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

Name: Canadian Income Taxation : Planning And Decision Making, 2013-2014 Edition Test Bank
Brand: Academic Documents Platform
Price: 15 USD
Availability: InStock
Author: David Miller

Maximize your score with Canadian Income Taxation : Planning And Decision Making, 2013-2014 Edition Test Bank, offering structured content, solved examples, and test-taking tips.

David Miller

Contributor

4.5

4 months ago

Preview (16 of 175)

Canadian Income Taxation: Planning and Decision Making- 2013-2014 Edition
Chapter One
Multiple Choice
1. Which of the following entities is not taxed directly on its income?
A) Individuals
B) Proprietorships
C) Corporations
D) Trusts
Ans: B
Difficulty: Knowledge recall
Page Ref: 5
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.
Ans: C
Difficulty: Comprehension
Page Ref: 3
3. Which of the following statements is true?
A) Payment of the return on equity is deductible by the corporation and is a form of property
income for the individual.
B) Payment of the return on equity is deductible by the corporation and is a form of business
income for the individual.
C) Payment of the return on equity is not deductible by the corporation and is a form of business
income for the individual.
D) Payment of the return on equity is not deductible by the corporation and is a form of property
income for the individual.
Ans: D
Difficulty: Knowledge
Page Ref: 5
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 rate of corporate tax.
D) cash flow before-tax.
Ans: B
Difficulty: Comprehension
Page Ref: 4
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
Ans: C
Difficulty: Comprehension
Page Ref: 5
6. Two investor corporations may not enter jointly into which of the following?
A) Joint venture
B) Partnership
C) Separate corporation
D) Proprietorship
Ans: D
Difficulty: Knowledge
Page Ref: 5
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.
Ans: B
Difficulty: Knowledge and Comprehension
Page Ref: 2
Problems
8. The text book lists four fundamental tax variables that 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.

Ans:
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
Difficulty: Knowledge
Page Ref: 5
9. ABC Corporation is in a 25% income tax bracket. John Adams is an employee at ABC. He
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 actual cost (after-tax) of the raise to the corporation.
B) Calculate the actual value (after-tax) of the raise for John.
Show all calculations.
Ans:
A) Actual cost to ABC: ($50,000 x 10%) x (1 - .25) = $3,750
B) Actual value for John: ($50,000 x 10%) x (1 - .4) = $3,000
Difficulty: Application, Comprehension
Page: 4
10. Explain what is meant by the principle that tax should be treated as a ‘controllable cost’.
Ans:
Just as decision makers in business must control costs such as product, occupancy, selling, 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.
Difficulty: Comprehension
Page Ref: 2

Canadian Income Taxation: Planning and Decision Making- 2013-2014 Edition
Chapter Two
Multiple Choice
1. The manager 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 has the manager used?
A) Transferring income to another entity.
B) Converting the nature of income from one type to another.
C) Shifting income from one time period to another.
D) This is a form of tax evasion and is not allowed.
Ans: C
Difficulty: Comprehension
Page Ref: 10
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.
Ans: D
Difficulty: Comprehension
Page Ref: 19
3. The manager 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 manager is
engaging in
A) tax evasion.
B) tax planning.
C) GAAR.
D) a Section 18 restriction.
Ans: B
Difficulty: Knowledge
Page Ref: 8
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 compounded after-tax value of the investment will be $1,077.
Ans: C (12% x [1-.4]) = 7.2% after-tax return
Difficulty: Comprehension, Application
Page Ref: 17
5. Which of the following statements regarding GAAR is false?
A) When an avoidance transaction takes place, the anti-avoidance rule is automatically applied.
B) A transaction is not seen as an avoidance transaction if it is undertaken primarily for bona-
fide business purposes.
C) A transaction is not seen as an avoidance transaction if it is undertaken primarily for
investment purposes.
D) A transaction is not seen as an avoidance transaction if it is undertaken primarily for family
purposes.
Ans: A
Difficulty: Comprehension
Page Ref: 20
Problems
6. Steven James earned $150,000 this year in profits from his proprietorship, which placed him
in a 45% tax bracket. The rate of tax for Canadian-controlled private corporations in his
province is 15% on the first $500,000 of income. Personal tax rates (federal plus provincial) in
James’ province are:
On the first $43,000 24%
On the next $44,000 32%
On the next $48,000 40%
On income over $135,000 45%
(All rates are assumed for this question.)
Steven requires $3,000 of after-tax withdrawals per month for his personal living expenses. All
remaining profits are used to pay taxes and to expand the business. Steve expects the same
profits before living expenses next year.
Steven is considering incorporating his business next year. If he incorporates, he will pay
himself a gross salary of $48,000.
Required:

Loading page 6...

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.
Ans:
A)
Excess cash as a proprietorship:
Profits $150,000
Tax: 24% x 43,000 $10,320
32% x 44,000 14,080
40% x 48,000 19,200
45% x 15,000 6,750
(Assumed federal plus provincial rates)
(50,350)
$ 99,650
Living expenses (36,000)
Available for expansion $ 63,650
Excess cash as a corporation:
Profits $150,000
Salary (48,000)
Corporate business profits 102,000
Tax: 15% x 100,424 (15,300)
Available for expansion $86,700
Excess cash ($86,700 - $63,650) $23,050
B) Transferring income to another entity
Difficulty: Application/Comprehension
Page Ref: 13-14
7. List the three key factors of cash flow and three factors that require speculation for decision
making in tax planning.
Ans:
Three key factors of cash flow
1. Amount of money coming in
2. Amount of money going out
3. Timing

Loading page 7...

Three factors requiring speculation
(Several examples are provided here, and students may list other relevant factors, also.)
1. Appropriate discount rate
2. Future tax rates
3. Available cash on hand
4. Predicted rates of growth
5. Future environmental conditions
6. Future business plans
Difficulty: Knowledge
Page Ref: 17-19
8. Andrew has $10,000 to invest. He can put his money into an investment earning an annual
rate of 12% interest, which is paid at the end of the year. His annual tax rate is 42%.
Required:
a) Calculate the value of Andrew’s investment, after-tax, at the end of the year.
b) Calculate the amount of taxes Andrew will have to pay on his investment.
Ans:
a) ($10,000 x .12) x (1-.42) = $696 $696 + $10,000 = $10,696
b) $10,000 x .12 x .42 = $504
Difficulty: Application
Page Ref: 18
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.
Ans:
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

Loading page 8...

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
Difficulty: Comprehension
Page Ref: 8-10
10. For each of the examples listed below, state which of the three categories of tax planning
(shifting income from one time period to another; shifting income from one entity to another;
shifting income from one type of income to another) has been applied.
A. Jack has run a successful proprietorship for the past four years, and has now decided to
incorporate his company.
B. 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.
C. XYZ Corporation has chosen to delay the recognition of a discretionary reserve until the
following year.
Ans:
A. Shifting income to another entity
B. Converting income from one type to another
C. Shifting income from one time period to another
Difficulty: Comprehension
Page Ref: 10-17

Loading page 9...

Canadian Income Taxation: Planning and Decision Making- 2013-2014 Edition
Chapter Three
Multiple Choice
1. Joe is a Canadian citizen. In March of 20X1, Joe was transferred to the United States with his
company. His wife and child moved with him at that time. Joe chose not to sell his house, and
instead, lends it to his family during the winter months when they visit Canada from overseas.
Joe has five weeks of vacation each summer, at which time he and his family return to Canada
and stay in their house. Joe did not cancel his country club membership in order 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.
Ans: D
Difficulty: Knowledge
Page Ref: 26
2. Of the following individuals, which would not be considered a resident of Canada for the
entire 20XX taxation year?
A) John had lived in Canada all of his life, prior to moving to Germany in 20XX, 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 20XX. 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 , 20XX. Upon arriving in Canada, he began full-time work and purchased a home.
D) June moved to Canada three years ago from the United States, and has maintained her
American citizenship.
Ans: C
Difficulty: Knowledge and Comprehension
Page Ref: 26
3. Segment A of the aggregate formula includes which of the following?
A) Income from employment, income from property, and income from capital transactions.
B) Income from employment, income from property, income from business, and income from
capital transactions.

Loading page 10...

C) Income from business, ‘other’ income, and income from capital transactions.
D) Income from employment, income from property, income from business, and ‘other’ income.
Ans: D
Difficulty: Knowledge
Page Ref: 36
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
Ans: B
Difficulty: Knowledge
Page Ref: 29
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 30 th .
C) An individual taxpayer can choose any twelve month period as their taxation year.
D) A corporation may have a taxation year less than twelve months during a year the corporation
is formed, dissolved, or is granted a change in its year end.
Ans: D
Difficulty: Knowledge
Page Ref: 41-42
Problems
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 the aggregating
formula.
B) Based on your answer in Part A, explain to Mrs. White why she will or will not have a tax
liability this year.
C) How would your answer change in Part A if Mrs. White realized a taxable capital gain of
$30,000 in 20XX?

Loading page 11...

Ans:
A)
Segment A: $40,000
3,000
2,000
Segment B: 0
Segment C: 0
Segment D: (22,000)
(5,000)
Net Income for Tax Purposes: $18,000
B) Mrs. White does not have a $0 balance for tax purposes as she is unable to use the capital loss
since she had no capital gains in the year.
C) If Mrs. White had realized a taxable capital gain of $30,000 in 20XX she would have been
able to apply the allowable capital loss of $20,000 ($40,000 x .5). This would add $10,000 to
her income, however, resulting in $28,000 in net income for tax purposes.
Difficulty: Application
Page Ref: 36-40
7. George and Gina Anderson, (Canadian citizens), moved to Europe on August 15 th , 20X1 to
open a café in a small Italian village. The restaurant was called ‘Gina’s Italian Eatery Inc.’.
Prior to moving, George earned $65,000 in 20X1 as a computer programmer and Susan earned
$67,000 in 20X1 as a registered nurse. They are both in their 60s and plan to retire in Italy,
which is Gina’s birthplace. They were able to sell their home in time to invest the proceeds prior
to leaving for Europe. As they only expect to return to Canada every second year, they cancelled
their bank accounts and driver’s licenses. Their café was successful in 20X1 and earned a pre-
tax profit of $25,000 by year’s end.
Required:
Determine the residency status of George and Gina and their café for Canadian tax purposes in
20X1 and discuss the Canadian tax treatment, if any, of their personal and business income.
Ans:
George and Gina would be considered ‘part-time’ residents (or ‘residents until August 15th’
)
since they severed their ties with Canada prior to leaving. When filing their Canadian tax
returns, they would only be liable for tax on their Canadian earnings in 20X1.
The café is not a Canadian resident. It was not incorporated in Canada, and its central

Loading page 12...

management and control is not exercised from within Canada. Therefore, the café is not required
to file a Canadian tax return. The income would be subject to Italian tax laws.
Difficulty: Application
Page Ref: 26-27
8. Allison Hill moved to Canada on April 30 th of this year. She was born and raised in Belgium,
and moved to Canada to start a career in architecture. She earned $45,000 from May to
December of this year from her new employer. Prior to leaving Belgium, Allison earned
$10,000. She received $1,000 in dividends in March and $1,000 in dividends in September from
stocks in a European corporation. Allison’s parents sent her a cheque for $2,000 as a gift for her
25 th birthday in August.
Required:
Determine Allison’s residency status for Canadian tax purposes for the current year. How much
income is Allison required to report on her T1 tax return? Explain why any items have not been
included in your calculations.
Ans:
‘Part-time resident’ or ‘Resident as of April 30 th ’
$45,000 + $1,000 = $46,000
The following items have been omitted:
• Income from employer in Belgium prior to Allison becoming a Canadian resident
• Dividends received prior to becoming a Canadian resident
• Birthday gift from parents is not taxable
Difficulty: Comprehension, Application
Page Ref: 26
9. Answer the following questions which pertain to the administration of the Canadian Income
Tax system.
1. Individuals (who do not carry on a business) must file an income tax return for the most
recent calendar year by what date?
2. Individuals who carry on an unincorporated business must file an income tax return for the
most recent calendar year by what date?
3. Who is responsible for the filing of a deceased taxpayer's tax return?
4. What is the taxation year for an inter vivos trust?
5. What is the taxation year for a testamentary trust?
6. A trust must file an income tax return within how many days of its taxation year-end?
7. What is the taxation year for a corporation (other than a professional corporation)?
8. A corporation is required to file an income tax return within how many months of its taxation
year-end?
Ans:
1. April 30
2. June 15

Loading page 13...

3. The deceased's legal representative
4. The calendar year
5. A chosen fiscal period
6. 90 days
7. A chosen fiscal period, not exceeding 53 weeks
8. 6 months
Difficulty: Knowledge
Page Ref: 41-42
10. ABC Corporation purchased inventory from Galaxy Wholesalers. The cost on the invoice
was $25,000. The inventory was marked up by 35% and sold to a retailer. The retailer
subsequently marked the goods up 45% and sold the products to its consumers. (Pre-GST costs
were used to calculate marked up prices.)
Required:
Calculate how much GST was collected and remitted by both the wholesaler and the retailer.
Ans:
Wholesaler:
Sale price to retailer $33,750 ($25,000 x 1.35) x 5% = $1,687.50
Cost from manufacturer (25,000) x 5% = (1,250.00)
Gain $ 8,750 437.50
Remitted to CRA 437.50
GST cost -0-
Retailer:
Sale price to consumer $48,937.50 ($33,750 x 1.45) x 5% = $2446.88
Cost from wholesaler (33,750) x 5% = (1,687.50)
Gain $15,187.50 $ 759.38
Remitted to CRA 759.38
GST cost -0-
Difficulty: Comprehension and Application
Page Ref: 48

Loading page 14...

Canadian Income Taxation: Planning and Decision Making- 2013-2014 Edition
Chapter Four
Multiple Choice
1. Susan was provided with a company car to drive during March to December of the current
year. The car cost the company $22,000 plus GST and PST totalling 11%. Susan drove the car a
total of 15,000 kilometres during the year. 11,000 kilometres were for business purposes and the
other 4,000 kilometres were for personal use. Susan’s employer pays for all of the vehicle’s
operating costs which totaled $1,100. What is the minimum amount that Susan can report as her
total taxable benefit for the use of the car during the year? (Round your answer.)
A) $1,172
B) $1,758
C) $2,252
D) $5,964
Ans: B Standby Charge: [($22,000 x 1.11) x .02 x 10] x 4,000/(1,667 x 10) = 1,172
Operating Benefit: Lessor of: 4,000 x .27 = 1,080 and 1,172 x .5 = 586
1,172 + 586 = 1,758
Difficulty: Application
Page Ref: 70
2. Which of the following factors are used by the courts in order to determine a taxpayer’s status
as an employee or a self-employed contractor?
A) control test, ownership of tools test, chance of lawsuit, integration test
B) control test, employer test, chance of lawsuit, integration test
C) control test, ownership of tools test, chance of profit and loss, integration test
D) control test, employer test, chance of profit and loss, integration test
Ans: C
Difficulty: Knowledge
Page Ref: 64
3. Cindy works for Sky Manufacturers, a public corporation. In 20X1 she was offered an option
to purchase shares at $15 per share from her employer. The fair market value on that day was
$17 per share. The option had a four year exercise time-limit. Cindy exercised her option in
20X3 and purchased 500 shares. The fair market value at that time was $21 per share. What is
Cindy’s tax treatment of this option in the year 20X3?
A) $1,000 taxable benefit
B) $2,000 taxable benefit

Loading page 15...

C) $3,000 taxable benefit
D) Not taxable until the shares are sold.
Ans: C 500 x ($21-$15) = $3,000. The benefit is taxable in the year she exercises her option.
Difficulty: Knowledge, Application
Page Ref: 74-76
4. Which of the following, when provided by an employer, is NOT a tax-deferred or tax-free
benefit for the employee?
A) Premiums for private health care plans.
B) Counselling services to prepare the employee for retirement.
C) Contributions to the employee’s registered pension plan.
D) A near-cash gift for the employee’s wedding.
Ans: D
Difficulty: Knowledge
Page Ref: 77
5. Sarah borrowed $25,000 from her employer at a rate of 1% interest. At the time the loan was
made, the CRA's prescribed rate of interest was 3%. Sarah is in a 40% income tax bracket. The
actual cost of Sarah's loan is which of the following? (Assume there are no fluctuations in the
prescribed rate of interest.)
A) 1%
B) 1.2%
C) 1.8%
D) 2%
Ans: C
Prescribed interest $750 ($25,000 x 3%)
Actual interest paid 250 ($25,000 x 1%)
Benefit $500
Tax cost $200 ($500 x 40%)
Actual interest $250
Tax cost 200
Total cost $450
Effective rate 1.8% (450/25,000)
Difficulty: Comprehension and Application
Page Ref: 72

Loading page 16...

13 more pages available. Scroll down to load them.

Preview Mode

100%

Study Now!

XY-Copilot AI

Unlimited Access

Secure Payment

Instant Access

24/7 Support

Document Chat

Document Details

Subject

Taxation

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

Study Now!

Document Details

Related Documents

Canadian Income Taxation : Planning And Decision Making, 2013-2014 Edition Solution Manual

Canadian Income Taxation 2017/, 2017/, 2017/2018 Edition Solution Manual

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

Canadian Income Taxation 2016/2017 Edition Test Bank

Canadian Income Taxation 2016/2017 Edition Solution Manual

Exploring International Taxation Benefits and Strategies for U.S. Corporations

The Impact of IRC Section 199 and Related Corporate Tax Provisions on U.S. Businesses

Analyzing Tax-Exempt Status: Requirements and Case Study of Mutual Insurance Companies

Corporate Taxation: Charitable Contributions, Accounting Methods, and Taxable Income Calculations

Pearson�s Federal Taxation 2020 Comprehensive 33rd Edition Test Bank

Company

Explore

Study Tools