax purposes is determinedby the same set 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 formulafor determining 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 anaggregatingformulawhichestablishestheconceptofataxpayer'sincomefortax

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three13purposes in comparison to other concepts of income. The formula defines what types ofincome are subject to tax and how any related losses affect a taxpayer's income. As theformula is restricted to five basic types of income activities, the scope of the tax system isestablished. The formula establishes that, although a taxpayer may carry on severalseparate activities, each separate type of income is not taxed separately but rather formspart of a total concept of income. As a result, with the exception of capital losses, a lossfrom one activity within a specified time period may be offset against the income derivedfrom other activities.In spite of the fact that the formula combines severaltypes of income into a single incomeamount, each type ofincome is determined inaccordance 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 otherhand, can only be deducted against a capital gain and,therefore,its ability to reducetaxes payable is considerably restricted. In addition, only one-half of a capital loss isincluded as part 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 remain unused.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, a gainderived 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 bea capital gain and not property income.R3-11Based on the determination of net income for tax purposes, the statement is not true.Both individuals and corporations determine net income for tax purposes in accordancewith the same aggregating formula. In addition, an individual who earns business incomedetermines that income in accordance with the same set of rules as a corporation thatearns business income.With respectto the conversionofnetincome fortax purposes to taxableincome,individuals are entitled to a capital gainsdeduction whereas a corporation is not. In thiscontext an individual receives preferentialtreatment. In arriving at taxable income, acorporationcanreduceitsnetincomebydividendsreceivedfromotherCanadiancorporations,whereas,individualscannot.However,corporateincomeisultimatelydistributed to shareholders who are individuals and,therefore,this corporate advantage istemporary[ITA110.6, 112(1)].

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three14R3-12Working as alawyer, an individual may earn either employment income or businessincome. 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 the lawyerindependently 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 the purpose of reselling it at a profit. Alternatively, if the land wasacquired, not for resale, but for long term use to generate income or for personalenjoyment, 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.bank account. These amounts are,therefore,taxable in Canada in the year earned. Theincome would also be taxable in the U.S. but Canadian taxes may be reduced by U.S.taxes on that income.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 toCanadian tax. The after-tax profits of the foreign corporation may be distributed toindividual B in the form of dividends at some future time. Such foreign dividends wouldthen be part of B's world 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 the intangibleproperty of 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 becausethetreesare 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 notmature, they represent inventory in process.___________________________________________________________

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three15Key ConceptQuestionsQUESTION ONEDeterminetheCanadianresidencystatusforthecurrentyearforeachofthefollowingtaxpayers.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 Canadapermanently.b)Al spent the current year in Belgium on temporary work assignment. 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 hasworldwide 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: ITA 2(3).QUESTION THREEA Ltd. is resident in Canada for tax purposes. In the current year A Ltd. earned interestincomeof $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).

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three16QUESTION FOURThe Canadian income tax system includes five specific categories of income. Identify theincome category to which each of the following pertains:1.Interest earned on a bond investment.2.Pension income.3.Consulting fees.4.Profit on the sale of shares of a public corporation. The shares were acquired as a long-term investment.5.Wages from employment services.6.Share of profits from a partnership that operates a restaurant.7.Dividends from the shares of a corporation that carries on a retail business.8.Tips from customers of an employer’s business.9.Rents from tenants of a commercial building.10.Fees for providing piano lessons to several students.11.Profit on the sale of land that was used by the owner for farming.12.Profit onthe sale of a summer cottage that was used by the owner for personalenjoyment.13.Profit on the sale of land that was purchased for resale.QUESTION FIVETaxpayer ATaxpayer BTaxpayer CEmployment income$30,000Business income (loss)$(20,000)Property income (loss)$(1,000)Pension income40,000Capital gain (loss)50,000(6,000)Calculate net income for tax purposes for each of the three taxpayers.Income tax reference:ITA 3.QUESTIONSIXMaureen, a resident ofCanada, has the following sources of income and losses for taxpurposesfor the current year.• Employment income$60,000• Business X profit3,000• Business Y loss7,000• Interest income2,000• Taxable capital gain on sale of land18,000•Allowable capital loss on sale of securities20,000• Allowable business investment loss5,000Calculate Maureen’s net income for tax purposes forthe current year in accordancewithSection 3 of theIncome Tax Act.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three12QUESTION SEVENWhat is the filing due date for each of the following income tax returns?Income tax reference:ITA 150(1)(a),(b),(d).(a)A corporation for its year ending November 30, 20X6.(b)An individual for the year 20X6. The individual carried onbusiness in 20X6.(c)An unmarried individual living alone for the year 20X6. The individual did notcarry ona business.(d)An individual for the year 20X6. The individual died on February 21, 20X7.QUESTIONEIGHTFor each of the followingindividuals, determine when their income tax return for the currentyearis due and when any balance of tax owing is due.Income tax reference: ITA 150(1),156.1(4),248(1) balance-due day.a)Bob is a bachelor.He has two sources of income,employment income and interestincome.b)Mary is a self-employed lawyer. Her law practice has a December 31 year end.c)Ron’s only source of income is employment income. Ron is married to Mary.See (b)above.d)Zeta is married to Leo.Their only source of income is pension income. Zeta died onNovember 20th of the current year.e)Sarah died on March 12th of the current year without having filed her tax return fortheprior year.QUESTION NINEWhen is the balance of tax due for each of the following entities?Income tax reference:ITA156.1(4);157(1)(b).a)A public corporation, resident in Canada.b)A Canadian-controlled private corporation, with taxable income less than$500,000, andclaiming the Small Business Deduction.c)An individual who carried onbusiness in the year.d)An individual where no business is carried on by the individual or the spouse.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three13QUESTIONTENFor each of the following corporations, determine when the income tax return for thecurrentyear is due and when any balance of tax owing is due.Income tax reference: ITA150(1),157(1)(b), 248(1) balance-due day.A Ltd. is a public corporation with a May31year end.B Ltd. is a private corporation with an October 31 year end.All of B’s income is taxed atthe highcorporate rate.C Ltd. is a Canadian-controlled private corporation with an October 31 year end. Last year allofC’s income was subject to the low rateof tax from claiming the smallbusiness deduction.D Ltd. is a Canadian-controlled private corporation with a May31year end. Last yearD had taxable income of $550,000. D claimed the small business deduction this year aswell aslast year.QUESTIONELEVENA taxpayer’s tax liability was $1,200for 20X1, $12,000 for 20X2, and is expected to be$36,000for 20X3.Is the taxpayer required to make tax instalments for 20X3and if so,what are the amountsandtheduedatesforeachinstalment?Incometaxreference:ITA156(1),156.1(1),(2),157(1),(1.1),(1.2),(2.1).QUESTIONTWELVEThesendingdate on the notice of reassessment for the taxpayer’s 20X2 tax return wasJuly 10,20X7. Thesendingdate on the original notice of assessment for the taxpayer’s20X2 tax returnwas June 20, 20X3.a)Does the CRA have the right to reassess the 20X2 tax return on July 10, 20X7?Incometax reference: ITA 152(3.1).b)If the taxpayer wishes todispute the reassessment, by what date must the notice ofobjection be filed?Income tax reference: ITA 152(3.1), 165(1).

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three14QUESTION THIRTEENTooblueLtd., a Canadian-controlled private corporation, filed its tax return for its year endedDecember 31, 20X6 on June 30, 20X7. The Notice of Assessment was received August 31,20X7. Thesendingdate on the Notice of Assessment was August 28, 20X7.1)Assuming there were no misrepresentations and that a waiver was not filed, how longdoes the CRA have to issue a reassessment for Tooblue Ltd.’s 20X6 taxation year?Income tax reference: ITA 152(3.1).2)If Tooblue Ltd. wishes to object to the original Notice of Assessment for the 20X6taxation year, by what date must the Notice of Objection be filed?Income tax reference:ITA 165(1).QUESTIONFOURTEENSuccessful Ltd. is a Canadian company with a December 31 year end.The federal incometaxreturn forlast year was filed with the CRA on September 30th of this year.The balanceof taxowing, $10,000, was paid at the bank on September 30th as well.Calculate the late-filing penalty for Successful Ltd.Income tax reference: ITA 162(1).QUESTIONFIFTEENDee Ltd. is a Canadian company carrying on a clothing wholesale business. For the firstquarterof the current year, its financial results were as follows:Revenue:Sales within Canada$500,000Exports30,000Expenses:Inventory purchased50,000Salaries & wages40,000Rent10,000a)Assuming Dee Ltd. is a GST registrant, calculate theGST to be remitted to the CRA forthe first quarter of the year.b)Assuming Dee Ltd. is a HST registrant, calculate theHSTto be remitted to the CRAforthe first quarter of the year.Assume a HST rate of 13%.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three15Solutions toKeyConceptQuestionsKC3-1[ITA: 250(1), (4)–Residence]a)Paula isa part-year resident.She is resident in Canada from January 1 to November 1andnon-resident for the remainder of the year.b)AlisresidentinCanada. Althoughheisoutofthecountryonatemporaryworkassignment for the current year, his residential ties remain in Canada.c)Kimberley is deemed to have been resident in Canada throughout the current taxationyear. Although she is not ordinarily resident in Canada, she sojourned (temporary stay) inCanada for more than 182 days, in total, in the current year [ITA250(1)(a)].d)102864 Limited is resident in Canada. Any companyincorporated in Canada after April 26,1965 is deemed resident in Canada [ITA250(4)(a)].e)Navy Ltd. is a non-resident corporation.KC3-2[ITA: 2(3)–Tax payable by non-residents]A non-resident must report three sources of income on a Canadian tax return:employmentincome earned in Canada, business income from carrying on business in Canada, and gains onthe disposal of taxable Canadian property [ITA2(3)].In this case, Bill must report on aCanadian tax return his $15,000 of employment earned in Canada.KC3-3[ITA: 2(1), 3(a)–World income reported by residents]Since A Ltd. is resident in Canada, income earned anywhere in the world must be reported onits Canadian tax return.Therefore, all $18,000 of interest income earned must be included onthe Canadian corporate income tax return.KC 3-4[Income categories]1.Property income8.Employment income2.Other income9.Property income3.Business income10.Business income4.Capital gain11.Capital gain5.Employment income12.Capital gain6.Business income13.Business income7.Property income

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three16KC3-5[ITA: 3–Net income]TaxpayerATaxpayerBTaxpayerC3(a)Employment Income$30,000Business incomeProperty incomeOther income (pension)$40,000.40,00030,0003(b)Taxable capital gains$25,0000Allowable capital losses(0)(3,000)Excess25,000040,00025,000$30,0003(c)Otherdeductions00040,00025,00030,0003(d)Business loss(20,000)Property loss(1,000)(0)(1,000)(20,000)Net Income$39,000$ 5,000$30,000KC3-6[ITA: 3–Netincome]3(a)Employment income$60,000Business income3,000Property income (interest)2,00065,0003(b)Taxable capital gain$18,000Allowable capital loss(20,000)Excess0065,0003(c)Other deductions065,0003(d)Business loss(7,000)Allowable business investment loss(5,000)(12,000)Net income$53,000

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three17KC3-7[ITA: 150(1)(a), (b), (d)–Filing due dates]The filing due dates are as follows:a)May 31, 20X7 (six months after the year-end of the corporation [ITA 150(1)(a)]). Whenthe corporation’s tax year ends on the last day of a month, the tax return is due by thelast day of thesixth month after the end of the tax year.b)June 15, 20X7 [ITA 150(1)(d)(ii)]c)April 30, 20X7 [ITA 150(1)(d)(i)]d)August 21, 20X7 (later of six months after deathand the normal filing due date[ITA 150(1)(b)]KC3-8[ITA: 150(1), 156.1(4), 248(1)–filing deadline and balance-due day for individuals]a)Bob’s tax return is due April 30thof the following year [ITA150(1)(d)(i)].The balance of taxowing, if any, is due on the same day [ITA156.1(4), 248(1)].b)Mary’s tax return is due June 15thof the following year [ITA150(1)(d)(ii)]. The balance of taxowing, if any, is due on April 30thof the following year [ITA156.1(4), 248(1)].c)Ron’s tax return is due June 15thof the following year [ITA150(1)(d)(ii)]. The balance of taxowing, ifany, is due on April 30thof the following year [ITA156.1(4), 248(1)].d)Zeta’s tax return is due May 20thof the following year, being the later of April 30thof thefollowing year and 6 months after the date of death [ITA150(1)(b)].The balance of taxowing, if any, is due on the same day [ITA156.1(4), 248(1)].e)Sarah’s tax return for thecurrent year (the year of death) is due April 30thor June 15thof thefollowing year being the later of the date the return isnormallydue and 6 months after thedate of death.The balance of tax owing, if any, is due onApril 30thof the following year.[ITA156.1(4), 248(1)].Also note that Sarah’s tax return for theprior year is due September 12thbeing the later ofthe date the tax return would normally be dueand 6 months after the dateof death [ITA150(1)(b)].The balance of tax owing, if any, is due onSeptember 12thas well[ITA156.1(4), 248(1)].KC3-9[ITA: 156.1(4); 157(1)(b); 248–Balance-due day]The balance of tax is due as follows:a)Two months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA 248]b)Three months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA 248]c)April 30thof the following year [ITA 156.1(4), “balance-due day” ITA 248]d)April 30thof the following year [ITA 156.1(4), “balance-due day” ITA 248]

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three18KC3-10[ITA: 150(1), 157(1)(b), 248(1)–filing deadline and balance-due day for corporations]•A Ltd.’s tax return is due November 30th(6 months after the year end) [ITA150(1)]. Thebalance of tax owing, if any, is due July31st(2 month after the year end) [ITA157(1)(b),248].•B Ltd.’s tax return is due April 30thof the following year (6 months after the year end) [ITA150(1)].The balance of tax owing, if any, is due December 31st (2 month after the yearend) [ITA157(1)(b), 248].•C Ltd.’s tax return is due April 30thof the following year (6 months after the year end) [ITA150(1)]. The balance of tax owing, if any, is due January 31stof the following year (3 monthafter the year end) since C Ltd. is a CCPC whose taxable income in the previous year didnot exceed the business limit and the small business deduction was claimed [ITA157(1)(b),248].•D Ltd.’s tax return is due November 30th(6 months after the year end) [ITA150(1)]. Thebalance of tax owing, if any, is due July 31st(2 month after the year end). Although D Ltd. isa CCPC claiming the small business deduction, it does not qualify for the one monthextension since its taxable income in the preceding year exceeded the business limit [ITA157(1)(b), 248].KC3-11[ITA: 156(1), 156.1(1), (2), 157(1), (2.1)–instalments for individuals and corporations]If the taxpayer is anindividual, instalments are required for20X3 since the tax liability for 20X3is expected to exceed $3,000and the tax liability for 20X2 exceeded $3,000[ITA 156.1(1)].Theinstalments are due the 15thday of March, June, September, and December.The amountpayable for each instalment is calculated using one of the following three methods[ITA 156(1)]:1)$9,000; ¼ x estimated tax payable for 20X3 (1/4 x $36,000)2)$3,000; ¼ x tax payable for 20X2 (1/4 x $12,000)3)$300for the March and June instalments; ¼ x tax payable for 20X1 (1/4 x $1,200); and$5,700for the September and December instalments; ½ ($12,000-$600).The CRA uses method (3) in their instalment notices.Since method (3) results in the taxpayerpaying the least amount of tax in March and June, the taxpayer will probably choosethismethod.If the taxpayer is acorporation, instalments are required for 20X3 since the tax liability for20X2 and the estimated tax liability for 20X3 exceed $3,000[ITA 157(2.1)].

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three19The instalments aregenerallydue at the end of each month. Theamount payable for eachinstalment is calculated using one of the following three methods[ITA 157(1)]:1)$3,000; 1/12 x estimated tax payable for 20X3 (1/12 x $36,000)2)$1,000; 1/12 x tax payable for 20X2 (1/12 x $12,000)3)$100for the first two instalments; 1/12 x tax payable for 20X1 (1/12 x $1200); and$1,180for the remaining ten instalments; 1/10 x ($12,000-$200).If the taxpayer is asmall-CCPCthen quarterly taxinstalmentsare permitted. The quarterlyinstalments are due the last day of each quarter and are calculatedusing one of the followingthree methods[ITA 157(1.1)]:1)$9,000; ¼ x estimated tax payable for 20X3 (1/4 x $36,000)2)$3,000; ¼ x tax payable for 20X2 (1/4 x $12,000)3)$300for the March instalment; ¼ x tax payable for 20X1 (1/4 x $1,200); and $3,900forthe June, September and December instalments; 1/3 x ($12,000-$300).A small-CCP has the following characteristics[ITA 157(1.2)]:•Taxable income for the current or preceding year does not exceed $500,000,•Taxable capital for thecurrent or preceding year does not exceed $10 million,•Claims the small business deduction in the current or preceding year,and•Has a perfect compliance record for the past 12 months with respect to tax paymentsand filing of returns.KC3-12[ITA: 152(3.1), 165(1)–Normal reassessment period and notice of objection]a)Individuals, trusts, and CCPCs can be reassessed within three years of the date the originalassessment was mailed. For other corporations, the time limit is extended to four years.Since the date ofsendingof the notice of assessment was June 20th, 20X3, the normalreassessment period expired prior to July 10th, 20X7 for all taxpayers. However, a tax returncan be reassessed at any time if the taxpayer has made a misrepresentation that isattributable to neglect, carelessness, orwillfuldefault or has committed any fraud in filing thereturn or supplying information.b)The notice of objection must be filed by October 8, 20X7. If the taxpayer is an individual, thenotice of objection must be filed by the later of April 30, 20X4, being one year after the taxreturn filing date for the 20X2 year; and October 8, 20X7, being 90 days after the date thereassessment was mailed.For all other taxpayers the notice of objection must be filed by90 days after the date the reassessment was mailed.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three20KC 3-13[ITA: 152(3.1)(b); 165(1)(b)–Normal reassessment period; Notice of objection]1)The CRA has until August 28, 20X10, being threeyears from the date ofsendingoftheNotice ofassessment (August 28, 20X7) to issue a reassessment [ITA 152(3.1)(b)].2)If TooblueLtd. wishes to object to the Notice of assessment, the Notice of objection mustbe filed by November 26, 20X7, being 90 days after thesendingdate on the Notice ofassessment [ITA 165(1)(b)].KC3-14[ITA: 162(1)–Late filing penalty]The late filing penalty is $800, being $10,000 x 8% (5% + 1% x 3 months).The tax return wasfiled threecompletemonths late.The penalty is5%of the unpaid tax that is due on the filingdeadline,plus 1%of this unpaid tax for eachcompletemonth that the return is late, up to amaximum of12months.KC3-15(a)[GST remittance]Sales within Canada $500,000 x 5%$25,000Inventory purchased$50,000Rent10,000$60,000x 5%(3,000)GST remittance$22,000(b)[HSTremittance]Sales within Canada $500,000 x13%$65,000Inventory purchased$50,000Rent10,000$60,000x13%(7,800)HSTremittance$57,200

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three21ProblemsPROBLEM ONEJohn Day and Carol Knight conduct similarfinancial activities. Each is employed and has aportfolio of investments, and during the current year, each started a separate small business.Their financial results for the year ended December 31, 20X1, are identical, as follows:Employment income$40,000Interest income from investment portfolio15,000Loss from new small business operation(20,000)TheonlydifferencebetweenDayandKnightisthatDayoperatedhisbusinessasaproprietorship, whereas Knight operated her business from awholly owned corporation.Required:1.Assuming that individual tax rates are 40%, compare the tax liability of Day with that ofKnight for 20X1.2.How and when may Knight utilize her business loss to reduce her tax liability?3.What impact maythe difference in tax treatment have on Day’s and Knight’s wealthaccumulation and on their long-term returns on investment?

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three22Solutionto P 3-11.Tax liability of Day:Employment Income$40,000Property Income15,000$55,000Less business loss(20,000)$35,000Tax @ 40%$14,000Tax liability of Night:Employment Income$40,000Property Income15,000$55,000Tax @ 40%$22,0002.Knight's business lossbelongs exclusively to the corporation as a separate taxable entity.The loss in the corporation is preserved and can be offset against future profits of thebusiness, if they occurwithin 20 years[ITA111(1)(a)].Alternatively, Knight maydispose of the shares of the corporation at a reduced value andmayrecognizeacapitallossofwhichonly one-halfisavailablefortaxpurposes.Assuming the corporation is a small business corporation, the loss is an allowablebusiness investment loss which can be offset against other sources of income, butnotuntilthe year in which the shares are disposed.Therefore, both the timing and amount ofloss which can be used to reduce income are affected[ITA38, 39(1)(c)].3.Impact on return on investment:because Day's tax liability is $8,000 less in year 20X1,Day has a greater cash flow which can be used for reinvestment. This increased cashflow may provide a greater long-term return on investment than can be achieved byKnight (who may reduce taxes from the loss at some future time). In addition, if Knightrecognizes the loss from a sale of shares, a lesser amount of tax savings will be receivedas only one-half of the loss is deductible.Because Day has higher cash flow than Knight in the first year, Day can use this cashflow to fund the loss of the business thereby reducing the risk of a complete businessfailure. Consequently, Day may achieve greater and more immediate success from thebusiness. In other words, the increased cash flow may reduce the risk of business failure.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three23PROBLEM TWO[ITA: 2(1); 2(3); 3(a); 114; 115(1)(a)(ii); 212(1)(b);250(1)(a); 250(4)]To what extent, if any, are the following individuals or corporations liable for tax in Canada?1.An individual who lives and works in Canada received an inheritance from an uncle inFrance. The inheritance consists of shares, bonds, and French real estate. During theyear, the investments generated interest, dividends, and rents, which were retained inFrance and reinvested.2.A large corporation based in Alabama operates a branch in Winnipeg that employsCanadian staff, holds a supply of inventory, and sells to the Canadian market.3.An American citizen who normally resides in New York and has extensive Americanincome, for health reasons takes an extended vacation of six-and-a-half months in Banff,Alberta in the current calendar year.4.A Manitoba corporation is controlled and managed by its British parent corporation.5.A Canadian individual, who is a student at the University of Saskatchewan, earnsincome during the summer by operating a street-vending unit in Boulder, Colorado.6.An individual has been employed in Canada by a large Canadian corporation. Heaccepts a transfer to manage, on a permanent basis, the corporation’s operations inDenver, Colorado. He leaves Canada with his family on March 31, 20X0.7.AnindividualwhoresidesinEnglandreceivesannualdividendincomefromaninvestment in aCanadian corporation.

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three24Solutionto P3-21.The individual is a resident of Canada and taxed on world income. Therefore, the interest,rents and dividends are taxable in Canada [ITA 3(a)].2.The Alabama corporationis not a resident of Canada. However, as a non-resident itcarries on business in Canada from a branch location in Winnipeg. It is,therefore,liablefor Canadian tax on the branch profits only [ITA 2(3), 115(1)(a)(ii)].3.Even though the individual does not have a continuing state of relationship with Canada,he/she is deemed to be a Canadian resident throughout the current year because ofhis/her presence in Canadafor183 days or more (6 1/2 months) and is,therefore,taxablein Canada on world income which includes the U.S. income [ITA 2(1), 250(1)(a)].4.The Manitoba corporation is a resident of Canada because it is incorporated in Canada. Itis taxable in Canada on its world income [ITA 2(1), 3(a), 250(4)].5.The student has a continuing relationship with Canada, is a resident and taxable on worldincome including the summer business income from the U.S. [ITA 2(1), 3(a)].6.The individual ceases to be a Canadian resident on March 31, 20X0 and is taxable onworld income in Canada only up to March 31, 20X0 [ITA 2(1), 114].7.The individual is not a resident of Canada.Therefore, theCanadian dividend incomeisNOT reported on a Canadian tax return.The Canadian corporation paying the dividend isrequired to withhold tax and remit the tax withheld to the Canadian government. The ratefor the withholding tax specified by the Income Tax Act is 25%[ITA 212(2)].

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Buckwold and Kitunen, Canadian Income Taxation,2016-2017Ed.Solutions Manual Chapter Three25PROBLEM THREE[Min Shan Shih v the Queen2000 DTC 2072–Residence]Read the Tax Court of Canada caseMin Shan Shih v the Queen2000 DTC 2072 and explain inyour own words the reason for the decision in the case.Solutionto P3-3The taxpayer was found not resident in Canada for the years in question because when allofthe facts were considered, the taxpayer never became a resident of Canada.His normalroutine of daily living remained in Taiwan (i.e., his work, parents, social ties, etc.).Thetaxpayer’s wife and children became resident in Canada so that the children could be educatedin Canada.Facts supporting the position that the taxpayer was resident in Canada throughout the years inquestion, 1997, 1998, and 1999:•Taxpayer owned a house in Canada, readily available to him at all times,•Taxpayer’s wife and children lived in Canada in the family home throughout the years inquestion,•Taxpayer filed a Canadian tax return for each of the years,•Taxpayer gave the family home in Canada as his address on his tax returns,•Taxpayer had applied for permanent residence status in Canada for himself and hisfamily,•In 1996 the taxpayer and his family were admitted to Canada as landed immigrants,•Taxpayer maintained a bank account in Canada jointly with his wife,•Taxpayer owned a car in Canada,•Taxpayer obtained an Ontario driver’s license and an Ontario health card,•Taxpayer was the sole shareholder of a Canadian corporation,•In 2000 the taxpayer’s wife and children became citizens of Canada, and•The family home in Taiwan was sold prior to coming to Canada.Facts supporting the position that the taxpayer was not resident in Canada throughout the yearsin question:•Taxpayer was employed in Taiwan throughout the years in question,•Taxpayer maintained an apartment in Taiwan,•Taxpayer’s pay (employment income) wasdeposited into his Taiwanese bank account,•Taxpayer had a Taiwanese driver’s license and pharmacist’s license,•All of the taxpayer’s club, church and professional association memberships were inTaiwan,•Taxpayer visited Canada only twelve times during the span 1996–1999,•Taxpayer spent a great deal more time in Taiwan than in Canada,

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