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

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Chapter 01 - Taxation-Its Role in Decision Making
1-1
Chapter 01
Taxation-Its Role in Decision Making
Multiple Choice Questions
1. Which of the following is not considered to be a separate entity for tax purposes in
Canada?
A. An individual
B. A proprietorship
C. A corporation
D. A trust
Accessibility: Keyboard Navigation
Blooms: Remember
Topic: 01-04 Fundamental Income Tax Structure and Its Complexity
2. Which of the following attitudes and actions will help decision-makers develop an efficient
approach to taxation?
A. Cash flows should be considered from a before-tax perspective when making decisions.
B. Functional managers should not be held responsible for the tax effects of decisions within
their divisions.
C. Tax costs to a business should be regarded as controllable expenses, much like product
costs and selling costs.
D. All managers should own a copy of the Income Tax Act.
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Blooms: Understand
Topic: 01-02 Taxation - A Controllable Cost

Chapter 01 - Taxation-Its Role in Decision Making
1-2
3. Which of the following statements is true?
A. Dividends paid by a corporation are deductible by that corporation and are a form of
property income for the recipient.
B. Dividends paid by a corporation are deductible by that corporation and are a form of
business income for the recipient.
C. Dividends paid by a corporation are not deductible by that corporation and are a form of
business income for the recipient.
D. Dividends paid by a corporation are not deductible by that corporation and are a form of
property income for the recipient.
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Blooms: Remember
Topic: 01-04 Fundamental Income Tax Structure and Its Complexity
4. When assessing the value of a corporation, the most relevant information that decision-
makers normally consider is
A. the potential for before-tax profits.
B. the potential for after-tax profits.
C. the current corporate tax rate.
D. cash flow before-tax.
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Blooms: Understand
Topic: 01-03 Cash Flow after Tax
5. Income tax is calculated for which of the following jurisdictional groups?
A. Municipal, provincial, and federal
B. Municipal, federal, and international
C. Provincial, federal, and international
D. Municipal, provincial, and international
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Blooms: Understand
Topic: 01-04 Fundamental Income Tax Structure and Its Complexity

Chapter 01 - Taxation-Its Role in Decision Making
1-3
6. Two investor corporations may not enter jointly into which of the following?
A. Joint venture
B. Partnership
C. Separate corporation
D. Proprietorship
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Blooms: Remember
Topic: 01-04 Fundamental Income Tax Structure and Its Complexity
7. Which of the following statements is false?
A. Cash flow should be calculated on an after-tax basis.
B. The tax cost to a business should not be regarded as a cost of doing business.
C. Income tax should be considered a controllable cost.
D. The value of an enterprise should not be based on pre-tax cash flow.
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Blooms: Remember
Blooms: Understand
Topic: 01-02 Taxation - A Controllable Cost
Topic: 01-03 Cash Flow after Tax
Short Answer Questions
8. The text book lists four fundamental tax variables which a manager needs to consider when
making business decisions. These variables are: 1) primary types of income; 2) entities
subject to taxation on income; 3) alternative forms of business and investing structures used
by taxable entities structure; and 4) tax jurisdictions. List the relevant variables within these
four categories.
Income: Business, Property, Employment, Capital Gains
Entities: Individuals, Corporations, Trusts
Forms of business: Proprietorship, Corporation, Partnership, Limited Partnership, Joint
Venture, Income Trusts
Tax Jurisdictions: Provincial, Federal, Foreign
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Blooms: Remember
Topic: 01-04 Fundamental Income Tax Structure and Its Complexity

Chapter 01 - Taxation-Its Role in Decision Making
1-4
9. ABC Corporation is in a 25% income tax bracket. John Adams is an employee at ABC and
is in a 40% tax bracket. The company has offered John a 10% pay raise. His current salary is
$50,000.
Required:
A) Calculate the after-tax cost of the raise to the corporation.
B) Calculate the after-tax value of the raise for John.
Show all calculations.
A) After-tax cost to ABC: ($50,000  10%)  (1 - .25) = $3,750
B) After-tax value for John: ($50,000  10%)  (1 - .4) = $3,000
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Blooms: Apply
Blooms: Understand
Topic: 01-03 Cash Flow after Tax
10. Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''.
Just as decision makers in business must control costs such as product, occupancy, selling,
and many others, so should tax costs be regarded as controllable. The actions and activities of
the organization must be analyzed at all levels, and across departments, to determine the
impact on the overall tax cost.
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Blooms: Understand
Topic: 01-02 Taxation - A Controllable Cost

Chapter 02 - Fundamentals of Tax Planning
2-1
Chapter 02
Fundamentals of Tax Planning
Multiple Choice Questions
1. The CEO at Big Company Corporation has decided to sell a piece of capital equipment
after the company's year-end in order to avoid paying capital gains tax this year. Which tax
planning method will the CEO be using?
A. Transferring income to another entity.
B. Converting the nature of income from one type to another.
C. Shifting income from one time period to another.
D. This is a form of tax evasion and is not allowed.
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Blooms: Understand
Topic: 02-05 Types of Tax Planning
Topic: 02-06 Shifting Income from One Time Period to Another
Topic: 02-07 Transferring Income to Another Entity
Topic: 02-08 Converting Income from One Type to Another
2. Which of the following scenarios illustrates a potential tax avoidance scheme?
A. Property transferred between arm's-length parties is valued at fair market value.
B. Dividends received from shares transferred from a wife to her husband are taxed in the
hands of the wife.
C. A shareholder owns two corporations and undertakes legal steps in order to permit loss
utilization between the two companies.
D. A man transfers property to his child at a value less than fair market value.
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Blooms: Understand
Topic: 02-04 Tax Avoidance

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Chapter 02 - Fundamentals of Tax Planning
2-2
3. The controller of Little Company Ltd. has decided to sell a piece of capital equipment after
the company's year-end in order to avoid paying tax on capital gains this year. The controller
is engaging in
A. tax avoidance.
B. tax evasion.
C. tax planning.
D. GAAR.
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Blooms: Remember
Topic: 02-02 Tax Planning Defined
4. Certain skills are necessary for successful tax planning. One of these skills is applying the
time value of money. Which of the following is FALSE regarding this skill?
A. Applying the time value of money is a tool used for wealth accumulation.
B. If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after-tax income on the
investment at the end of the first year, the taxpayer's tax rate is 40%.
C. If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annual
after-tax return is 4.8%.
D. If a taxpayer invests $1,000 for one year at a rate of return of 14% and is subject to a 45%
tax rate, the after-tax value of the investment will be $1,077.
(12%  [1 - .4]) = 7.2% after-tax return.
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Blooms: Apply
Blooms: Understand
Topic: 02-08 Converting Income from One Type to Another

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Chapter 02 - Fundamentals of Tax Planning
2-3
5. Which of the following statements regarding GAAR is true?
A. The purpose of GAAR is to catch tax evaders.
B. When an avoidance transaction takes place, the anti-avoidance rule is automatically
applied in all circumstances.
C. Canada Revenue Agency states that "A transaction will not be an avoidance transaction if
the taxpayer establishes that it is undertaken primarily for bona fide business, investment or
family purposes."
D. Individuals who organize their affairs in order to pay as little tax as possible will
automatically be subject to GAAR.
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Blooms: Understand
Topic: 02-11 Specific Anti-Avoidance Rules
Short Answer Questions
6. Steven James earned $150,000 this year in profits from his proprietorship. The rate of tax
for Canadian-controlled private corporations in his province is 13% on the first $500,000 of
income. Personal tax rates (federal plus provincial) in James' province are:
On the first $47,000 24%
On the next $47,000 32%
On the next $51,000 40%
On the next $61,000 45%
On income over $206,000 50%

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Chapter 02 - Fundamentals of Tax Planning
2-4
(All rates are assumed for this question.)
Steven withdraws $3,000 per month for his personal living expenses. All remaining profits are
used to pay taxes and to expand the business. Steven expects the same business after-tax
profits next year.
Steven is considering incorporating his business next year. If he incorporates, he will pay
himself a gross salary of $48,000.
Required:
A. Determine the increase in Steven's cash flow if he incorporates his company? Show all
calculations.
B. Name the type of tax planning that Steve would be engaging in if he incorporated his
company.
A) Excess cash as a proprietorship:
Pre-tax Profits $150,000
Tax:
24% 47,000 $11,280
32% 47,000 15,040
40% 51,000 20,400
45% 5,000 2,250
(Assume federal plus provincial rates)
(48,970)
After-tax profits $101,030
Living expenses withdrawn (36,000)
Available for expansion $65,030
Excess cash as a corporation:

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Chapter 02 - Fundamentals of Tax Planning
2-5
Profits before salary $150,000
Salary (48,000)
Corporate pre-tax profits 102,000
Tax: 13% × 102,000 (13,260)
After-tax profits (Available for expansion) $88,740
Excess cash available for expansion ($88,740 - $65,0303) $23,710
B) Transferring income from one entity to another (individual to corporation)
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Blooms: Apply
Blooms: Understand
Topic: 02-02 Tax Planning Defined
Topic: 02-07 Transferring Income to Another Entity

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Chapter 02 - Fundamentals of Tax Planning
2-6
7. Part A: List the three key factors of cash flow.
Part B: List the six skills required for tax planning as suggested in the textbook.
Part A:
Three key factors of cash flow
1. Amount of money coming in
2. Amount of money going out
3. Timing
Part B:
Six skills required for tax planning
1. Anticipation
2. Flexibility
3. Speculation
4. Applying the 8th Wonder of the World
5. Perspective
6. Global approach
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Blooms: Remember
Topic: 02-08 Converting Income from One Type to Another
Topic: 02-12 The General Anti-Avoidance Rule - GAAR
8. Andrew has $10,000 to invest. He wants to put his money in a one-year investment earning
an annual interest rate of 12%. Andrew is in a 42% tax bracket.
Required:
a) Calculate the total value of Andrew's investment, after-tax, at the end of the year.
b) Calculate the amount of taxes Andrew will have to pay on his investment.
a) $10,000 + ( ($10,000  12)  (1 - .42)) = $10,696
b) $10,000  .12  .42 = $504
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Blooms: Apply
Topic: 02-08 Converting Income from One Type to Another

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Chapter 02 - Fundamentals of Tax Planning
2-7
9. Match each of the following terms with the most accurate example. Use each example only
once.
TERMS:
Tax evasion
Tax planning
Tax avoidance
EXAMPLES:
A. An individual is seeking a beneficial outcome, and therefore, applies an application that is
not specifically prohibited by law.
B. A business is seeking a beneficial outcome, and therefore, does not report a portion of
revenue earned during the year.
C. Two unrelated companies take steps to become related in order to shift income from the
profitable business to the company with losses.
An individual is seeking a beneficial outcome, and therefore, applies an application that is not
specifically prohibited by law. Tax planning
A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue
earned during the year. Tax evasion
Two unrelated companies take steps to become related in order to shift income from the
profitable business to the company with losses. Tax avoidance
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Blooms: Understand
Topic: 02-03 Tax Evasion
Topic: 02-04 Tax Avoidance
Topic: 02-05 Types of Tax Planning

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Chapter 02 - Fundamentals of Tax Planning
2-8
10. For each of the three examples listed below (1-3), identify the category of tax planning
(A-C) that has been applied.
1. Jack has run a successful proprietorship for the past four years, and has now decided to
incorporate his company.
2. Karen has decided not to pay herself a dividend from her corporation, (of which she is the
sole shareholder), but has chosen to sell a portion of her shares to an associate instead.
3. XYZ Corporation has chosen to delay the recognition of a discretionary reserve until the
following year.
A. Shifting income from one time period to another
B. Shifting income from one entity to another
C. Shifting income from one type of income to another.
1. B. Shifting income from one entity to another
2. C. Shifting income from one type of income to another
3. A. Shifting income from one time period to another
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Blooms: Understand
Topic: 02-05 Types of Tax Planning
Topic: 02-06 Shifting Income from One Time Period to Another
Topic: 02-07 Transferring Income to Another Entity
Topic: 02-08 Converting Income from One Type to Another

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Chapter 03 - Liability for Tax, Income Determination, and Administration of the Income Tax System
3-1
Chapter 03
Liability for Tax, Income Determination, and Administration of the Income
Tax System
Multiple Choice Questions
1. Joe is a Canadian citizen. In March of 20x1, Joe was transferred to the United States by his
employer. His wife and child moved with him at that time. Joe chose not to sell his house, and
instead, lends it to his extended family during the winter months when they visit Canada from
overseas. Joe has five weeks of vacation each summer, at which time he and his wife and
child return to Canada and stay in their house. Joe did not cancel his country club membership
so that he could golf with his friends on his vacations. He did close his bank accounts,
however. Which of the following statements is true?
A. Joe is a Canadian citizen, and will therefore, automatically be considered a Canadian
resident for tax purposes.
B. Joe no longer resides in Canada, and will therefore, automatically be considered a non-
resident of Canada.
C. Joe is considered a part-time resident of Canada for the five weeks he vacations in the
country.
D. Joe might be considered to have a continuing state of relationship with Canada.
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Blooms: Remember
Topic: 03-07 Resident Individuals and Corporations

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Chapter 03 - Liability for Tax, Income Determination, and Administration of the Income Tax System
3-2
2. Of the following individuals, which would not be considered a full-time or deemed resident
of Canada for the entire 20x1 taxation year?
A. John lived in Canada all of his life prior to moving to Germany in 20x1, where he was
assigned to a seven-month assignment to set up the international operations for his Canadian
employer. He did not sell his home on Vancouver Island, as his wife and children remained in
Canada for work and schooling reasons.
B. Marie is a Swiss citizen who lived in Canada from February to October of 20x1. While in
Canada, she joined the local fitness club, gained part-time employment, and opened an
account in a Canadian bank.
C. Prasham is a citizen of India, where he lived his entire life prior to moving to Canada on
April 30th, 20x1. Upon arriving in Canada, he began full-time work and purchased a home.
D. June moved to Canada three years ago from the United States, and has maintained her
American citizenship.
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Blooms: Remember
Blooms: Understand
Topic: 03-07 Resident Individuals and Corporations
3. Section 3(a) of the Income Tax Act includes which of the following?
A. Income from: employment, property, and capital transactions.
B. Income from: employment, property, business, and capital transactions.
C. Income from: business, other items, and capital transactions.
D. Income from: employment, property, business, and other items.
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Blooms: Remember
Topic: 03-13 Net Income for Tax Purposes--The Aggregating Formula
4. Which of the following type of payment is NOT subject to Canadian withholding tax when
paid to a non-resident?
A. Dividends
B. Interest paid to an arm's length party
C. Pension benefits
D. Registered retirement income fund payments
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Blooms: Remember
Topic: 03-08 Non-Resident Individuals and Corporations

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Chapter 03 - Liability for Tax, Income Determination, and Administration of the Income Tax System
3-3
5. Regarding taxation years, which of the following statements is TRUE?
A. Corporate taxpayers must use the calendar year as their taxation year.
B. The taxation year for an individual taxpayer ends on April 30th.
C. Individual taxpayers may choose any twelve month period as their taxation year.
D. A corporation may have a taxation year less than twelve months during a year the
corporation is formed, dissolved, or is granted a change in its year end.
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Blooms: Remember
Topic: 03-15 Administration of the Income Tax System
Short Answer Questions
6. Your neighbor, Mrs. White, has heard that you are studying personal tax. She has come to
you with her financial information for 20xx. In 20xx, Mrs. White had employment income of
$40,000, property income of $3,000, a business loss of $22,000, an allowable business
investment loss of $5,000, income from an RRSP withdrawal of $2,000, and a capital loss of
$40,000 on the sale of shares in a public corporation.
Mrs. White hopes that her losses will result in a net income for tax purposes of $0.
Required:
A) Determine Mrs. White's net income for tax purposes in accordance with Section 3 of the
Income Tax Act.
B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a tax
liability this year, assuming that her taxable income will be equal to her net income for tax
purposes.
C) How would your answer change in Part A if Mrs. White realized a taxable capital gain of
$30,000 in 20xx?
A)

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