Test Bank for Canadian Income Taxation Planning and Decision Making 25th Edition.

Test Bank for Canadian Income Taxation Planning and Decision Making, 25th Edition by William Buckwold, Joan Kitunen, Matthew Roman, Abraham Iqbal

CHAPTER 1 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

2) Which of the following attitudes and actions is most likely to 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.

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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4) When assessing the value of a corporation, the most relevant information that decisionmakers 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.

5)

Income tax is calculated for which of the following jurisdictional groups?

A) Municipal, provincial, and federal B) Municipal, federal, and foreign C) Provincial, federal, and foreign D) Municipal, provincial, and foreign

6)

Two investor corporations may not enter jointly into which of the following?

A) Joint venture B) Partnership C) Separate corporation D) Proprietorship

7)

Which of the following statements is true?

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A) Cash flow should never be calculated on an after-tax basis.

B) The tax cost to a business should be regarded as a cost of doing business.

C) Income tax cannot be treated as a controllable cost.

D) The value of an enterprise should be based on pre-tax cash flow.

8) Logan holds a 7% interest-bearing debt instrument in Glow Co. Glow Co.'s tax rate is 27%, and Logan is in a 45% tax bracket. Which of the following statements is correct?

A) The after-tax cost of the debt instrument is 5.11% to Glow Co., and the after-tax value to Logan is 3.85%.

B) The after-tax cost of the debt instrument is 5.11% to Glow Co., and the after-tax value to Logan is 3.15%.

C) The after-tax cost of the debt instrument is 1.89% to Glow Co., and the after-tax value to Logan is 3.15%.

D) The after-tax cost of the debt instrument is 7% to Glow Co., and the after-tax value to Logan is 7%.

9) Which of the following lists accurately names the five general income categories for tax purposes?

A) Business, Interest, Employment, Capital Gains, Other B) Business, Property, Employment, Capital Gains, Foreign C) Business, Property, Employment, Capital Gains, Other D) Business, Property, Employment, Investments, Other

10) Proprietorships, corporations, partnerships, limited partnerships, joint ventures, and income trusts are all

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A) categories of income for tax purposes.

B) tax jurisdictions.

C) examples of financial instruments.

D) forms of business.

11) Which of the following statements regarding taxation within jurisdictions in Canada is true?

A) Federal and provincial or territorial tax brackets are always identical to one another.

B) Only federal taxes apply to individuals while both federal and provincial or territorial taxes apply to corporations.

C) Both federal and provincial or territorial taxes apply to Canadian taxpayers.

D) Only federal taxes apply to corporations while both federal and provincial taxes apply to individuals.

12) Jamie is an employee at ABC Ltd. and is in a 45% tax bracket. ABC Ltd. has a tax rate of 27%. The company has offered Jamie a 10% pay raise. Jamie's current salary is $50,000. What is after-tax cost of the raise to ABC Ltd.?

A) $1,350 B) $2,750 C) $2,858 D) $3,650

13) Simone is an employee at XYZ Ltd. and is in a 45% tax bracket. XYZ Ltd. has a tax rate of 27%. The company has offered Simone a 10% pay raise. Simone's current salary is $50,000.

What is after-tax value of the raise to Simone?

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A) $1,350 B) $2,250 C) $2,750 D) $5,000

14)

All cash flow must be considered on an after-tax basis because

A) companies want a positive cash flow.

B) the value to a business must be considered.

C) the investor's tax rate is irrelevant.

D) decisions that appear favourable on a pre-tax basis may be unfavorable or marginally favourable on an after- tax basis.

15)

Which of the following is not a separate entity for tax purposes?

A) Corporation B) Trust C) Partnership D) Individual

16)

The Canadian income tax system for individuals is considered

A) progressive.

B) regressive.

C) flat.

D) unfair.

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17)

What is the most significant form of taxation that affects return on investment?

A) Property Taxes B) Excise Taxes C) Income Taxes D) All taxes

18) QWERTY Co. decides to give a 6% raise to its employee Jean, who is currently in the 40% tax bracket. The company is in the 27% tax bracket. What is the after-tax implication for each of the parties in this transaction?

A) The company has a net after-tax cost of 4.38% and Jean has an after-tax income of 3.6%.

B) Both Jean and the company have a 3% after-tax cost/benefit.

C) We should only consider the pre-tax amount of 6% to each party.

D) Both the company and Jean have an after-tax cost of 4.38%.

19) Explain what is meant by the statement that "tax should be treated as a ‘controllable cost'."

20) Blake holds a 5% interest-bearing debt instrument in Day Co. Day Co.'s tax rate is 27%, and Blake is in a 50% tax bracket.

Required: A) Calculate the after-tax cost (as a percentage) of the debt-instrument to Day Co. B) Calculate the after-tax value (as a percentage) of Blake's interest income.

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21) Tanner holds a 7% interest-bearing debt instrument in Eve Co. Eve Co.'s tax rate is 13%, and Tanner is in a 45% tax bracket.

Required: A) Calculate the after-tax cost (as a percentage) of the debt-instrument to Eve Co. B) Calculate the after-tax value (as a percentage) of Tanner's interest income.

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Answer Key Test name: Chap 01_25e 1) B 2) C 3) D 4) B 5) C 6) D 7) B 8) A 9) C 10) D 11) C 12) D 13) C 14) D 15) C 16) A 17) C 18) A

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CHAPTER 2 1) The CEO at Big Co. has decided to sell a piece of capital equipment after the company's year-end to avoid paying capital gains tax this year. Which tax planning method will the CEO be using?

A) Transferring income to another entity B) Shifting income from one time period to another C) Converting the nature of income from one type to another D) This is a form of tax evasion and is not allowed

2)

Which of the following scenarios illustrates unacceptable tax planning?

A) Property transferred between Stan and Reed (arm's-length parties) is valued at fair market value.

B) Mr. A transfers his shares to his spouse, and the dividends from the shares are included in Mr. A's income.

C) Faizan owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies.

D) Ben transfers property to his child at a value less than fair market value.

3) The controller of Little Company Ltd. has decided to sell a piece of capital equipment after the company's year-end to avoid paying tax on capital gains this year. The controller is engaging in

A) tax planning.

B) tax avoidance.

C) tax evasion.

D) GAAR.

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4) If Cindy invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, what is Cindy's tax rate?

A) 4.8% B) 8% C) 40% D) 60%

5) Which of the following statements regarding the General Anti-Avoidance Rule (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) 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.

6)

The three key factors of cash flow are

A) the amount of money coming in, the amount of money going out, and timing.

B) the amount of money coming in, the amount of money going out, and interest rates.

C) the amount of money coming in, the amount of money saved, and timing.

D) the amount of money coming in, the amount of money saved, and interest rates.

7) One important skill required for tax planning purposes, referred to as the 'eighth wonder of the world,' is

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A) having a global perspective.

B) respecting the time value of money.

C) having perspective.

D) the ability to speculate.

8) Rory has run a successful proprietorship for the past four years and has now decided to incorporate the business. Which category of tax planning has Rory applied?

A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another

9) The sole shareholder of ABC Co. purchased the shares of the company in 2016 for $25,000 and has recently valued the shares at $150,000. In preparation to sell the company to an arm's-length party, the shareholder decided not to issue the usual annual dividend of $20,000.

What type of tax planning is the shareholder engaging in?

A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another

10) XYZ Inc. has chosen to delay the recognition of a discretionary reserve until the following year. What type of tax planning is the shareholder engaging in?

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A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another

11)

What is tax planning?

A) The legal arranging of transactions to minimize the impact of taxes on cash flow B) Making sure the least amount of tax is paid C) Filing taxes in an orderly fashion D) Avoid the payment of unnecessary taxes at all costs

12) Lee decides to incorporate their business to take advantage of the reduced tax rates for small business corporations. What type of tax planning has Lee engaged in?

A) Shifting income to another type B) Shifting income to another entity C) Shifting income to another time period D) This is tax avoidance because there is no business reason to incorporate

13) Tax planning requires skills to minimize taxes payable in a legal fashion. Why is this so important?

A) The ability to maximize cash flow and reinvest the amounts is extremely desirable.

B) Tax planning is a desirable employable skill.

C) Tax planning is something that managers see as a by-product of good business.

D) Tax planning requires the avoidance of taxes.

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14)

What is the general anti-avoidance rule (GAAR)?

A) Avoid paying taxes at all costs.

B) Non-arm's length transactions are prohibited.

C) All of taxpayer's transaction amounts must be reasonable.

D) Taxpayers cannot enter into transactions where the sole purpose is to reduce taxes, without any business purpose.

15) Fred decides that it is better if his corporation pays him a dividend rather than a salary.

What type of tax planning is Fred using?

A) Shifting income to another entity B) Shifting income to another type C) Shifting income to another time period D) Hiding income to avoid paying taxes

16) Quinn's proprietorship earned $160,000 in pre-tax profits this year. Quinn does not require personal funds from the business.

Personal tax rates (federal plus provincial) in Quinn's province are:

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20%

On the next $50,000

30%

On the next $56,000

40%

On the next $66,000

45%

On income over $222,000

50%

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(All rates are assumed for this question.)

The combined federal and provincial rate of tax for Canadian-controlled private corporations in Quinn's province is 13% on the first $500,000 of income.

Quinn has been considering incorporating the business.

Required: A. Calculate the after-tax profits for the business as i) a proprietorship, and ii) a corporation.

Show all calculations.

B. Name the type of tax planning that Quinn would be engaging in if the company were incorporated.

17)

List the three key factors of cash flow.

18) Ahmad has $10,000 to invest and wants to put the funds in a one-year investment earning an annual interest rate of 12%. Ahmad is in a 42% tax bracket.

Required: a) Calculate the total value of Ahmad 's investment, after-tax, at the end of the year. b) Calculate the tax liability of the investment.

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19) 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, legally arranges transactions to minimize the impact on cash flow from taxes owing.

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 solely for the purpose of loss utilization.

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Answer Key Test name: Chap 01_2022-23 1) B 2) D 3) A 4) C 5) C 6) A 7) B 8) A 9) B 10) C 11) A 12) B 13) A 14) D 15) B

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CHAPTER 3 1) Fran is a Canadian citizen. In March of this year, Fran's employer transferred Fran to the United States. Fran's spouse and child moved with Fran at that time. Fran chose not to sell the family's home, and instead, now lends it to extended family from overseas during the winter months. Fran has five weeks of vacation each summer, at which time the family returns to Canada and stay in their house. Fran did not cancel a long-standing country club membership, nor did they close the family's Canadian bank accounts. Which of the following statements is true?

A) Fran is a Canadian citizen, and will therefore, automatically be considered a Canadian resident for tax purposes.

B) Fran no longer resides in Canada, and will therefore, automatically be considered a non-resident of Canada.

C) Fran is considered a part-time resident of Canada for the five weeks that Fran and family vacation in the country.

D) If Fran is considered to have a continuing state of relationship with Canada, Fran might be a resident for tax purposes.

2) Of the following individuals, which would be considered a part-year resident of Canada for the 2022 taxation year?

A) John lived in Canada all of his life prior to moving to Germany in 2022, 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 spouse 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 2022.

While in Canada, Marie 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, 2022. Upon arriving in Canada to begin his new career, he began full-time work and purchased a home.

D) June moved to Canada three years ago from the United States, maintaining American citizenship.

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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

4) Which of the following may be exempt from 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

5)

Regarding taxation years, which of the following statements is TRUE?

A) All corporate taxpayers must use the calendar year as their taxation year.

B) The taxation year for an individual taxpayer typically 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.

6)

With regards to the taxation year, which of the following situations is correct?

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A) An individual taxpayer's taxation year ends on April 30th.

B) A corporation's taxation year is its fiscal period not exceeding 52 weeks.

C) Corporations must use December 31st as the taxation year end.

D) Taxation year ends must be considered for tax planning purposes within business structures.

7)

The category of ‘Other Income' includes

A) employment income.

B) capital gains and losses.

C) lottery winnings.

D) pension benefits.

8) During the year Mackenzie 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. How much is Mackenzie's net income for tax purposes in accordance with Section 3 of the Income Tax Act?

A) $0 B) $18,000 C) $20,500 D) $23,000

9) During the year Marija had employment income of $50,000, property income of $5,000, a business loss of $12,000, income from an RRSP withdrawal of $3,000, and a capital loss of $30,000 on the sale of shares in a small business corporation. How much is Marija's net income for tax purposes in accordance with Section 3 of the Income Tax Act?

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A) $0 B) $16,000 C) $31,000 D) $46,000

10) During the year Jungkook had employment income of $30,000, property income of $1,000, a business loss of $2,000, income from an RRSP withdrawal of $2,000, and a capital gain of $30,000 on the sale of shares in a small business corporation. How much is Jungkook's net income for tax purposes in accordance with Section 3 of the Income Tax Act?

A) $1,000 B) $31,000 C) $46,000 D) $61,000

11) Sami moved to Europe on August 15th, 2022, to open and incorporate a café in a small European village. Prior to moving, Sami’s only income for 2022 was a salary of $55,000. Sami did not own any assets prior to moving. Sami severed all other ties to Canada prior to moving.

What is the residency status for Sami in 2022 for Canadian tax purposes?

A) Sami is a full-time resident for all of 2022.

B) Sami is a sojourner in 2022.

C) Sami is a non-resident for all of 2022.

D) Sami is a part-year resident in 2022.

12)

With respect to residency of corporations, which of the following is correct?

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A) The determination of residency for corporations is usually more complex than determining residency for individuals.

B) Corporations that are incorporated in Canada are considered residents of Canada regardless of where the controlling shareholders reside.

C) Corporations that are incorporated in Canada are considered residents of Canada only if the controlling shareholders reside in Canada.

D) Corporations that are incorporated in Canada will be classified as non-resident if the controlling shareholders reside in a foreign jurisdiction.

13) When there is a conflict between the Income Tax Act and international tax treaties, what must be attended to first?

A) The Income Tax Act B) International tax treaties C) Whichever appears to be fairer to the taxpayer D) Provincial/territorial income tax law

14) A taxpayer operates a business as a member of a partnership. How will income earned in the partnership be taxed?

A) The partnership will be taxed on the income and each partner will be taxed on any salary taken.

B) Each partner will be taxed on the share of net income according to the partnership agreement.

C) The partnership will be taxed on net profit only.

D) Each partner will be taxed on withdrawals taken during the year.

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15) Aaliyah, along with her spouse and children, have lived in Canada all their lives. In April of the current year, Aaliyah receives a job offer which requires her to move to the US. She decides to move on April 10th but her spouse and children remain in Canada until June 27th. They move to the US on June 27th and it takes until July 15 to find a suitable home for them in the U.S. When does Aaliyah's residency in Canada end?

A) April 10, the day Aaliyah moves out of Canada B) June 27th, when the family joins Aaliyah C) July 15th when the family finds a new home in the U.S. D) They are all deemed residents for the entire year.

16) ABC Co. was incorporated in Canada in 2015, however, it never did business in Canada.

It had a permanent establishment in the US only. How will ABC be taxed?

A) Taxed in Canada on its Canadian income only B) Taxed in the US only since that is where the permanent establishment is C) Taxed in both Canada and the US based on share of income D) Taxed in Canada on its world income and given a foreign tax credit for any US taxes paid

17)

A taxpayer has an allowable capital loss of $5,000. How will it be used?

A) It may be deducted against all types of income.

B) The loss may be carried back 3 years or forward indefinitely and used against taxable capital gains.

C) The loss may be carried back 3 years or forward 10 years against any income.

D) The loss may be carried back 3 years or forward 20 years against any taxable capital gains

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18) Fouad Jacobs moved to Canada on April 30th, 2022. Fouad was born and raised in Beirut and moved to Canada to start a career in architecture. Fouad earned $45,000 from May to December in 2022 from the architecture firm. Fouad earned $10,000 of employment income from January to March in 2022 while still living in Beirut, and also received $1,000 in dividends in March 2022 and $1,000 in dividends in September 2022 from stocks in a European corporation. Fouad's parents e-transferred $2,000 as a gift for Fouad's 25th birthday in August 2022.

Required: a) Determine Fouad's residency status for Canadian tax purposes for 2022. b) How much income is Fouad required to report for the 2022 tax year? c) Explain why any items have been excluded from your calculations.

19) 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 which date?

2. Individuals who carry on an unincorporated business must file an income tax return for the most recent calendar year by which 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 type of trust is permitted to choose a non-calendar year for tax purposes?

6. A trust must file an income tax return within how many days of its taxation year?

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?

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20)

The following list contains Division C deductions:

a. Charitable donations b. Employee stock option deductions c. Unused losses of other years d. Dividends from Canadian corporations e. Capital gain deduction on certain property f. Dividends from foreign affiliates Required: Sort the deductions into the appropriate columns below. (Answers may be used more than once if applicable.)

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Individual

Corporation

Net Income for Tax Purposes

Net Income for Tax Purposes

Less:

Less:

= Taxable Income

= Taxable Income

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Answer Key Test name: Chap 03_2022-23 1) D 2) C 3) D 4) B 5) D 6) D 7) D 8) B 9) C 10) C 11) D 12) B 13) B 14) B 15) B 16) D 17) B

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CHAPTER 4 1) Ali was provided with a company car to drive from March 1st to December 31st of 2022.

The car cost the company $22,000, plus GST (5%) and PST (6%). Ali drove the car a total of 15,000 kilometers during the year. 11,000 kilometers were for business purposes and the other 4,000 kilometers were for personal use. Ali's employer paid for all of the vehicle's operating costs which totaled $1,100. What is the minimum amount that Ali will report in total taxable benefits as a result of the above information? (Round your answer to the nearest dollar and apply tax rules for 2022.)

A) $1,758 B) $2,332 C) $6,044 D) $7,021

2) Which of the following is one of the tests used by the courts to determine a taxpayer's status as an employee or a self-employed contractor?

A) Chance of lawsuit test B) Employer test C) Ownership of tools test D) Contractor test

3) Piper works for Moon Co., which is a public corporation. Piper was granted a stock option in three years ago to purchase shares at $15 per share from the company when the fair market value was $17 per share. Piper exercised the option this year and purchased 500 shares.

The fair market value at that time was $21 per share. What is Piper's tax treatment of this option?

A) $1,000 taxable benefit and no security option deduction B) $1,000 taxable benefit and a 50% security option deduction C) $3,000 taxable benefit and no security option deduction D) $3,000 taxable benefit and a 50% security option deduction

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4) Which of the following, when provided by an employer, is a tax-deferred or tax-free benefit for the employee?

A) Premiums for private health care plans providing extended health coverage beyond a public plan B) Financial counselling services not connected to re-employment or retirement C) Group term life insurance policy D) A $200 cash gift for the employee's wedding

5) Keegan received $25,000 by way of an employee loan at a rate of 1% interest when the CRA's prescribed rate of interest was 3%. Keegan is in a 40% income tax bracket. What is the actual cost (rate) of Keegan's loan? (Assume there are no fluctuations in the prescribed rate of interest.)

A) 1% B) 1.2% C) 1.8% D) 2%

6) The following pertains to the 2022 tax year. Minju is employed as a salesperson and earned a salary of $50,000 and commission income totaling $5,500. Minju is required to pay for numerous employment expenses each year which are identified on the annual T2200. Minju paid $6,200 for advertising and promotion during the year. Minju uses a personal vehicle for work purposes. The undepreciated capital cost of the vehicle was $25,000 at the beginning of the year and $320 of interest was paid per month on a loan for the car. Minju drove the car a total of 20,000 kilometres during the year. 8,000 of these were for work purposes. How much is Minju's total salesperson deduction for the year?

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A) $9,960 B) $10,057 C) $16,600 D) $17,540

7) Alex works exclusively from home as an employed salesperson for SET Co. During the year, Alex earned $21,000 from SET Co. Alex's office occupies 8% of the home's square footage. The following costs were incurred for the entire home during the year: property taxes $3,000, insurance $1,500, utilities $2,400, and mortgage interest $6,000. How much can Alex deduct for the year?

A) $552 B) $1,032 C) $6,900 D) $12,900

8) An individual has the option to receive a $1,000 annual bonus and invest the after-tax amount for 25 years or receive $1,000 per annum in a registered pension plan for the next 25 years. Assuming a constant rate of return of 8% and a tax rate of 40%, what will be the total after-tax difference between the two plans? (Calculate for either as ordinary annuity) (Round intermediate calculations to nearest whole dollar.)

A) The RPP will yield $16,005 more than the annual bonus.

B) The annual bonus will yield $16,005 more than the RPP. C) The RPP will yield $29,242 more than the annual bonus.

D) The annual bonus will yield $29,242 more than the RPP.

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9) Sven is choosing between an annual $1,000 bonus from his employer to be invested at 8% over 20 years or an annual $1,000 RPP from his employer also to be invested at 8% over 20 years. Which of the following statements is accurate? (Sven's tax rate will remain constant at 45% and all funds will be treated as ordinary annuities.) (Round intermediate calculations to nearest whole dollar.)

A) Sven's accumulated funds will be greater if he selects the bonus.

B) Sven's accumulated funds will be the same regardless of which option he chooses.

C) Sven's accumulated funds will be greater if he selects the RPP. D) If Sven chooses the RPP, the funds will compound at a rate of 4.4%.

10) The following pertains to the 2022 tax year. Cleo is employed by ABC Inc., a public corporation. You are provided with the following information: Cleo's salary for the year was $90,000, a cash bonus of $8,000 was announced on December 3rd to be paid to Cleo on January 10th, 2023, RPP contributions of $2,000 were made by both Cleo and ABC, Cleo exercised a stock option during the year when the FMV was $5 per share (granted at $4 per share when the FMV was $3), and a $20 meal allowance was provided once a month due to the three hours of overtime that was required once a month immediately following eight hours of regular work.

Which of the following is correct?

A) Cleo will have a $4,000 RPP deduction from employment income.

B) Cleo's meal allowance is a non-taxable benefit.

C) The cash bonus is taxable in 2022.

D) The stock option was granted at a price greater than the fair market value and is therefore not taxable until sold.

11) An employee received the following from their employer during a taxation year: 1) a $55,000 salary, 2) a watch valued at $200 as a birthday gift, and 3) a $15,000 low-interest loan with a 1% interest rate when the CRA's prescribed rate during the year was 3%. What is the employee's net income for tax purposes?

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A) $55,000 B) $55,300 C) $55,500 D) $55,750

12) Z Co. declares a bonus to be paid to employee Marcia during the fiscal year ended December 31, 2022. The bonus will be paid on June 30, 2023. When will Marcia claim the income?

A) Marcia will claim the income in 2022 when it is earned.

B) Marcia will claim the income in 2023 when it is received.

C) Marcia will claim the income in 2024, the year after it is received.

D) Marcia does not have to claim the income.

13) Chris does work for several clients. Chris pays for the tools used to perform assigned tasks and is responsible for scheduling the work and ensuring tasks are done on time. If Chris is late, the client invoices are reduced by 15%. How would Chris report this income?

A) This is employment income, and the clients must issue T4 slips.

B) Chris is an independent contractor, and this is business income.

C) Chris should choose the method which will benefit him the most - employee or independent contractor.

D) The clients should choose the method which will benefit them the most - employee or independent contractor.

14) During the year, Amr received the following noncash gifts from his employer: A painting worth $400 and a watch worth $250. How will these gifts be taxed?

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A) These gifts will not be taxed at all.

B) The entire $650 will be reported on Amr's return.

C) As noncash gifts, there is a $500 exemption and the remaining $150 will be taxed.

D) The painting will not be taxed but the watch will.

15) ABC Co. provides a generous employee benefits package that includes a life insurance policy and a health and dental policy covered by a private health service plan. How will an employee be taxed if they use the benefits?

A) The employee will be taxed on life insurance and health and dental benefits.

B) The benefits package is not taxable since the employee would not receive funds.

C) The employee will be taxed on the value of benefits used.

D) The employee will be taxed on the life insurance premium but not the health benefits.

16) A taxpayer works in Windsor and travels throughout the city during their 8-hour day.

They keep their receipts and deduct the value of meals because they heard that 50% of meal expense is allowed. When CRA audits this taxpayer, will the deduction be denied?

A) No, since the taxpayer has receipts and was working for an employer.

B) Yes, since the taxpayer was not away from the municipality for more than 12 hours.

C) No, since the taxpayer deducted 50% of the costs incurred.

D) No, as long as the taxpayer has other travel expenses.

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17) Kelly is a high school history teacher and a national expert in ancient ruins. In July of 2023, Kelly was hired by the local university to teach an elective course in ancient Mayan history. Kelly then conducted a field trip of the ruins in Guatemala with some of the local students from July 30th to August 10th. Kelly recruited another local expert to teach the last class that fell during the dates of the trip.

Kelly earned $55,000 from the teaching job and negotiated a contract price of $5,000 to teach the university elective and $7,000 to conduct the tour. The university provided Kelly with office space during the month of July. Kelly's personal laptop and collection of books were used to prepare the lectures and the tour material. Kelly was paid on July 31 st and August 31st and was not provided any additional benefits or insurance by the university.

Required: Determine the tax treatment of Kelly's income and expenses for 2023. Apply the four tests within the guidelines used by the courts to determine whether a taxpayer is an employee or an independent contractor.

18) Alistair was employed by ABC Ltd. (a Canadian-controlled private corporation) from January to December of 2023. Alistair earned a gross salary of $72,000.

The following deductions were made during the year: Income tax

$20,000

CPP & EI

$4,453

Registered Pension Plan contribution

$3,000

The following amounts were paid by ABC Ltd. in 2023 on Alistair's behalf:

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$4,834

Registered Pension Plan

$3,000

Group life insurance

$1,200

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Additional information: On January 15, 2021, Alistair was given an option to purchase 500 shares of ABC for $5.00 per share when the market value was $5.50. Alistair exercised the option on June 1, 2022, when the shares were valued at $7.00 and sold the shares on March 17, 2023 when the market value was $8.00 per share. Alistair pays $50 a month for a personal cell phone. Alistair purchased $300 worth of merchandise (at cost) from ABC Ltd. during the year. The retail value of the merchandise was $500.

Required: A) Calculate Alistair's minimum net income for tax purposes from employment for 2023, in accordance with Section 3 of the Income Tax Act. B) Calculate Alistair's capital gain from the sale of the stock option.

C) Identify items that have been omitted in your calculations in A and B. (Alistair minimizes the tax liability whenever possible.)

D) Will Alistair be able to deduct the stock option deduction to arrive at taxable income? Why or why not?

19) Wyatt Harris worked for RET Co. from March 1st to December 31st during the year.

Wyatt earned a monthly base salary of $4,000, plus a 1% commission on sales. During the year, Wyatt's sales totaled $800,000. RET required Wyatt to pay for some employment expenses.

Wyatt travelled out of the city most days to sell to customers in surrounding towns and received a monthly allowance of $500 to cover travel costs (which has been accurately recognized as ‘unreasonable'). Wyatt and RET each contributed $2,000 to Wyatt's registered pension plan during the year.

Wyatt provided you with the following receipts for the year: Gasoline receipts related only to employment

$5,200

Meals with clients

3,200

Purchase of a laptop

1,000

Advertising costs

800

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Phone call charges for business

1,200

Consumable supplies for work

500

Membership to a local golf club

8,000

Wyatt purchased a new vehicle during the year to use for employment at RET. 12,000 of the 25,000 km driven during the year were for business purposes. The vehicle cost Wyatt $39,000 plus an HST of 11%. Work-related interest payments on the car loan totaled $200 per month.

Required: Calculate Wyatt's minimum employment net income for tax purposes for the year in accordance with Section 3 of the Income Tax Act. (Round intermediate and final answers to nearest whole dollar.)

20)

The following case pertains to the 2022 tax year.

Angelo is employed fulltime as the Head of Human Resources at State Fund Corporation ("State Fund"), a large public corporation with its head office located in Toronto. The following information is provided regarding the taxation year: 1) Salary

$275,000

Payroll deductions (paid by Angelo): Employment Insurance premiums

$953

Canada Pension Plan contributions

3,500

Registered pension plan contributions

9,000

Income tax

50,400

2)

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State Fund paid for the following amounts on Angelo’s behalf in 2021: a.

Canada Pension Plan contributions

$3,500

b.

Employment Insurance premiums

1,334

c.

Registered pension plan contributions

9,000

d.

Gym membership

500

e.

Group term life insurance premium

700

f.

Extended health and dental premium

600

Group sickness and accident insurance

400

3) Angelo is provided with a company car and State Fund pays the $1,000 per month lease cost.

The company also pays for the annual operating costs of $3,500. Angelo drove the car for 20,000km during the year, and the travel log shows that about 30% of the total km related to performing employment duties.

4) Angelo also participates in State Fund's employee stock option plan, and three years ago was granted the option to acquire shares for $45 per share. At the time, the shares were trading for $39 per share. Angelo exercised the option in January of this year and acquired 1,000 shares (the shares were trading for $50 per share at that time). In December of this year, Angelo sold 800 shares for $52 per share.

5) State Fund allows employees to work from home two days a week. Angelo maintains a home office and allocates 10% of the housing costs (property tax, internet, utilities, and home insurance) to this office. In 2021, 10% of the total costs were $2,400. Angelo also purchased a new computer this year for $3,000 to be used exclusively for working from home. The nature of Angelo's work (HR) does not require meeting with clients of State Fund.

Required: Calculate Angelo's income from employment for this year. You must provide a brief explanation for anything you have intentionally omitted from the calculation. No marks will be given for unexplained omissions.

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21)

The following case pertains to the 2022 tax year.

Izumi Tanaka is employed by TSK Inc., a Canadian-controlled private corporation. The following information has been provided to you: 1) Izumi earned $90,000 from TSK. 2) A cash bonus of $8,000 was announced on December 3rd, to be paid to Izumi on January 10th of the following year.

3) Izumi was provided with a company car for the entire year. The cost of the car (including taxes) was $40,000. All operating costs were paid by TSK. Izumi drove the car 21,000 kilometers during the year. 10,000 kilometers were for personal use.

4) Izumi and TSK each contributed $2,000 towards Izumi's registered pension plan.

5) Izumi was presented with a watch from TSK, valued at $200, as a birthday gift.

6) In January, Izumi was granted a stock option to purchase 2000 shares in TSK at a cost of $8.00 per share. At that time, the fair market value per share was $9.00. Izumi exercised the option in February when the market value had risen to $9.50 per share.

7) TSK provided Izumi with a $20 meal allowance once a month due to the two hours of overtime that was required to be worked once a month immediately following eight hours of regular work.

8) An annual union due of $850 was deducted from Izumi's pay during the year.

Required: A) Calculate Izumi's minimum employment income for tax purposes in accordance with Section 3 of the Income Tax Act. B) Identify any items that have been omitted in your calculations, and briefly explain why.

(Round intermediate calculations to nearest whole dollar.)

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Answer Key Test name: Chap 04_2022-23 1) A 2) C 3) C 4) A 5) C 6) A 7) A 8) A 9) C 10) B 11) B 12) B 13) B 14) C 15) D 16) B

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CHAPTER 5 1) Blue Co. was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its annual tax return. Which of the following general limitations to business profit determination best describes the reason for the CRA's decision?

A) Exempt-income test B) Personal-expense test C) Insurance proceeds exemption D) Reserve test

2) Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act?

A) Maintenance fees on a yacht at Yellow Yacht Leasing Inc. B) Legal and accounting fees incurred during the construction of a building C) Advertising costs in a non-Canadian newspaper directed at an American market D) Workspace in a home used as a taxpayer's principal place of business

3) Sari ran a proprietorship that generated $75,000 in profits during the year. Included in these profits were: a) $10,000 - amortization expense; b) $5,000 - reasonable bad debt expense; c) $55,000 - cost of goods sold (closing inventory at market value); and $8,000 - meals and entertainment with clients. The business' capital cost allowance has been accurately calculated at $8,500 for the year. How much is Sari's business net income for tax purposes?

A) $73,500 B) $75,000 C) $80,500 D) $89,000

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4) Hansa invested in a piece of land seven years ago when real estate prices were rising in his area and land values were expected to double within five years. The land remained vacant and was only used in 2018 when Hansa was approached to rent the land for two weeks for a local carnival for a fee of $1,000. Hansa has just been offered a significant sum of money for the land in response to an advertisement in a local newspaper. Based on Hansa's primary intention for the land, the gain on the sale would be classified as

A) business income.

B) property income.

C) a capital gain.

D) exempt income.

5) A taxpayer recognized a $40,000 loss during the year from a small farm (which was a secondary activity to a full-time job as a dentist). What is the maximum deduction that would be allowed from the farm loss for the year?

A) $0 B) $17,500 C) $21,250 D) $40,000

6)

Employers can deduct unpaid remuneration for tax purposes in a taxation year

A) if paid within 180 days of the taxation year.

B) if paid within 250 days of the taxation year.

C) if paid within 365 days of the taxation year.

D) if paid within two years of the taxation year.

7) Which of the following is one example of a qualified expenditure for scientific research and experimental development?

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A) Engineering and design work B) Market research and sales promotion C) Quality control or routine testing D) Humanities related research

8) ABC Co. is a retail outlet. Recently ABC Co. sold its shares in Public Corp. for $10,000.

The shares originally cost ABC Co. $7,000. For tax purposes, this is an example of

A) capital income.

B) business income.

C) other income.

D) property income.

9) A contractor constructed a house for resale which was sold immediately. For tax purposes, this is an example of

A) capital income.

B) business income.

C) other income.

D) property income.

10) LM Truck Dealer Ltd. sold a fleet of new trucks to XYZ Mining Inc. For tax purposes, this is an example of

A) capital income.

B) business income.

C) other income.

D) property income.

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11) Emory Co. recognized business profits of $100,000 during the year prior to deducting a reserve for doubtful accounts of $45,000. Emory deducted a reserve for its uncollectible debts of $35,000 in the previous year. Emory is forecasting profits of $200,000 and uncollectible debts of $50,000 next year. If Emory claims a reserve this year, what is the company's net income for tax purposes?

A) $20,000 B) $90,000 C) $100,000 D) $110,000

12) A new small business is preparing its first tax statement and is uncertain as to how to report the closing inventory for this year and the beginning inventory for the following year.

Which of the following would be a correct treatment of the inventory values?

A) The closing inventory is valued at lower of cost or market and the beginning inventory is valued at market value.

B) The closing inventory is valued at market value and the beginning inventory is valued at the lower of cost or market value.

C) The closing inventory is valued at lower of cost or market, or all items at market value, and the beginning inventory is valued in the same manner chosen for the closing inventory.

D) The closing inventory is calculated on a LIFO basis.

13) ABC Corporation has accounts receivable of $145,000 in 2022. It has also determined that the allowance for doubtful accounts is $4,000 for the year (a reasonable amount). During 2023, it records the following in the books: Write-off of accounts receivable $2,500 and reinstatement of accounts previously written off $3,000. For the year ended 2023, it determines that the allowance for doubtful accounts should be $5,000 (a reasonable amount). What is the deduction of the reserve for doubtful debts in 2023 for tax purposes?

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A) $4,500 B) $500 C) $2,500 D) Not allowed

14) Smith and company completed landscaping on its grounds in 2023. The invoice total was $11,000 of which $7,500 was paid during the year. What is the deduction for tax purposes?

A) $11,000 B) None, this is part of the cost of land.

C) $7,500 D) The company would deduct CCA as part of the building.

15) Jones Company has declared and accrued management bonuses for the year ended December 31, 2022. The bonus amounts of $50,000 are scheduled to be paid on June 30, 2023.

How are these bonuses to be deducted for tax purposes?

A) Deduct the amounts in 2023.

B) Deduct the amounts in 2024.

C) Deduct the amounts in 2022.

D) Bonuses cannot be deducted.

16) Kind Corporation pays its employees for using their own vehicles while conducting company business. It paid an employee $.59 per km and they drove 10,000 km in 2022. The allowance is tax-free to the employee. How much is actually deductible by the company in that year?

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A) $5,900 B) $6,100 C) $3,050 D) $5,800

17) Pardeep uses his own vehicle for his sole proprietorship. He borrowed money to purchase the vehicle in 2021. The interest he paid on the amount owing for 2023 was $5,700. He drove the vehicle a total of 10,000 km of which 7,200 km were related to employment. How much can he deduct in 2023?

A) $3,600 B) $4,400 C) $4,104 D) $2,592

18) List the six general limitations to business profit determination and give an example for three of the items.

19) Jaylen Abbas runs a small proprietorship. You have been provided with the following financial information pertaining to his business: Sales

$150,000

Cost of goods sold*

80,000

Advertising in a local paper

1,000

Advertising in a U.S. newspaper directed at Canadians living in the U.S.

2,000

Meals and entertainment

10,000

Property taxes on a vacant piece of land (which earns no income) adjacent to the business

2,500

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Golf course fees for Jaylen

1,500

Cost of one convention held on a cruise ship in the Mediterranean Sea sponsored by a Canadian association.

2,000

(*All closing inventory is valued at market value.)

Required: A) Calculate the net income for tax purposes for Jaylen's proprietorship.

B) Explain why any items have been omitted.

C) Briefly discuss how your answer in A) would change if Jaylen had valued the inventory at cost.

20)

The following scenario pertains to the 2022 tax year.

Karok Sanders has provided you with the following information: • The financial statements for Karok's dental practice reported a net income of $120,000.

• Amortization of $15,000 is reported in the expenses.

• Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements.

Karok conducted scientific research and experimental development (SR&ED) during the year. $40,000 of the expenditures are qualified SR&ED activities. These costs are currently reported as capital items on the balance sheet.

• Karok has a small hobby farm in the country, which recognized a loss of $9,000 during the year.

Required: Calculate Karok's minimum net income for tax purposes.

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21) Waves Ltd. is a Canadian-controlled private corporation, operating a small gift store in Kelowna. The company has a December 31st year-end. Waves' financial statements reported net income before taxes of $220,000 in Year 1.

Financial information relating to Year 1 is as follows: Land adjacent to the gift shop was purchased with a $75,000 bank loan during the year and is used as an outdoor sales area. Interest expense on the loan for the year was $9,600, and the fee to obtain the loan was $1,000. Both the interest and the loan fees were expensed by Waves in Year 1.

The company hired a contractor to landscape the land. The $5,000 bill for the landscaping was paid in full during the year and capitalized on Waves' Balance Sheet.

During the year, a new display case worth $2,000 was purchased and expensed on the books.

Amortization expense of $21,000 was deducted during the year. Total CCA (following any adjustments) for the year was $16,000 and is not reflected in the financial statements.

The following were also expensed during the year: Meals with clients

$1,400.00

Lawn mowing service

$1,000.00

Golf dues for employees

$5,000.00

A reasonable reserve for bad debt

$2,000.00

On December 30th, Waves' president announced a bonus to be paid to the company's key employee in the amount of $5,000, which was expensed on the books that day. The employee will receive the bonus in Year 2 in equal payments of $2,500, to be issued on January 30 th and July 30th.

Required: Determine Waves Ltd.'s net income for tax purposes for Year 1.

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Answer Key Test name: Chap 05_2022-23 1) A 2) B 3) C 4) A 5) B 6) A 7) A 8) A 9) B 10) B 11) B 12) C 13) B 14) C 15) A 16) D 17) D

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CHAPTER 6 1) X Co. purchased a piece of Class 8 machinery in June 2020 for $5,000. In 2022 the machine was sold for proceeds of $2,000 and there were no other purchases or disposals during the year. The undepreciated capital cost (UCC) in the Class 8 pool was $5,500 at the beginning of 2022. What is the UCC of this class at the end of 2022?

A) $700 B) $2,800 C) $3,500 D) $4,800

2)

Which of the following statements regarding recapture is true?

A) Recapture only occurs when there is a positive balance in a class pool and that pool of assets is empty.

B) Recapture may be deducted from business income.

C) Recapture occurs when there is a positive balance in a class pool, even if there are assets remaining in that class pool.

D) Recapture occurs when there is a negative balance in a class pool, even if there are assets remaining in that class pool.

3) R Co. was incorporated in 2022. Incorporation costs were $3,500. How much CCA is allowed in 2022 and how much operating expense is allowed in the year? (Round final answers to the nearest whole dollar.)

A) $38, $3,000 B) $25, $3,000 C) $175, $0 D) $225, $500

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4) Which of the following cases is disqualified for capital cost allowance in the current year?

A) A Canadian-controlled private corporation purchased and installed a new engine in a semi-trailer that is used to haul produce to Mexico.

B) An employee owns and uses an automobile in the course of their employment duties during the month of December. Their pay for December is not received until January of the following year.

C) A piece of equipment was purchased by a public company during the year on a 5-year financing term.

D) A building under construction is scheduled for completion in eighteen months. The building will be used as a production facility.

5) A piece of equipment that belonged to a construction company was sold in June 2021.

The proceeds from the sale generated recapture. A new piece of equipment was purchased in January of 2022. The company's fiscal year-end is December 31st. The CEO has heard about deferred recapture. Which of the following is correct?

A) The recapture on the disposition may be deferred as the new equipment was acquired within 12 months.

B) The recapture on the disposition may be deferred as the disposition was voluntary and the property qualifies.

C) The recapture on the disposition may not be deferred as the disposition was voluntary and the property does not qualify.

D) Recapture on dispositions can never be deferred.

6) In 2021, a storage facility was destroyed in a fire. The undepreciated capital cost (UCC) of the building at the end of 2020 was $47,000, and the original cost was $55,000. Insurance proceeds of $50,000 were received for the market value in 2021. Pursuant to S.13(4), the taxpayer elected to defer the recapture. A new building was built in 2022 at a cost of $60,000.

How much is the amended recapture for 2021 following the replacement in 2022?

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A) $0 B) $3,000 C) $5,000 D) $13,000

7) Z Ltd. was incorporated on January 1, 2022. The incorporation costs were $4,500. Z then purchased W Co. The assets of W Co. included $80,000 of equipment, goodwill of $50,000, and a customer list valued at $30,000. Z's year-end is December 31. The company maximizes its allowable deductions. How much is Z's Class 14.1 undepreciated capital cost (UCC) at the end of 2022? (rounded)

A) $75,387 B) $78,163 C) $77,425 D) $79,463

8) A Co. (a public corporation) leased an office and paid $20,000 for leasehold improvements in January of this year. This cost includes drywall, new carpets, and all the new lighting fixtures. The term of the lease is 2 years, plus an option to renew for 2 more years. What is the maximum CCA that A Co. will be allowed to deduct this year?

A) $4,000 B) $5,000 C) $6,000 D) $7,500

9) X Co. (a public corporation) purchased a Class 8 photocopier in 2020 for $2,500. The copier needed replacing in 2022, and a new Class 8 machine costing $2,800 was purchased. The old copier was sold for $300 in parts. What is the most beneficial impact on income from this 2022 transaction? (X Co. has always claimed the maximum CCA allowed.)

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A) $780 B) $1,030 C) $1,940 D) $2,140

10) Globe Inc. (a public corporation) had a Class 10 undepreciated capital cost (UCC) balance of $12,000 at the end of 2021. The only asset in the pool (a small pickup truck) was sold on December 20th of 2022 for $5,000. On the same day, Globe purchased a new truck for $8,000. How much CCA can Globe claim in 2022? (The maximum CCA is always claimed by Globe Inc.)

A) $1,350 B) $3,600 C) $4,500 D) $4,950

11) MN Co. (a public corporation) had a Class 8 UCC balance of $3,500 at the end of Year 1.

The company sold its only Class 8 asset on December 31st, Year 2, for $3,000 and purchased a new Class 8 asset the same day for $1,000. MN Co. has a December 31st year-end. Which of the following is correct?

A) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, caused an increase in MN's Year 2 NITP. B) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, caused a decrease in MN's Year 2 NITP. C) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, had no impact on MN's Year 2 NITP. D) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, resulted in recapture.

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12) T Ltd. (a public corporation) purchased a Class 53 asset for $50,000 in 2022. The undepreciated capital cost (UCC) of the class was $20,000 at the end of 2021. T Ltd. will apply accelerated CCA. How much is the UCC at the end of 2022?

A) $0 B) $10,000 C) $35,000 D) $60,000

13)

On what assets may a company claim capital cost allowance (CCA)?

A) Any depreciable assets used to earn business income B) All assets including land and building C) All long-term assets except land and building D) Only corporations may claim CCA

14) Z Co. (a public corporation) claims the maximum capital cost allowance (CCA) allowed each year. It purchased a new passenger vehicle in 2022 at a cost of $48,000. What is the maximum CCA Z Co. can claim? (Ignore GST/HST implications.)

A) $14,400 B) $21,600 C) $10,200 D) $15,300

15) During the year, X Co. sold depreciable property (the last asset in the Class) for $7,000 and experienced a loss of $3,000 for accounting purposes. Before the sale, the undepreciated capital cost (UCC) of the Class was $10,000. How will that loss be reported for tax purposes?

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A) Allowable capital loss of $1,500 B) Terminal loss of $1,500, claimed against business income C) Terminal loss of $3,000 claimed against business income D) Capital loss of $3,000 claimed against taxable capital gains

16) What classes are the exception to declining balance method of calculating capital cost allowance (CCA)?

A) No exceptions B) Class 13 only C) Class 14 only D) Class 13 and 14

17) Y Co. sold a building and some equipment during the year and will experience recapture on all assets sold. To what extent will it be able to defer the recapture to a future year?

A) It cannot defer recapture.

B) It can defer recapture by replacing the assets with assets used for a similar purpose within 24 months of the end of the taxation year of the disposition.

C) It can defer recapture by replacing the assets within 12 months of the end of the taxation year of the disposition.

D) It can defer the recapture on the building only by purchasing a replacement building within 12 months of the end of the taxation year of the disposition.

18) R Co. (a public corporation) began business on October 1, Year 1. The company’s yearend is December 31st. R Co. purchased a Class 1 (4%) asset on November 1, Year 1 for $100,000. How much is the maximum CCA that R Co. can claim in Year 1? (Rounded)

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A) $1,003 B) $1,512 C) $4,000 D) $6,000

19) J Co. (a Canadian-controlled private corporation) had a Class 8 UCC balance of $10,000 at the end of 2021. In 2022, J Co. purchased a Class 8 asset for $50,000 to be used by the business immediately. What is J Co.’s maximum CCA for 2022?

A) $12,000 B) $17,000 C) $52,000 D) $60,000

20)

The assets and UCC balances for K Ltd. (a public corporation) are listed below: Asset

UCC Balance, End of 2021

Class 1 (4%) building purchased in 2010

$100,000

Class 10 Delivery van

15,000

Class 8 Furniture and office equipment

30,000

Separate Class 8 Photocopier purchased in 2020

2,000

Class 44 Patent (purchased in 2019)

10,000

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The following transactions took place in 2022: a. K Ltd. purchased $2,000 worth of small tools (each costing under $500). b. The delivery van was sold for $12,000. The original cost was $20,000. A second-hand van was purchased in the year for $16,000. c. $15,000 was paid for an air conditioning system in the building, which was added to the cost of the standard Class 1 pool. d. K Ltd. sold the photocopier for $1,500 in the year and will replace it in January 2023 with a second-hand model valued at $1,700. e. The business acquired a Class 14 franchise on March 1st of 2022 for $55,000. The franchise has a limited legal life of 20 years. (Ignore leap year effects.)

Required: A) Calculate the following: 1) The total CCA that K Ltd. will be able to claim in 2022.

2) Any recapture and/or terminal loss that occurred during the year.

B) What would the tax effect have been for the original photocopier if K Ltd. had purchased the new photocopier during 2022?

21) WKL Ltd. is a public corporation operating a land-development business in Kelowna, BC. In June 2022, the company acquired a license to manufacture prefabricated homes and began operations immediately. Financial information for the 2022 taxation year is outlined below: WKL's profit before income taxes for the year ended November 30, 2021, was $245,000, as follows: Income from land development and prefabricated home manufacturing

$248,000

Loss of sale of properties

(3,000)

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$245,000

The loss on sale of property resulted from two transactions. On October 1, 2022, WKL sold all of its shares of Q Ltd., a 100% subsidiary, for $100,000. (The shares were acquired seven years ago for $80,000.) Also, during the year, WKL sold some of its vehicles for $25,000. The vehicles originally cost $50,000 and had a book value of $48,000 at the time of sale. New vehicles were obtained under a lease arrangement.

The 2021 corporate tax return shows the following ending UCC balances: Class

Undepreciated capital cost

Class 8

$30,000

Class 10

120,000

Class 13

45,000

Class 14.1

2,100

WKL occupies leased premises under a seven-year lease agreement that began three years ago.

At the time, WKL spent $60,000 to improve the premises. The lease agreement gives WKL the option to renew the lease for two three-year periods. WKL began manufacturing prefabricated homes on June 1, 2022. At that time, it acquired the following: License: right to manufacture for 10 years

$90,000

Manufacturing equipment (Class 53)

105,000

Trucks (Class 10)

60,000

Accounting amortization in 2022 amounted to $60,000.

WKL normally acquires raw land, which it then develops into building lots for resale to individuals or housing contractors. In 2022, it sold part of its undeveloped land inventory to another developer for $400,000. The sale realized a profit of $80,000, which is included in the land-development income above. The proceeds consisted of $40,000 in cash, with the balance payable in five annual instalments beginning in 2023.

Travel and entertainment expense includes the following: Professional hockey tickets for suppliers and staff

$7,000

Hotel and airfare

9,000

Charitable donations

4,000

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Legal and accounting expense includes the following: Revising the corporation's articles of association to conduct business in all provinces

$2,000

Collection of bad debts

1,500

Reviewing the terms of a collateral agreement on a long-term bank loan

3,000

Annual audit

8,000

Golf dues

2,000

Required: Calculate WKL's net income for tax purposes for the 2022 taxation year.

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22) EB Co. (a public corporation) began operations in 2021 in Edmonton, Alberta. All income in the company classifies as 'business income'. The following information was provided: 1) EB Co. signed an 8-year lease for a building when the business began. The building is estimated to be worth $500,000. EB Co. has an option to renew the lease for an additional 2 years. EB Co. spent $100,000 in 2021 on improvements to the leased building at the beginning of the year.

2) EB Co. purchased land and a building adjacent to the business for $120,000 in 2021. The Class 1 (4%) building was valued at $50,000 and is used as a storage facility.

3) EB Co. purchased several small tools in 2021 that are used to maintain the rental tools. The total cost of these tools was $8,000, and each tool cost under $500.

4) A delivery van costing a total of $50,000 was purchased in 2021, to be used solely in the business.

5) EB Co. furnished the business at a cost of $30,000 with Class 8 assets.

6) A computer was purchased for $1,000 to track sales and inventory.

7) Incorporation costs for the business in 2021 were $5,000.

8) EB Co. purchased a $42,000 passenger vehicle to be used for the business. In 2021 the vehicle was driven 20,000 km. 15,000 km were for business. (The car was to be used exclusively for business in the following years.)

9) The business was very successful in the first year so EB Co. chose to use all of the CCA that was available in 2021.

10) EB Co.'s business is an HST registrant.

The following transactions occurred in 2022: 1) EB Co. sold the delivery truck for $48,000, and immediately purchased a newer and larger model for $55,000.

2) New shelving was purchased for the reception area, at a cost of $1,000.

3) Maximum CCA was claimed for the year.

Required: Calculate the capital cost allowance per class claimed by the company in 2021 and 2022. All the assets qualify as Accelerated Investment Incentive Property. (Round all answers.)

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23) Fine Furnishings Canada Inc. (FFC) is a public corporation and manufacturer of luxury hand-crafted wooden furniture. The company operates out of Markham, Ontario and has been in business for over 35 years. FFC prepares its financial statements in accordance with ASPE and reported net income before taxes of $1,500,000 for its fiscal year ending December 31, 2022.

The following is additional information as it relates to the calculation of net income before taxes: 1. The employee salaries and wages expensed for 2022 for accounting purposes include an accrual of $350,000 for bonuses that will be paid in March of 2023. In the 2021 financial statements there was a similar accrual in the amount of $300,000 for bonuses that were paid out in March of 2022.

2. Employee benefits expensed in the year included $37,500 for golf memberships for FFC's account managers and company executives.

3. General and administrative items expensed for accounting purposes includes: a. Cost of investigating a site for a proposed warehouse (site was rejected) - $25,000 b. Client meals and entertainment - $73,500 c. Company holiday party - $18,000 d. Warranty accrual of $1,100,000 (actual costs in the year were $850,000) 4. Professional fees expensed in the year included a. Audit fees - $55,000 b. Legal fees for general corporate affairs - $11,500 c. Legal fees to enforce collection of overdue accounts receivable - $23,500 d. Financing fees relating to obtaining new capital assets - $10,000 5. The UCC balances on January 1, 2021, were: a. Class 1 (manufacturing) - $4,000,000 b. Class 8 - $900,000 c. Class 10 - $165,000 d. Class 12 - nil e. Class 53 - $200,000 6. FFC had the following capital asset additions and disposals during the year a. A luxury automobile was purchased for $70,000 plus 13% HST for the company's CFO. b. Permanent landscaping around the company's building - $120,000 c. FCC purchased new manufacturing machinery for an aggregate cost of $800,000. The old

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machinery, that originally cost $500,000, was sold for $100,000. d. Small tools having an aggregate cost of $350,000 were sold off for proceeds of $100,000. e. New furniture and fixtures were acquired for $325,000 in the year. Old fixtures originally costing $150,000 were disposed for proceeds of $25,000 f. $200,000 was spent to acquire a patent for a new proprietary lacquer formula that improves the water resistance and shine during the manufacturing process of FFC's outdoor furniture lines.

The patent was acquired November 1 and has a 20-year life. g. For accounting purposes, the dispositions of the old manufacturing equipment, fixtures, and small tools resulted in a net loss on disposal of assets of $182,000 on the income statement.

Required: Determine FFC's business income for income tax purposes for the 2022 taxation year. Provide a brief explanation for anything you have intentionally omitted from the calculation.

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Answer Key Test name: Chap 06_2022-23 1) B 2) D 3) A 4) D 5) C 6) A 7) A 8) C 9) C 10) D 11) A 12) B 13) A 14) D 15) C 16) D 17) D 18) B 19) C

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CHAPTER 7 1) Which of the following statements concerning the tax treatment of interest income is true?

A) Individuals must accrue interest on a daily basis.

B) The anniversary day accrual method of recognizing interest income requires that interest income received by a corporation be recognized for tax purposes for every twelve-month period from the date the investment is made.

C) Foreign interest income is exempt from taxes in Canada.

D) The anniversary day accrual method of recognizing interest income requires that interest income received by an individual be recognized for tax purposes for every twelve-month period from the date the investment is made.

2) Midori Sato owns a rental property which had a UCC of $85,000 at the beginning of 2022. After all allowable expenses other than CCA, Midori's total rental income was $1,000 in 2022 and $10,000 in 2023. Midori always deducts the maximum CCA allowed. What is the UCC for the rental property at the end of 2023? (The property is a Class 1 - 4%, building.)

A) $78,336 B) $80,640 C) $84,000 D) $85,000

3)

Which of the following is true concerning dividends?

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A) Foreign dividends are included in income at their pre-withholding-tax amounts for tax purposes.

B) Dividends received from a CCPC's business income that is not subject to the small business deduction are typically grossed-up to include 115% of the dividend.

C) Dividends received from a CCPC's business income that is subject to the small business deduction are typically grossed-up to include 138% of the dividend.

D) Eligible dividends require a 115% gross-up.

4) In 2023, Mango Inc. earned $150,000 of pre-tax income. The tax rate for the company is 13%. The sole shareholder received all of the net earnings in the form of a non-eligible dividend during the year. The shareholder has a personal tax rate of 50%. If the shareholder is entitled to a total (federal + provincial) dividend tax credit equal to $20,000, what is the net personal tax liability on the dividend (ignoring all other tax implications)? (Round intermediate and final amounts to nearest whole dollar.)

A) $19,500 B) $20,000 C) $55,038 D) $75,038

5) Varuna Doshi had rental income before CCA of $3,000 in Year 1. The UCC at the beginning of Year 1 was $50,000 (Class 1 - 4%). In Year 2 the rental income before CCA was $1,000. Varuna chose to expense the allowable CCA on the rental property both years. Which of the following statements is true?

A) Varuna has a net rental loss in Year 2 of $920.

B) Varuna has net rental income in Year 2 of $1,000.

C) Varuna has net rental income in Year 2 of $0.

D) Varuna has net rental income in Year 1 of $3,000.

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6)

Royalty income requiring considerable effort to earn the income is typically treated as

A) employment income.

B) business income.

C) property income.

D) other income.

7) As a result of anti-avoidance provisions of the Income Tax Act, property income shifted to a spouse or child in a lower tax bracket will typically

A) be permitted to utilize the lower tax rate.

B) be disallowed unless the child is under the age of 18.

C) be attributed back to the transferor of the property or subject to the top personal tax rate.

D) be attributed back to the transferor of the property or subject to the lowest personal tax rate.

8) Gurpreet owns a rental property. The pre-tax yield of the rents and the capital is expected to be 5% each. Gurpreet is in a personal marginal tax bracket of 45% for ordinary income, 30% for eligible dividends, and 23% for capital gains. What are the after-tax yields (as a percentage) of the rent and the real estate?

A) 5% for both the rents and the real estate B) 2.75% for the rents and 3.85% for the real estate C) 2.25% for the rents and 1.15% for the real estate D) 2.25% for both the rents and the real estate

9) Lily Chen received a $150,000 inheritance. With the proceeds, Lily purchased rental properties and bonds. Lily currently has $150,000 in personal liabilities. What tax effect could Lily have realized if the inheritance had been used to pay off the liabilities, and the investments were then purchased using a bank loan.

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A) Lily could deduct the interest payments on the loan used to purchase the investments against the property income.

B) Lily would be taxed on the interest payments on the loan used to purchase the investments.

C) The inheritance income would be taxed.

D) There would be no tax effect.

10) On March 1, Year 1, Tree Co. purchased a two-year guaranteed investment certificate (GIC) for $15,000. The interest compounds annually at 8%. Tree Co. has a marginal tax rate of 30%, which will increase to 34% for Years 2 and 3. Tree Co. uses the calendar year as its fiscal year. How much is Tree Co.'s total after-tax interest income from the GIC? (Use a 365-day year for all years.)

(Round intermediate and final answers to nearest whole dollar.)

A) $720 B) $808 C) $1,200 D) $1,687

11) On March 1, Year 1, Bailey purchased a two-year guaranteed investment certificate (GIC) for $15,000. The interest compounds annually at 8%. Bailey has a marginal tax rate of 40%. How much is Bailey's total after-tax interest income from the GIC?

A) $960 B) $1,440 C) $1,498 D) $2,400

12) A Canadian corporation's net income for tax purposes may be reduced by which of the following to arrive at taxable income?

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A) Dividends received from other taxable Canadian corporations B) Interest received from other taxable Canadian corporations C) Rental income received from other taxable Canadian corporations D) Royalties received from other taxable Canadian corporations

13)

Property income includes

A) income derived from ownership of an asset with minimum effort from the owner.

B) only income from the leasing of land and building.

C) income from the sale of assets.

D) only interest income.

14) Z Co. lends out a $10,000 3-year note with 5% interest on October 1. The agreement calls for interest to be paid at the end of the term. The year-end is November 30. How much interest must it claim in the first year the loan is outstanding? (Rounded)

A) $0 B) $500 C) $1,500 D) $84

15) During the year, X Co., a small business corporation (which earns only business income subject to the low corporate rate) pays out a $1,000 dividend to its only shareholder Sam. How much must Sam add to his income?

A) $1,000 B) $0 C) $1,150 D) $1,380

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16) DJ earns rental income and wishes to minimize the income. DJ may deduct CCA (capital cost allowance) with which of the following limitations?

A) No limitation on CCA. B) CCA on a building is limited to the net rental income after other expenses.

C) CCA may not be deducted on rental.

D) The deduction of CCA on all rental assets, combined, cannot exceed the taxpayer’s net rental income before CCA.

17) Y Co., a public corporation, issues a 5% stock dividend when the market price is $10 per share. An individual, Jesse, received 100 shares as a result of this dividend. What amount must Jesse include in property income?

A) $1,570 B) $1,380 C) $1,000 D) $100

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18)

The following problem pertains to the 2022 tax year.

Thato has provided you with the following information: That owns rental properties originally valued at $275,000. (Property 1: land $70,000, building $55,000) (Property 2: land $90,000, building $60,000) The buildings are Class 1 (4%) properties. Net rental income before CCA was $11,000.

• The UCC on building 1 at the beginning of the year was $50,000.

• The UCC on building 2 at the beginning of the year was $40,000.

• Property 2 was sold during the year for $250,000 (land $200,000, building $50,000) Thato owns shares in ABC Inc. (a CCPC) valued at $50,000, and received $5,000 in noneligible dividends during the year.

Thato purchased a 5-year GIC two years ago for $30,000. Interest earned for the year was $1,000.

Thato works full-time as a baker, earning a gross salary of $45,000.

Thato is in a 45% tax bracket.

Required: Calculate Thato's net income for tax purposes in accordance with Section 3 of the Income Tax Act (exclusive of enhanced CPP). Thato will take the maximum CCA allowed this year on the rental properties.

19) Jiang has received an inheritance of $100,000. Jiang is trying to decide what to do with this money and has come to you for some advice. Jiang has an excellent credit rating and no outstanding debts and would like to buy a $225,000 house and invest $100,000 in bonds.

Required: How could Jiang minimize this year's tax liability, assuming only the facts given?

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20) A public corporation earns $500,000 in pre-tax profits and pays out all its after-tax earnings in dividends. The corporate tax rate is 27.5% and the sole shareholder is in a 50% tax bracket. The dividend gross-up rate is 1.38 and the total dividend tax credit (federal and provincial) is equal to the corporate tax.

Required: A) Calculate the tax liability for 1) the corporation and 2) the shareholder.

B) Briefly explain how this tax structure illustrates the theory of integration.

21)

Ricki received the following income during the tax year:

Eligible dividend for $2,000 Non-eligible dividend for $3,500 Foreign dividend for $1,500 ($225 was withheld by the foreign country, netting Ricki $1,275.)

Required: Calculate Ricki’s property net income for tax purposes.

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Answer Key Test name: Chap 07_2022-23 1) D 2) B 3) A 4) C 5) C 6) B 7) C 8) B 9) A 10) D 11) C 12) A 13) A 14) D 15) C 16) D 17) B

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CHAPTER 8 1) Havana purchased a piece of land two years ago with plans to build and operate a greenhouse and evergreen nursery. Havana is a full-time teacher but has always dreamed of running a business. Havana has not yet started the business, and upon receiving an offer to teach on a tropical island, has decided to sell the land. Which of the following statements is correct?

A) Havana's primary intent suggests that the income should be treated as a business transaction.

B) Havana purchased the land with the primary intent to resell it at a profit.

C) Havana purchased the land with the primary intent to recognize a long-term economic benefit.

D) The intent of the purchase is insignificant when determining the type of taxable income to report.

2) When a taxpayer owns more than one residence, the decision to designate a particular property as the 'principal residence'

A) occurs at the time of acquisition.

B) occurs on the first anniversary of the residence.

C) occurs at the time of sale.

D) is restricted to the residence with the lowest value.

3) Dakota sold a piece of land in Year 1 for $350,000. The land was recognized as capital property. The original cost of the land was $75,000. The selling costs incurred in Year 1 were $5,000. The terms of the payment included an immediate down payment of $50,000, with the remainder of the cost to be paid over the next three years in three equal payments. Dakota wishes to report the minimum taxable capital gain allowed each year. What is the taxable capital gain for Year 1? (Round intermediate and final answers to nearest whole dollar.)

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A) $0 B) $27,000 C) $54,000 D) $135,000

4) Rayyan purchased 1000 shares in Y Co. in Year 1 for $5 per share. Due to a decline in market value, Rayyan sold the shares on September 22, Year 2, when they were trading for $3 per share. On October 3, Year 2, Rayyan repurchased 1000 shares of Y Co. at $2.50 per share.

Which of the following is true for Rayyan?

A) Rayyan can recognize a $2,000 capital loss on the sale of the shares in the Year 2 tax year.

B) Rayyan can recognize a $2,000 superficial loss on the sale of the shares in the Year 2 tax year.

C) The adjusted cost base of Rayyan's new shares is $4,500.

D) The adjusted cost base of Rayyan's new shares is $2,500.

5) When establishing whether the sale of an asset is capital income or business income, which of the following is one of the factors typically taken into consideration to determine the primary intention of a transaction?

A) Age of the asset B) Payment terms of the sale C) Number and frequency of transactions D) Market value of the asset

6) Duane sold the shares of an arm's-length small business corporation in Year 1, resulting in a capital loss of $2,000. If all of the conditions for an allowable business loss are met, Duane will recognize which of the following?

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A) ITA 3(d) deduction of $1,000 in Year 1 B) ITA 3(b) deduction of $2,000 in Year 1 C) ITA 3(b) gain of $1,000 in Year 1 D) ITA 3(d) loss of $2,000 in Year 1

7) Sasha gifted Canadian public securities to a public charity in Year 1. The securities had a market value of $22,000 and an ACB of $8,000. Sasha is in a 40% tax bracket. Which of the following will apply to Sasha?

A) Sasha will have a capital gain of $14,000 and receive a donation receipt for $14,000.

B) Sasha will have a capital gain of $14,000 and receive a donation receipt for $5,600.

C) Sasha will have a capital gain of $0 and receive a donation receipt for $14,000.

D) Sasha will have a capital gain of $0 and receive a donation receipt for $22,000.

8) The weighted average method is used to determine the adjusted cost base in order to determine the capital gain or loss for which of the following?

A) Identical properties B) Commodities and futures transactions C) Voluntary and involuntary dispositions D) Gifts of Canadian public securities

9) In which of the following situations would the gains on the sale of commodities and futures be required to be reported as business income?

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A) The sale of commodities and futures is always treated as capital income.

B) The nature of the taxpayer's business is closely associated with the commodity.

C) The commodity is an infrequently traded cryptocurrency by an investor with little knowledge about the market and little time is spent on the trades.

D) Similar transactions are accurately reported as capital income year after year.

10) A gain resulting from the receipt of compensation for expropriated property may be deferred if the property is

A) replaced before the end of the second taxation year that begins following the year of expropriation.

B) replaced before the end of the fifth taxation year that begins following the year of expropriation.

C) not land or a building used in the business.

D) not equipment or machinery used in the business.

11) Big Co. purchased land 5 years ago for $100,000 which it sold this year (Year 1) for $150,000. The terms of the sale included $45,000 to be received this year, with three equal installments to follow beginning next year (Year 2). Big Co.’s year-end is December 31. The taxable capital gain to be reported in Year 1 is

A) $5,000.

B) $7,500.

C) $15,000.

D) $25,000.

12) Tiny Nurseries Ltd. purchased land 10 years ago for $200,000 which it sold this year for $250,000. The terms of the sale included $60,000 to be received this year (Year 1), with eight equal installments to follow beginning next year (Year 2). The company’s year-end is December 31. The taxable capital gain to be reported in Year 2 is

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A) $4,000.

B) $6,000.

C) $19,000.

D) $25,000.

13) Capital gains or losses are defined as the gains or losses experienced when a capital property is sold. Capital property is defined as

A) property held for a long time.

B) property whose intended purpose at acquisition was to achieve a long-term benefit.

C) any long-term asset.

D) property, plant, and equipment only.

14)

Taxable capital gains are categorized into several categories. They are

A) listed personal property and financial property.

B) private-use property, personal-use property, and financial property.

C) listed personal property and personal-use property.

D) listed personal property, personal-use property, and financial property.

15) During the year, Rashad sold two assets: a vehicle which was sold for $20,000 that originally cost $23,000 and a cottage (not a principal residence) which sold for $200,000 and originally cost $125,000. What is Rashad's taxable capital gain as a result of these transactions?

A) $72,000 B) $36,000 C) $37,500 D) $75,000

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16) Luke owns shares of L Co., a Canadian small business corporation. L Co. goes bankrupt during the year and Luke's shares that originally cost $20,000 are now worthless. Luke can claim which of the following?

A) An allowable capital loss of $10,000, which may be claimed against taxable capital gains B) An allowable business investment loss of $10,000, which may be claimed against any source of income C) A non-capital loss of $20,000, which may be claimed against any source of income D) An allowable capital loss of $20,000, which may be claimed against taxable capital gains

17) Renée sold 500 shares of X corporation that originally cost $19 for $15 per share. The following week, Renée repurchased 200 of those shares for $18 per share. What is Renée's allowable capital loss?

A) $1,000.

B) $600 C) $0 D) $100

18) Leslie sold 500 shares of X corporation that originally cost $19 for $15 per share. The following week, Leslie repurchased 200 of those shares for $18 per share. What is the adjusted cost base of the remaining 200 shares?

A) $4,400 B) $3,600 C) $3,800 D) $3,000

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19) The residential property flipping rule treats profits from the sale of property sold on or after January 1, 2023 (where life event exemptions do not apply) as

A) business income if the property is owned for less than twelve months.

B) capital income if the property is owned for less than twelve months.

C) a principal residence if the property is owned for less than twelve months.

D) tax exempt if the property is owned for less than twelve months.

20) Giang Ngo sold a piece of land in Year 1 for $500,000. The original cost of the land was $100,000. Selling costs totaled $15,000. The land qualifies as capital property. The purchaser of the land paid Giang $80,000 in Year 1 and will pay $84,000 each year for the next five years.

Required: Calculate the minimum taxable capital gain that Giang will include in income for tax purposes for Year 1 and Year 2.

21)

Emily Spring sold the following assets during the tax year.

Asset

Original Cost

Proceeds of Disposition

Sportscar

$24,000

$10,000

Antique cabinet

$1,000

$2,000

A rare coin

$100

$1,100

Shares in a public corporation

$4,000

$3,000

Canoe

$500

$600

Limited edition painting

$800

$2,500

Sculpture

$1,100

$900

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Required: Determine the total taxable income from Emily's sales, identifying the appropriate categories of capital property.

22) Juanita Olsen purchased a home in 2015 for $150,000 and a cottage in 2019 for $100,000. Due to a rise in real estate prices, Juanita decided to sell both properties and travel for a year. Both properties were sold in October of 2023. Juanita received proceeds of $375,000 for the house, and $250,000 for the cottage.

Required: Calculate the minimum taxable capital gain that Juanita will report for the house and cottage for the 2023 tax year. Show all calculations, identifying the taxable capital gain for each property.

23)

Angel Ramos received the following income in 2023: Employment income

$85,000

Non-eligible dividends

$5,000

Sale of capital assets:

Proceeds

ACB

Shares in IMZ Co. (public corporation)

$20,000

$12,000

Shares in BAR Co. (public corporation)

$3,000

$10,000

Shares in TRI Inc. to arm's-length party (small business corporation)

$2,000

$7,500

Stamp set

$1,500

$2,500

Personal electronic system

$3,000

$1,000

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Coin set

$4,000

$800

Required: Determine Angel's net income for tax purposes for 2023 in accordance with the aggregating formula of Section 3 of the Income Tax Act. (CPP for enhanced contribution = $461)

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Answer Key Test name: Chap 08_2022-23 1) C 2) C 3) B 4) C 5) C 6) A 7) D 8) A 9) B 10) A 11) B 12) A 13) B 14) D 15) C 16) B 17) B 18) A 19) A

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CHAPTER 9 1)

Which of the following deductions is allowed as an 'other' deduction for tax purposes?

A) Contributions to a child's RESP B) Lump sum support payments to a former spouse C) Support payments for a child D) Contributions to an individual's RRSP

2) A parent gifted shares in a public corporation to their fifteen-year-old child. The ACB of the shares was $10,000. During the year, the child received $500 in dividends from the shares.

The child then sold the shares for $12,000. Which of the following is true for the parent and child?

A) The child will recognize the dividends and capital gain on their tax return.

B) The parent will recognize the dividends on their tax return and the child will recognize the capital gain on their tax return.

C) The parent will recognize the dividends and a capital gain on their tax return.

D) The child will recognize the dividends on their tax return and the parent will recognize the capital gain on their tax return.

3)

Which of the following is true regarding Tax Free Savings Accounts (TFSAs)?

A) There is a mandatory age by which a TFSA must be wound up.

B) TFSA contributions are tax deductible.

C) Unused amounts not contributed in a given year may not be carried forward to future years.

D) A spouse may contribute to the other spouse's TFSA without attribution consequences.

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4) Car Co. is selling its land and building to Truck Co. for $340,000 (Land $200,000, Class 1 Building $140,000). These values have not been officially appraised and Truck Co. thinks that the land is only worth $150,000 and the building is worth $190,000. (Car Co. originally paid $100,000 for the land and constructed the building for $150,000. The UCC on the building is currently $130,000.) Which of the following statements is correct based on these facts?

A) Future CCA will be higher for Truck Co. if Car Co.'s terms are accurate.

B) Car Co. will recognize higher net capital gains if Truck Co.'s terms are accurate.

C) Car Co. will recognize higher recapture if Truck Co.'s terms are accurate.

D) The allocation of the costs is irrelevant for tax purposes as the total price is the same under both sets of terms.

5) Which of the following examples of income received from private corporations is subject to tax on split income (TOSI) for adult family members?

A) A capital gain from the sale of qualified small business corporation shares B) Income received from a related business C) Income received by the spouse of a 68-year-old business owner D) Income received by an uncle

6)

With respect to the death of a taxpayer, which of the following is accurate?

A) The reserves that are normally deductible from income are deductible up to 70% in the year of death.

B) Only income from a set list of sources is accrued up until the date of death.

C) A surviving spouse or common-law partner who is the named beneficiary of an unmatured RRSP cannot avoid tax by transferring the unmatured RRSP to their own RRSP. D) A TFSA will continue to exist if the surviving spouse/partner is the beneficiary of the deceased spouse's/partner's TFSA.

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7) Asha is 35 and single and had earned income of $57,000 in 2021 and $62,000 in 2022.

Asha's pension adjustment (PA) was $3,500 in 2021 and $4,000 in 2022. Asha's 2021 Notice of Assessment showed unused RRSP room of $8,000. How much can Asha contribute to an RRSP for the 2022 taxation year?

A) $10,260 B) $14,760 C) $15,160 D) $27,830

8) Neta had total income of $112,000 and earned income of $75,000 in 2021. Neta's 2021 Notice of Assessment reported unused RRSP contribution room of $12,000. Neta's T4 showed a pension adjustment of $5,000 in 2021. Neta anticipates a pension adjustment of $5,500 in 2022.

How much can Neta contribute to an RRSP for the 2022 taxation year?

A) $13,500 B) $20,500 C) $25,500 D) $27,830

9) Trudy is 35 years old and is considering investing $2,000 per year in a savings account at 8% or $2,000 in an RRSP at 8%, (both annual interest and ordinary annuities). The money will be invested for the next 30 years and will not be withdrawn until Trudy retires at the age of 65.

Trudy pays 35% tax on ordinary income. Which of the following is correct? (Round your future value annuity factor to 3 decimal places.)

A) Trudy will have $9,736 more if she chooses the RRSP. B) Trudy will save more if she chooses the savings account.

C) Trudy will have $19,320 more if she chooses the RRSP. D) Trudy will earn the same amount of income under both choices.

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10) Which of the following is excluded from other income or expenditure for the purpose of calculating income for tax purposes?

A) Old age security payments received from the Canadian government B) Costs to babysit a child 16 years of age or younger if incurred so the taxpayer can pursue employment, a business, or research activities C) An inheritance received D) Foreign pension benefits

11) Which of the following is included in other income or expenditure for the purpose of calculating income for tax purposes?

A) Disability pension received by a member of the Royal Canadian Mounted Police (RCMP) B) A $400 scholarship received by a student enrolled in a non-qualifying education program C) Research grants covering only the expenses incurred to conduct related research D) Foreign pension benefits

12) Laksmi pays $1,000 a month to a former spouse, $700 of which is to support their child, as per a court ordered agreement and on a regular, periodic basis. Which of the following applies to Laksmi for tax purposes?

A) Laksmi can deduct the full payments.

B) Laksmi can deduct the payments in support of the former spouse.

C) Laksmi can deduct the payments in support of the child.

D) Laksmi cannot deduct any of the payments.

13) Jessi is divorced from Caroline and as per the divorce agreement, Jessi pays support for Caroline and their child. During the year Jessi paid $14,000 in total, $12,000 of which was to meet the agreement for the child. What is Jessi's deduction for tax purposes?

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A) $6,000 B) $2,000 C) $14,000 D) $12,000

14) Wahid had earned income of $250,000 in 2021. Wahid's pension adjustment was $12,000. How much can Wahid invest in RRSP's in 2022 considering he had no carry-forward amounts?

A) $45,000 B) $33,000 C) $27,830 D) $15,830

15)

Investing in spousal RRSPs

A) allows for income splitting when the contributor turns 71.

B) allows the annuitant spouse to claim the RRSP deduction and the contributing spouse to be taxed upon withdrawal.

C) allows for the contributing spouse to claim the RRSP deduction and the annuitant spouse to claim the income.

D) is not allowed by the general anti-avoidance rules.

16) Lina contributes $2,000 to her child's RESP during the year. How much may Lina deduct for that contribution?

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A) $2,000 B) $0 C) $400 D) $1,400

17) Jean has contributed qualified investment income of $75,500 in a TFSA and through smart investing, the account is now worth $400,000. Jean decides to withdraw the entire amount and buy a house. How much will be taxed?

A) None, it is tax-free.

B) $75,500 C) None, but the excess amount will incur a 1% per month penalty.

D) $162,250

18) Rory gifted 500 shares of X Co. that originally cost $19 to their child. At the time of the gift the fair market value (FMV) of the shares was $28 per share. What amount must Rory include in taxable income?

A) $0 B) $2,250 C) $4,500 D) $3,000

19) Maya gifted 5,000 shares of Z corporation, a public company, that originally cost $15, to her spouse. At the time of the gift the fair market value (FMV) of the shares was $25 each. The shares paid dividends of $1,000. What amount must Maya include in her income, assuming no elections are filed?

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A) $0, the transfer is at cost B) $0 taxable capital gains, but the taxable dividend of $1,380 is attributed back to Maya C) Taxable capital gain of $25,000 and no attribution on the dividend D) Taxable capital gain of $25,000 and a taxable dividend of $1,380 due attribution on the dividend

20) Which of the following is a feature of the Tax-Free First Home Savings Account to begin in 2023?

A) The lifetime contribution limit is $25,000.

B) Contributions are tax-deductible.

C) Withdrawals made to purchase a first home are taxable.

D) Unused contribution room can be carried forward.

21) In Year 1, Gael Villeneuve was transferred by COOL Co. to run a small branch of the company. Gael moved 2874 kilometers from Big-city to Small-town to take on the new position.

Gael began the new job on October 1st. The new position pays $5,100 per month which is an increase from $4,500 at the former position. Gael has provided you with the following information pertaining to the moving costs: Legal fees on purchase of new home

$3,000

Payment to a national moving company for the cost of the move

$16,000

Payment to the moving company for container storage until Gael was able to take possession of the new home

$1,000

Commission fees on sale of Big-city home

$10,000

21 days accommodations at a hotel in Small-town

$2,100

Meals for Gael, Gael’s spouse, and their child, on the two-day trip from Big-City to Small-town.

$200

Gas receipts for the two-day trip. (For this case, CRA vehicle rates are 55 cents/km for the province of origin and 45 cents/km for the province of destination.)

$450

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Gael received a reimbursement of $15,000 from COOL Co. to assist with the moving expenses.

Required: A. Calculate the maximum amount of moving expenses that Gael can deduct on the Year 1 tax return. (Round your intermediate calculations to the nearest whole dollar.)

B. Will the moving expenses have any effect on Gael's Year 2 tax return?

22) Chris Nowicki was employed by Real Co. in 2022. Chris earned $35,000 from January 1 to October 10 before transferring with the company to a town 1312 kilometres away. The new position began on November 1, 2022, and paid Chris a gross salary of $4000 per month.

Chris's moving expenses included: 1. $7,000 for a moving van 2. $300 for meals for Chris and Chris's 4-year-old child on the four-day drive 3. $700 for accommodations on the four-day trip 4. $3000 ($150 per day) for 20 nights of temporary lodging in the new location until an apartment was available 5. $550 in gas receipts Chris was not reimbursed for the move.

Chris also received the following in 2022: Support payments from a former spouse ($3,000 × 12)*

$36,000

Life insurance proceeds from a deceased relative

$20,000

Prize for achievement in Chris' field of endeavour

$300

RRSP withdrawal to use for other than education or first home purchase

$15,000

Lottery winnings

$2,000

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*The support payments are in accordance with Chris's divorce agreement, which calls for monthly support payments of $1,500 for Chris and $1,500 for Chris's child.

Assumed mileage rates: New location = 50 cents/km Previous location = 47 cents/km Required:A. Determine Chris's minimum net income for tax purposes for 2022 in accordance with Section 3 of the Income Tax Act. B. Show all calculations for the moving expenses and identify any amounts to be carriedforward.

C. Explain why any amounts have not been included.

(Round your intermediate calculations to the nearest whole dollar.)

23) Indicate whether or not the parties in the following situations are "related" for tax purposes. (Consider the unrelated examples to be operating at arm's length.)

A) An uncle and their nephew are negotiating an economic transaction. Are the uncle and nephew related for tax purposes?

B) An individual is the sole shareholder of Corporation X, and the individual's spouse is the sole shareholder of Corporation Y. Are the two corporations related for tax purposes?

C) An individual owns 70% of the shares of ABC Co. Another individual owns the remaining 30%. The two individuals are not related. Is the 30% shareholder related to ABC Co.?

D) Individual X owns 30% of the shares of Corporation A. X’s spouse also owns 30% of the shares of Corporation A. The remaining 40% is owned by a friend of the family. Is individual X related to Corporation A for tax purposes?

E) Individual A and their sibling's spouse are negotiating an economic transaction. Are Individual A and the sibling's spouse related for tax purposes?

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24) Tree Corp. and Branch Co. are related for tax purposes. Tree operates as a retail outlet and Branch Co. operates as a wholesale unit. During Year 1, Tree Corp. purchased inventory for $5,000. The inventory had a market value of $7,500 in the wholesale market, and a value of $11,000 in the retail market. Tree sold the inventory to Branch Co. for $5,000. Branch then sold the inventory to other retail outlets for $11,000.

Required: A) Determine the total business income for tax purposes for both Tree and Branch in Year 1 based on the facts.

B) How would your answer in A) differ if Tree had sold the inventory to customers at the retail price instead of selling the inventory to Branch?

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Answer Key Test name: Chap 09_2022-23 1) D 2) B 3) D 4) C 5) B 6) D 7) B 8) B 9) A 10) C 11) D 12) B 13) B 14) D 15) C 16) B 17) A 18) B 19) B 20) B

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CHAPTER 10 1) Modern Ltd. had an unused allowable capital loss of $20,000 during the current fiscal year and an unused business loss of $10,000. Modern Ltd. has a December 31 year-end. Which of the following statements is correct?

A) All the losses will be lost if not used in this fiscal year.

B) The unused allowable capital loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused business loss will become a noncapital loss and can be carried back three years and forward twenty years.

C) The unused business loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused allowable capital loss will become a non-capital loss and can be carried back three years and forward twenty years.

D) The unused business loss will become a non-capital loss and can be carried back three years and forward indefinitely.

2) Which of the following statements is incorrect regarding the final tax return for a taxpayer?

A) Unused net capital losses less any capital gains deductions previously claimed are deductible against any income.

B) Non-refundable tax credits are prorated to the date of death on the final tax return.

C) In addition to the final tax return, rights or things return may be filed.

D) Of the tax returns available for a deceased taxpayer, only the final tax return must be filed.

3) Which of the following accurately describes one of the requirements for a business to qualify as a qualified small business corporation (QSBC)?

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A) The corporation must be a CCPC that uses at least 50% of the fair market value of its assets for active business purposes in Canada at the time the shares are sold.

B) More than fifty percent of the fair market value of the assets of the business must have been used for active business in the past 36 months.

C) The corporation must hire less than 5 full-time employees.

D) The shares must not have been owned by another non-related individual in the past 24 months.

4) Courtney received an eligible dividend in the amount of $2,000. Courtney is in the 50% tax bracket for regular income. How much is Courtney's dividend tax credit? (Assume a dividend tax credit rate of 15%.)

A) $300 B) $414 C) $1,000 D) $2,760

5) Which of the following is not one of the personal federal non-refundable tax credits available to reduce the total federal tax?

A) Canada employment credit B) Dividend tax credit C) Adoption expense credit D) GST/HST input tax credit

6) Seymour passed away unexpectedly at the age of 72. Which of the following of Seymour’s income items can be reported on a Rights or Things Return?

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A) Dividends declared before the date of death, but not paid prior to Seymour's passing B) Salary for the pay period ending after the date of death, when some of the days were worked prior to passing C) Salary for the pay periods paid to Seymour prior to his passing D) Interest on Seymour's bank account

7) Tony earned foreign interest income of $7,000 during the year. 15% tax was withheld by the foreign country. Tony's total net income for the year was $80,000, and the tax payable was calculated at $10,500. How much is Tony's foreign tax credit? (Rounded)

A) $919 B) $1,007 C) $1,050 D) $1,575

8) Niko reported several tax preference items in taxable income in Year 1. The normal federal tax in Year 1 was $35,000 and the alternative minimum tax (AMT) was $52,000. Niko's tax liability for Year 1 was:

A) $17,000 B) $35,000 C) $52,000 D) $87,000

9) Nanna reported several tax preference items in taxable income in Year 1. The normal federal tax in Year 1 was $45,000 and the alternative minimum tax (AMT) was $60,000. In Year 2, Nanna earned only employment income, and the normal tax for the year was $38,000. Nanna's tax liability for Year 2 was:

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A) $15,000.

B) $23,000.

C) $38,000.

D) $53,000.

10) Diego earned employment income of $112,000 in 2022. The combined CPP and EI deduction for 2022 totaled $4,453. Of this amount, $461 was the CPP enhanced contribution.

During 2022 Diego enrolled in part-time studies at the local university paying tuition fees of $1,500 and donated $2,000 to a registered charity for tax purposes. What is the total of Diego's non-refundable tax credits for 2022?

A) $3,605 B) $3,798 C) $3,729 D) $3,477

11) Barney had a net income for tax purposes of $50,000 in 2022. During the year Barney spent a total of $4,500 on eyeglasses, dental care, and prescriptions, none of which was covered by insurance or reimbursed. What is Barney's non-refundable tax credit for the medical expenses in 2022?

A) $0 B) $450 C) $3,000 D) $4,500

12) Carey earned $85,000 in employment income in 2022, $2,000 in capital gains, and $5,000 in business income. Carey’s enhanced CPP is $461. In 2021, Carey realized a business loss for tax purposes of $8,000 which could not be used, and a capital loss on the sale of public shares for $3,000 which could not be used. How much is Carey's taxable income for 2022?

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A) $84,539 B) $80,539 C) $81,039 D) $81,539

13) Taxpayer J receives social assistance from the provincial government amounting to $4,000. How is this amount handled for tax reporting purposes?

A) Not taxable so no need to report it.

B) Report $4,000 other income but allow a division C deduction of the same amount.

C) $4,000 added in 3(a) as other income.

D) $4,000 added to 3(a) and then deducted from income in 3(c).

14) Taxpayer W had an allowable capital loss of $10,000 in the current year. W also had a taxable capital gain of $5,000 in the previous year. W had no other capital transactions. How might W take full advantage of the loss?

A) Deduct it in the current year against all sources of income.

B) Deduct $5,000 loss carry-back to the previous year and deduct the remaining amount in the current year.

C) Since W had no taxable capital gains in the current year, W will have to carry-forward the amount for the next 20 years.

D) Carry back enough allowable capital loss to offset the taxable capital gain in the previous year and carry the remainder forward indefinitely.

15) Samaa is a full-time teacher at the local high school. In the summer, she operates a farm as a part-time business. During the current year, her farm experienced a loss of $14,000. How can Samaa use that loss in the most effective manner?

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A) Deduct the full amount of the loss under 3D, against all sources of income.

B) Deduct $7,000 against all sources of income under 3D and carry the remainder forward to be used against farming income.

C) Deduct $8,250 in the current year against all sources of income in 3D and carry the remaining amount back 3 years forward 20 years to be used against farming income.

D) The deduction is not allowed by the anti-avoidance rules.

16) Padma had the following capital gains during the current year: Sale of vacant land $40,000, sale of shares of a public corporation $20,000, and the sale of qualified small business corporation shares $200,000. She has never used any lifetime capital gain exemption before.

Padma's CNIL balance is 0 and she has no loss carryovers. How much will her Division C capital gains deduction be to calculate her taxable income?

A) $100,000 B) $260,000 C) $130,000.

D) $200,000

17) Allison has taxable income of $75,500 in 2022. What is Allison's federal tax payable before tax credits?

A) $11,325 B) $10,710 C) $12,717 D) $15,478

18)

Refundable tax credits are unique because

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A) the federal government pays money to individuals.

B) the federal government grants a refund to individuals, but in some cases, they have to meet an income test.

C) they are only allowed in certain provinces.

D) they are only available to low-income earners.

19) Ralph earned income of $200,000, but since most of it was from the sale of small business shares, Ralph's taxable income was $10,000. Ralph is upset that he had to pay alternative minimum tax (AMT). What might you say to Ralph to ease the frustration?

A) The transaction ultimately saved you money.

B) You will be able to carry this excess tax over for 7 years and apply it when your regular taxes payable exceeds AMT. C) Your taxable capital gain of $95,000 was at the low rate.

D) You will be able to carry this excess tax over for 10 years and apply it when your regular taxes payable exceeds AMT.

20) Pensioners who have a net income in excess of $81,761 in 2022 are required to pay back a portion of, or all of, their

A) non-refundable age credit.

B) Old Age Security.

C) employment pension.

D) RRSPs.

21)

Shirin Gilani incurred the following income, disbursements, and losses in 2022 and 2023:

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2023

Employment income

$25,000

$28,000

Proprietorship income

$-

$5,000

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Proprietorship loss

$3,000

$-

Dividend income (non-eligible dividends)

$10,000

$10,000

Bond interest

$1,000

$1,100

Business investment loss on loan made to a qualified small business corporation

$10,000

$-

RRSP contribution

$2,000

$2,000

Taxable capital gains from the sale of public shares

$-

$1,000

Allowable capital loss from the sale of public shares

$2,000

$-

Additional information: 2022 was the first year that Shirin sold a capital asset.

Shirin incurred a business loss of $5,000 from the proprietorship in 2021 (the first year of the business) that was not needed to reduce net income for tax purposes in 2021.

Shirin has never used the lifetime capital gains deduction.

Shirin’s enhanced CPP is $161 in 2022 and $245 in 2023.

Required: Calculate Shirin's minimum taxable income for 2022 and 2023, in accordance with Section 3 of the Income Tax Act.

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22) Finlay McDonald works full-time as a dentist and is in a 50% tax bracket. Finlay lives on an acreage and has operated a small farm since 2021. During 2022, Finlay incurred farm expenses totaling $38,500 and farm revenue of $5,200. Operations became more profitable in 2023 with farm revenues of $20,000 and expenses of $16,000.

Required: A. Name the type of loss that Finlay was able to recognize in 2022?

B. Calculate the loss from farming operations that Finlay was able to apply against other sources of income in 2022.

C. What effect will the 2022 operations have on Finlay's 2023 and future year's taxable income?

Show your calculations.

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23) Harjot earned $90,000 in 2022 at his full-time job, and also generated revenues of $8,000 from a part-time farm on the family's acreage. The farm expenses totaled $12,000.

The additional following information pertaining to Harjot's 2022 tax return has also been provided to you: 1) Net capital losses from 2021 totaled $10,000, and non-capital losses from 2021 totaled $2,000, and neither could be carried back to previous years.

2) Harjot had the following amounts deducted from his pay during the year: CPP and EI of $4,453 (which includes Enhanced CPP contributions of $461) and income tax of $19,000.

3) Harjot contributed $5,000 to a TFSA and $15,000 to a guaranteed investment certificate (GIC) which pays 4% annual interest. The first interest receipt for the GIC will be on June 30, 2023.

4) Harjot received a $1,000 non-eligible dividend in 2022.

5) Harjot's spouse works full-time and earns $68,000 a year.

6) Harjot had extensive dental work done in 2022. The total cost was $7,500 and Harjot did not receive any reimbursement for the cost.

Required: A. Calculate Harjot's net income for tax purposes for 2022 in accordance with Section 3 of the Income Tax Act. B. Calculate Harjot's taxable income for 2022.

C. Calculate Harjot's minimum federal tax liability for 2022. (Round all amounts to zero decimal places.)

D. Identify carry over item(s) and related amount(s).

24) Marble Inc. is a Canadian-controlled private corporation that conducts its business in Canada. The sole shareholder, Latoya Flores, is considering selling the company and would like to know if Marble is a qualified small business corporation.

The fair market value of the assets is listed below:

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$2,000.00

Accounts receivable

7,000.00

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Market securities

11,000.00

Delivery vehicles

15,000.00

Equipment

20,000.00

Goodwill

35,000.00 $90,000.00

Accounts payable

-8,000.00

Net fair market value

$82,000.00

The relevant values of the assets and liabilities have not fluctuated during the past 24 months.

During that time, Latoya has been the only shareholder.

Required: Determine if Marble Inc. is a qualified small business corporation. Briefly explain your conclusion.

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Answer Key Test name: Chap 10_2022-23 1) B 2) B 3) D 4) B 5) D 6) A 7) A 8) C 9) B 10) C 11) B 12) D 13) B 14) D 15) C 16) A 17) C 18) B 19) B 20) B

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CHAPTER 11 1) When shares are transferred from one group of shareholders to another and there is a change in control, which of the following applies?

A) Net-capital losses that arise following the change in control are automatically deemed to have expired.

B) Non-capital losses arising prior to the change in control are automatically deemed to have expired.

C) Net-capital losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.

D) Non-capital business losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.

2) Which of the following statements accurately describes the tax treatment of Canadian corporations?

A) Public and private Canadian corporations are eligible for the small business deduction.

B) Public and private Canadian corporations may be eligible for the general rate reduction.

C) Public corporations are granted beneficial tax treatment on the first $500,000 of business income.

D) Canadian controlled private corporations recognize the general tax reduction on all business income.

3) Rover Co. began operations two years ago (Year 1) and recognized $37,000 in business income and $1,000 in taxable capital gains that year. Last year (Year 2) the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000. During the current year (Year 3) business income was $50,000, taxable capital gains were $4,000, and the company received $10,000 in dividends from a taxable Canadian corporation. Rover Co. utilizes any unused losses in the earliest years possible. Which of the following taxable incomes are correct after all carry-over adjustments have been made?

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A) Year 1: $12,000; Year 2: $0; Year 3: $52,000 B) Year 1: $38,000; Year 2: ($28,000); Year 3: $64,000 C) Year 1: $13,000; Year 2: $0; Year 3: $61,000 D) Year 1: $37,000; Year 2: $0; Year 3: $27,000

4) Many corporations carry on business in more than one province. If a corporation from Province 1 wishes to conduct business in Province 2, the corporation will not make any provisional allocation to Province 2 if

A) the parent corporation sets up a branch in Province 2.

B) the permanent establishment in Province 2 has a lower sales to wage ratio than the ratio in Province 1.

C) a branch treaty exists between Province 1 and Province 2.

D) business is conducted in Province 2 by way of direct sales from Province 1.

5)

Which of the following can be included as a Division C deduction during the year?

A) Dividends received from a taxable Canadian corporation by ABC Co. (a CCPC) B) Dividends received from a taxable Canadian corporation by an individual C) A donation made to a registered charity by an individual D) A net-capital loss from the previous year by Small Inc. which earned only active business income during the year

6) Beetle Ltd. had the following accounts in Year 1: Revenue $100,000, COGS $65,000, Salaries $45,000, Gain on Sale of Assets $20,000, Administrative Expenses $8,000. Which of the following is correct?

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A) Beetle Ltd. will have a non-capital loss carryforward of $0 at the end of the year.

B) Beetle Ltd. will have a non-capital loss carryforward of $4,000 at the end of the year.

C) Beetle Ltd. will have a non-capital loss carryforward of $8,000 at the end of the year.

D) Beetle Ltd. will have a non-capital loss carryforward of $18,000 at the end of the year.

7) The Big Corp. is a Canadian controlled private corporation which realized a total net income for tax purposes of $230,000 in Year 1. During the year, Big received $25,000 in dividends from a taxable Canadian corporation, and Big also donated $15,000 to a registered charity. What is Big's taxable income in Year 1?

A) $190,000 B) $205,000 C) $215,000 D) $240,000

8) Y Co. is a Canadian controlled private corporation with active business income of $350,000 in Year 1. The company engages in retail and wholesale activities. Capital gains recognized by the company in Year 1 totaled $84,000. Y Co. will utilize a net capital loss carryover of $28,000 on its Year 1 tax return. What is Y Co.'s net income for tax purposes?

A) $350,000 B) $364,000 C) $392,000 D) $434,000

9) W Co. is a Canadian controlled private corporation with active business income of $400,000 in Year 1. Capital gains recognized by the company in Year 1 totaled $50,000. W Co. will utilize a net capital loss carry-over of $30,000 on its Year 1 tax return. What is W Co.'s taxable income?

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A) $395,000 B) $400,000 C) $420,000 D) $435,000

10) Maple Co. is a new Canadian controlled private corporation with active business income of $450,000 in its first year of operations. Capital gains recognized by the company during the year totaled $30,000. How much is Maple Co.'s small business deduction for the year? (The annual limit has not been reduced by any small business deduction reductions.)

A) $85,500 B) $88,350 C) $91,200 D) $95,000

11) Dover Inc. is a public Canadian corporation which was established five years ago. The company's head office is located in Province 1. A small branch was established last year in Province 2. The company's books show the following for the current year: Sales in Province 1: $6,800,000 Sales in Province 2: $1,200,000 Total labour costs of the company: $2,000,000 Labour costs in Province 1: $1,500,000 Labour costs in Province 2: $500,000 Income from operations in Province 1: $550,000 Income from operations in Province 2: $100,000 Dividends received from a taxable Canadian corporation: $50,000 What is Dover Inc.'s taxable income in Province 1?

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A) $487,500 B) $520,000 C) $552,500 D) $560,000

12) Swan Co. is a CCPC with net income for tax purposes of $800,000 in Year 1. All of Swan Co's income is active business income except for a $15,000 taxable dividend income that was received from another taxable Canadian corporation during the year. How much is Swan Co.'s federal tax liability in Year 1? (Apply rates applicable for 2022. The annual small business deduction limit has not been reduced for Swan Co.)

A) $33,600 B) $87,750 C) $90,000 D) $161,850

13)

Under the Canadian Income Tax Act, corporate profits are taxed at

A) the shareholder level since corporations are extension of shareholders.

B) the corporation level because it is a separate entity.

C) the corporation level first and then the shareholder level on the difference in tax rates.

D) the corporation level first and then the shareholder level on profits distributed.

14)

The net income for tax purposes of a corporation is determined by the

A) income statement.

B) income statement less income taxes.

C) income statement less income taxes and depreciation.

D) application of the section 3 schema.

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15) W Co. had net income of $30,000 as per the income statement. It included $1,000 of donations and $3,000 of dividends from a taxable Canadian corporation. What is W’s taxable income?

A) $30,000 B) $26,000 C) $27,000 D) $29,000

16) XYZ Co. has net income consisting solely of $50,000 in dividends from a taxable Canadian Public Corporation. What is its taxable income?

A) $0 B) $50,000 C) $25,000 D) $69,000

17) Corporation A has a profit of $100,000, and Corporation B has a loss of $250,000. Both corporations have the same shareholders. How might Corporation A get the use of Corporation B's losses?

A) Corporation A can transfer its profits to Corporation B. B) The loss from Corporation B can be transferred to Corporation A. C) Only $100,000 from Corporation B can be transferred to Corporation A. D) Corporations B and A would have to merge to one company.

18) From 2021 to 2031 there is a temporary enhancement to the small business deduction and general rate reduction for

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A) retail outlets.

B) general contractors.

C) manufacturing and processing of eligible zero-emission technology.

D) new businesses specializing in medical devices.

19) The Canadian tax system practices integration between corporations and individuals in order to address and reduce double taxation. The following information has been provided for analysis purposes: Corporate income

$200,000

Non-eligible dividends paid to shareholder

174,000

Corporate tax rate

13%

Personal tax rate

50%

Marginal non-eligible dividend tax rate

43%

Required: Using the data provided, demonstrate numerically the concept of integration.

20) Using general terms, explain how a change in control of a corporation can affect the netcapital losses and the non-capital losses.

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21) Robin Co. is a Canadian controlled private corporation with active business income of $750,000 in Year 2. Dividends of $80,000 were received during Year 2 from a taxable Canadian corporation. The company recognized a $50,000 capital gain during Year 2. The company's yearend is December 31st.

Additional information is as follows: Net-capital loss carry-over from Year 1 is $30,000 Non-capital loss carry-over from Year 1 is $70,000 Required: Calculate the following for the company for the Year 2 tax year: A. Net income for tax purposes B. Taxable income C. Part I Federal Tax - Identify amounts for 1) basic federal tax, 2) federal abatement, 3) refundable tax on investment income, 4) small business deduction, 5) general rate reduction), and 6) the total federal tax.

22) Khensu incorporated a small Canadian controlled private corporation in Year 1. The company pays non-eligible dividends. The balance sheet for Year 3 is as follows: Balance Sheet, December 31, Year 3 Assets

$20,000

$20,000

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Share Capital

$3,000

Retained Earnings

$17,000 $20,000

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Khensu would now like to leave the company and is considering either 1) a sale to an arm'slength party for the current share value of $20,000, or 2) winding up the corporation by taking the retained earnings as a dividend and a tax-free return of the share capital.

Khensu's marginal tax rates are 50% on ordinary income, 41% on non-eligible dividend income, and 25% on capital gains. The company is not a QSBC. Required: A. Determine the tax that Khensu will realize as a shareholder if the company is sold.

B. Determine the tax that Khensu will realize as a shareholder if the corporation is wound up.

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Answer Key Test name: Chap 11_2022-23 1) D 2) B 3) A 4) D 5) A 6) C 7) A 8) C 9) B 10) A 11) B 12) B 13) D 14) D 15) C 16) A 17) D 18) C

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CHAPTER 12 1)

Which of the following scenarios would be appropriate for a section 85 roll-over?

A) A shareholder of a corporation wishes to transfer their vehicle to their corporation.

The vehicle originally cost $20,000 and has a market value of $12,000.

B) A corporation wishes to convert land owned by the company into a parking lot.

C) A taxpayer wishes to transfer property worth $200,000, with an ACB of $90,000, to their corporation.

D) A corporation is selling its equipment to another corporation and does not wish to own shares in the other corporation.

2) Which of the following statements is correct regarding the disposal of shares by a shareholder?

A) When a shareholder sells shares to other shareholders, the corporation's capital base increases.

B) The sale of shares to other shareholders is known as a 'buy-back'.

C) The sale of shares back to the corporate treasury is not an allowable transaction.

D) The sale of shares to the corporate treasury may result in a deemed dividend and a capital gain or capital loss to the shareholder.

3) Andi sold 5000 shares back to ABC Co. for $30,000 during the current fiscal year. Andi purchased these shares from an arm's-length party three years ago for $15,000 who had originally purchased the shares from the corporate treasury for $10,000. Which of the following tax consequences will Andi recognize?

A) A deemed dividend of $15,000 and no capital gain or loss.

B) A deemed dividend of $20,000 and a capital loss of $5,000.

C) A deemed dividend of $20,000 and a capital gain of $10,000.

D) A deemed dividend of $15,000 and a capital gain of $10,000.

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4) X Co. transferred a small piece of land to one of its shareholders as a dividend in kind.

The land originally cost $50,000 and had a fair market value of $175,000 at the time of the transfer. The corporation will realize , and the shareholder will realize .

A) no tax effect; a dividend of $125,000 B) a dividend of $125,000; no tax effect C) a capital gain of $125,000; a dividend of $175,000 D) a capital gain of $50,000; a dividend of $125,000

5) Little Co. is a Canadian controlled private corporation and Large Co. is a public Canadian corporation. Both corporations have a paid-up capital balance of $25,000. Which of the following statements is correct, provided the proper legal steps are followed?

A) If Little Co. makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence for the shareholders.

B) If Little Co. makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.

C) If Large Co. makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence for the shareholders.

D) If Large Co. makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.

6) Marta has operated a proprietorship for three years and now plans to incorporate the company. All of the assets and liabilities of the proprietorship will be transferred to the corporation.

Amongst the list of assets being transferred are accounts receivable with a fair market value of $5,000 and a tax cost of $7,000. If Marta chooses to transfer the receivables using a joint Section 22 election, which of the follow will apply?

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A) The cost of the receivables to the corporation for tax purposes will be $5,000.

B) The corporation will not be allowed to claim a reserve for doubtful accounts or bad debts against its business income at year-end.

C) Marta will treat the loss as a capital loss.

D) Marta will treat the loss as a business loss.

7) A shareholder of a Canadian corporation is planning to transfer a building to the corporation and wishes to avoid tax on the transaction. The building originally cost $150,000. It has a UCC of $85,000 and a fair market value of $225,000. Which of the following will meet the shareholder's wish?

A) The shareholder can receive non-share consideration of $150,000 and preferred shares of $85,000.

B) The shareholder can receive non-share consideration of $140,000 and preferred shares of $10,000.

C) The shareholder can receive non-share consideration of $85,000 and preferred shares of $140,000.

D) The shareholder can receive non-share consideration of $225,000 and preferred shares of $0.

8) There are significant attributes in the tax treatment of shareholder debt and shareholder equity from the perspective of both a CCPC and its shareholders. Which of the following is an example of a tax consequence on return on investment of shareholder debt?

A) Interest is typically fully deductible by the corporation B) There is preferential timing of loss on shareholder debt C) A shareholder loan is easily returned if there is enough capital in the corporation D) A capital gain realized by an individual may be eligible for the capital gain deduction if the CCPC is a QSBC

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9) There are significant attributes in the tax treatment of shareholder debt and shareholder equity from the perspective of both a CCPC and its shareholders. Which of the following is an example of a tax consequence on return of investment of shareholder equity?

A) Interest is taxed in the hands of the shareholder at a marginal tax rate for regular income.

B) Sale of shares back to the corporation may result in a S.84(3) deemed dividend and capital gain or capital loss.

C) Dividends received by a CCPC from taxable Canadian corporations are deducted from net income for tax purposes to reduce the corporation's taxable income.

D) A loss on the investment is typically a capital loss which may potentially qualify as an ABIL.

10) There are significant attributes in the tax treatment of shareholder debt and shareholder equity from the perspective of both a CCPC and its shareholders. Which of the following is an example of a tax consequence from the loss of investment of shareholder debt?

A) Interest is typically fully deductible by the corporation.

B) Sale of shares to another shareholder may create a capital gain or loss.

C) The loss on shareholder debt typically has preferential timing in comparison to the loss on shareholder equity.

D) The loss may be recognized when the shares are sold, or the corporation is insolvent or bankrupt.

11) X Co. is transferring the following land to Y Co. (a Canadian controlled private corporation) under section 85 of the Income Tax Act. The land has an ACB of $70,000 and a FMV of $150,000. X Co. will receive $100,000 as non-share consideration and $50,000 in preferred shares. What is the minimum elected value for the transfer?

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A) $50,000 B) $70,000 C) $100,000 D) $150,000

12) ABC Inc. is transferring land to Fins Co. (a CCPC) under section 85 of the Income Tax Act. The land has an ACB of $70,000 and a FMV of $150,000. ABC Inc. will receive $100,000 as non-share consideration and $50,000 in preferred shares.

How much is ABC's income or loss for tax purposes as a result of the roll-over if the minimum allowable elected value is selected?

A) $0 B) $15,000 C) $30,000 D) $70,000

13) X Co. is subject to a 27% combined tax rate and earns income before interest of $2,000.

A shareholder (in a 50% tax bracket on regular income) lends $20,000 to the corporation at a rate of 10%. What is the combined corporate and shareholder tax?

A) 0 B) $540 C) $940 D) $1,000

14) X Co. is subject to a 27% combined tax rate and earns income before interest of $2,000.

A shareholder lends $20,000 to the corporation interest-free. All after-tax corporate profits will be paid to the shareholder as a non-eligible dividend. What is the combined corporate and shareholder tax, assuming a shareholder tax rate of 50% on regular income and 43% on noneligible dividends? (Round your intermediate calculations to the nearest whole dollar.)

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A) $542 B) $1,168 C) $860 D) $1,000

15) A shareholder owns a building with an original cost of $100,000, an undepreciated capital cost of $90,000, and a fair market value of $150,000. The shareholder wishes to transfer the building to the corporation and avoid tax on the transfer. How can this be done?

A) Sell the building to the corporation for $100,000.

B) It cannot be done. You must transfer the building at fair market value.

C) File a tax election electing a transfer price of $90,000.

D) Sell the building to an arm's length price.

16)

When a corporation distributes a stock dividend it

A) does nothing.

B) reduces retained earnings and increases share capital by the same amount.

C) has to pay a tax equal to the dividend.

D) has to pay a tax on the number of shares distributed.

17) A shareholder transfers land with fair market value of $150,000 and a cost of $40,000 for $40,000 cash and preferred shares worth $110,000. If the shareholder wishes not to pay any tax on the transfer, what would they do?

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A) The shareholder may claim $130,000 capital gain, and the cost to the company can only be $20,000.

B) The shareholder may elect $110,000 because that is the value of equity received.

C) The shareholder may recognize the fair market value of $150,000 because that is the amount received.

D) The shareholder would make a tax election, electing a transfer price of $40,000 for the land.

18) Aram Fisher has operated a proprietorship for five years and has decided to incorporate the company this year. The following assets will be transferred to the corporation:

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UCC/ACB

FMV

Land

$50,000

$200,000

Building (capital cost $120,000)

100,000

140,000

Equipment (capital cost $100,000)

75,000

75,000

Goodwill

NIL

20,000

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The transfer will also include the company's inventory and accounts receivables. The inventory originally cost $25,000 and has a fair market value of $30,000. The accounts receivable have a fair market value of $10,000 and a cost of $12,000.

Aram wishes to minimize the tax effect of this business decision using a Section 85 rollover where beneficial. Aram will receive the maximum non-share consideration possible and the remainder of the transfer in preferred shares for assets transferred using Section 85. Any other assets will be transferred for non-share consideration.

Required: A. What is the elected value for each of the assets transferred under Section 85?

B. What is the value of the non-share consideration that Aram will receive for those assets benefitting from Section 85? (Show the amounts for each asset, and the total for all.)

C. What is the value of the preferred shares that Aram must receive in order to defer any income inclusions from the assets that will benefit from Section 85? (Show the amounts for each asset, and the total for all.)

D. Identify any asset(s) not included in your previous answers, and briefly explain why they were excluded.

E. If Aram elects to transfer the accounts receivable using a Section 22 election, what is the amount of Aram's business loss that will be included in the corporation's income?

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19) Oliver Glenn owns 20% of the shares of Treatz Inc., a Canadian qualified small business corporation. Oliver purchased the shares from a previous shareholder for $50,000. The stated paid-up capital of the shares is $10,000. Two other shareholders own equal portions of the remaining shares of Treatz.

Oliver has decided to sell the shares, which have a market value of $120,000. The shares are to be sold either to the two other shareholders, or back to the corporate treasury. All three of the shareholders have used all of their capital gains deductions.

Oliver has employment income of $185,000, a capital gain in the amount of $50,000, and property income of $20,000 for the current year.

All three shareholders are in a 50% tax bracket. The marginal rate on dividends is 43%. The corporate tax rate for Treatz is 13%.

Required: A. Determine the tax cost for Oliver if he sells his shares to: 1) the other shareholders.

2) the corporate treasury.

B. Determine the cost of the share purchase for: (Round your answer to the nearest whole dollar.)

1) the other shareholders, assuming that the purchase will be made using dividend income paid to the two shareholders from the corporation.

2) the corporation, assuming that the purchase will be made from business profits.

C. Which option is preferential for: 1) Oliver and 2) the other shareholders?

D. What is the significance of Oliver's $50,000 capital gain received in the year if Oliver were to sell the shares back to the corporate treasury?

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20) Leena Walla is the sole shareholder of LW Inc. (LWI). Leena would like to lend $500,000 to LWI company by way of a shareholder loan but is not sure whether to issue an interest free loan or a loan with an interest rate of 10%. Leena does not take a salary from LWI, but rather takes all after-tax profits in the form of a dividend. LWI had taxable income of $200,000 this year.

Required: A. Calculate the total combined tax liability for Leena and LWI under both alternatives (an interest free loan and a loan with 10% interest).

Assume the following: CRA's prescribed rate of interest is 2%, Leena' marginal tax rate on ordinary income is 50% and the marginal tax rate on non-eligible dividends is 43%, and LWI is subject to a 13% tax rate.)

B. Has double taxation occurred in either scenario? (Provide a brief answer.)

21) The following shares were issued in Quartz Co.: January 1, Year 1: Kelsey Weber incorporated Quartz Co. and received 2,000 common shares for $2,000 from the corporate treasury.

January 1, Year 2: István Horvath received 500 common shares in Quartz Co. for $1,000 (fair market value) from the corporate treasury.

December 31, Year 3: Addison Walker received 1000 preferred shares of Quartz Co. for $5,000 (fair market value) from the corporate treasury.

Required: A. Calculate the paid-up capital (PUC) of the common shares and the preferred shares of Quartz Co. at the end of Year 3.

B. Calculate the PUC and adjusted cost base (ACB) of the shares held by Kelsey, István, and Addison.

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Answer Key Test name: Chap 12_2022-23 1) C 2) D 3) B 4) C 5) A 6) D 7) C 8) A 9) B 10) C 11) C 12) B 13) D 14) B 15) C 16) B 17) D

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CHAPTER 13 1) Which of the following types of corporate income are subject to the special refundable tax of 10 2/3% and a tax reduction of 30 2/3% upon distribution of the income to shareholders?

A) Business income and net property income B) Specified investment business income and dividend income C) Specified investment business income and taxable capital gains D) Dividend income and net taxable capital gains

2) Which of the following statements is not permittable in regard to corporations and shareholders?

A) The small business deduction provides a tax reduction on the first $500,000 of active business profits.

B) Dividends paid to individual shareholders are deductible business expenses.

C) There is greater flexibility to bring family members on board as owners.

D) The owner/employee may participate in a registered pension plan through the corporation.

3) Private Inc. received a $5,000 eligible dividend from Public Inc., which is a nonconnected corporation. Which of the following applies?

A) The dividends can be reinvested by Private Inc. on a tax-free basis.

B) The dividend will be subject to Part I tax.

C) The dividend will be subject to Part IV tax at rate of 38 1/3%.

D) Receipt of the dividend will result in an immediate dividend refund for Private Inc.

4) Which of the following scenarios presents two corporations that will not be associated for tax purposes (in a de jure context)? (There is no specified corporate income in any of the examples.)

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A) ABC Co. owns 90% of the shares of XYZ Co. B) Tiny Co. is wholly owned by Elsa. Elsa's child, Charly, owns 65% of the shares of Creative Inc. Elsa owns the remaining 35% of the shares.

C) Bilal owns 100% of the shares of Triad Ltd. Bilal's parents each own 30% of the shares of Quid Co. A friend owns 10% of Quid Co., and Bilal owns the remaining shares.

D) Toni and Dorien are a married couple who each own 50% of the shares of Penn Co. Their children, Sal and Geri, each own 45% of Paya Co., and Toni owns the remaining 10% of the shares.

5) Pepper Co. had a non-eligible RDTOH (NERDTOH) balance of $15,000 at the end of 2021 and the dividend refund from the NERDTOH in 2021 was $7,000. The company's Part IV tax on non-eligible dividends for 2022 is $8,000. The company's active business income is $475,000 and its taxable income is $410,000. Pepper is associated with Lion Co., which has only active business income. Lion Co. was allocated $125,000 of the small business deduction in 2022. Pepper has investment income which remained at $45,000 in both 2021 and 2022. The total taxable capital of the two corporations is less than $50 million. Part I tax for 2022 was $47,283. What is Pepper's NERDTOH balance at the end of 2022? (Round intermediate and final answers to the nearest whole dollar)

A) $8,000 B) $16,000 C) $26,733 D) $65,623

6) A loan by a corporation to a shareholder/employee to purchase treasury shares in the corporation must be in order to meet one of the conditions necessary to avoid the inclusion of the loan principal as taxable income to the shareholder.

A) documented at the time the loan is made B) interest-bearing C) repaid in one year D) less than $2,000

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7) The General Rate Income Pool account accumulates the after-tax earnings that can be paid as

A) non-eligible dividends.

B) eligible dividends.

C) capital dividends.

D) exempt dividends.

8) Chester and Ramona own shares of Mainly Inc., split 60/40 respectively. In 2022 Mainly Inc. earned $700,000 of active business income. Mainly's taxable income was $750,000. Mainly reported $100,000 of adjusted aggregate investment income in the previous year. The taxable capital of the corporation is less than $50 million. How much of the small business deduction is available to Mainly Inc. in 2022?

A) $0 B) $250,000 C) $400,000 D) $500,000

9) Bonnie owns all of the shares of Grey Inc. Bonnie also owns 55% of the shares of Blue Inc., and the remaining shares are owned by Sid (25%) and Sam (20%). Bonnie, Sid, and Sam are all unrelated. All of the shares held in both corporations are common shares. The corporations are

A) associated due to control by the same person or group of persons.

B) associated due to control by unrelated groups.

C) associated due to control by one person and a group of persons.

D) not associated.

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10) Bland Co. reported a net income for tax purposes of $800,000 in Year 1 which included $30,000 of non-eligible dividends from Sweet Co. Bland and Sweet are both CCPCs. Bland Co. owns 20% of the shares in Sweet Co. Sweet Co. received a dividend refund of $20,000 in Year 1 as a result of paying taxable dividends. (Neither company is subject to rules pertaining to specified corporate income, excessive income from passive investments, or taxable capital in excess of $50 million.) How much is Bland Co.'s Part IV tax?

A) $0 B) $4,000 C) $6,000 D) $11,499

11) Bing Co. (a CCPC) had active business income of $770,000 and taxable income of $745,000 in Year 2. Bing Co. is associated for tax purposes with Sing Co. (a CCPC). Sing Co. used $310,000 of the small business deduction limit in Year 2. No eligible dividends have been received or paid by Bing Co. since the company began operations. Bing's GRIP balance was $0 at the end of Year 1. What is Bing Co.'s GRIP balance at the end of Year 2?

A) $0 B) $136,800 C) $399,600 D) $555,000

12) Kat Co. (a CCPC) reported a net income for tax purposes of $800,000 in Year 1. In Year 1, Kat Co. made a contribution of $25,000 to eligible charities and received $30,000 in noneligible dividends from a connected taxable Canadian corporation. What is Kat Co.'s taxable income in Year 1?

A) $745,000 B) $770,000 C) $775,000 D) $800,000

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13) Which of the following options best describes the ownership of a Canadian-controlled private corporation?

A) Public corporations may not have any share ownership, but non-residents may own up to 50% of the voting shares in the company.

B) Public corporations may control the company, but non-residents may not own any shares.

C) Non-residents or public corporations may have some ownership, but Canadian residents must have control.

D) Only Canadian resident shareholders may hold any shares of the company.

14) J Co. is a Canadian-controlled private corporation. During the year, it earned $300,000 of income from selling products and $50,000 in interest and rental income from property. How much income is eligible for the small business tax rate?

A) $300,000 B) $350,000 C) $250,000 D) $325,000

15) A shareholder has a personal service business corporation. What rate of federal tax may be expected on taxable income?

A) 9% small business tax rate B) The high rate of tax less the general rate reduction C) The high rate of tax plus a 5% additional tax D) The base rate of 38%

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16) The following corporate structure exists: Shareholder X and Y are related to each other.

What is the relationship between the corporations Co. A and Co. B?

A) Associated B) Related but not associated C) Neither associated nor related D) Arm's length

17) V Co. is a Canadian-controlled private corporation owned solely by employee V. V Co. has a net income of $590,000, all from active business in Canada. How can V Co. minimize its taxes payable?

A) It needs to pay the small business rate on 500,000 and the high rate on the remaining $90,000 B) Declare a dividend in favour of taxpayer V for $90,000 and pay the small business rate on all its income C) Pay tax at the small business rate on all its income D) Pay shareholder V a $90,000 bonus, reducing income to $500,000 taxed at the small business rate

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18)

This case pertains to the 2022 tax year.

X Inc. is a Canadian-controlled private corporation with a December 31 year-end and the controller has asked you to prepare the T2 tax return. The company reported a net income of $200,000 on its financial statements. Of this amount, $15,000 was from non-eligible dividend income received from a taxable Canadian corporation. The remaining income was from active business.

Additional information: 1) The non-eligible dividends were received from Z Ltd., a connected Canadian-controlled private corporation. Z has only one class of shares, and the total amount of non-eligible dividends paid during the year was $50,000 which resulted in a non-eligible dividend refund of $9,000.

2) X had a balance in its non-eligible RDTOH account of $3,000 at the end of the previous year.

The company did not receive a dividend refund that year.

3) X is associated with J Co. J used $220,000 of the small business deduction limit on its tax return this year.

4) X's financial net income includes a donation expense of $1,000.

5) Amortization of $30,000 was expensed on X income statement. CCA has been correctly calculated at $28,500 for the year and has not been transferred from the tax accounts to the financial statements. X utilizes the maximum CCA deduction each year.

6) X paid non-eligible dividends totaling $5,000 during the year.

(None of the above is subject to rules pertaining to specified corporate income, excessive income from passive investments, or taxable capital in excess of $50 million.)

Required: A. Determine X's net income for tax purposes.

B. Determine X's taxable income.

C. Determine the small-business deduction for X. In your answer, identify the values for 1) active business income 2) taxable income 3) annual limit.

D. Calculate X's 1) Part IV tax on non-eligible dividends 2) dividend refund from non-eligible RDTOH, if applicable.

Round intermediate and final answers to the nearest whole dollar.

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19)

This case pertains to the 2022 tax year.

Square Inc. is a Canadian-controlled private corporation and has correctly calculated its net income for tax purposes to be $857,000 for the year ending the tax year, as shown below.

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Business income

$710,000

Taxable capital gains

80,000

Taxable dividends from Canadian public corporations

32,000

Taxable dividends from Circle Inc.*

5,000

Interest on five-year bonds

30,000

Net income for tax purposes

$857,000

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*Square owns 100% of the shares of Circle.

Additional information: 1) Square made charitable donations of $45,000 during the year.

2) Net capital losses were $35,000 at the end of the previous year.

3) Non-capital losses were $50,000 at the end of the previous year.

4) At the end of the previous year, Square had balances in its non-eligible refundable dividend tax on hand (NERDTOH) account of $18,000 and, General Rate Income Pool (GRIP) of $2,000.

Circle received a dividend refund of $1,917 from its NERDTOH when it paid the dividend to Square.

1) Square received a dividend refund of $3,000 in the previous year.

2) Eligible dividends of $90,000 and capital dividends of $10,000 were paid by Square at the end of the year. Dividends equal to the GRIP balance were designated as eligible dividends.

3) Circle claimed the small-business deduction on $80,000 of its active business income.

4) The taxable capital of Square and Circle, combined, is below $50,000,000. The combined adjusted aggregate investment income was below $50,000 in the previous year.

Required: A. Determine Square's Part I tax.

B. Determine Square's Part IV tax.

C. Determine Square's ERDTOH and NERDTOH balances at the ending balances.

D. Determine Square's GRIP balance.

E. Determine Square's dividend refund.

(Round intermediate and final answers to the nearest whole dollar.)

20)

This case pertains to the 2022 tax year.

A snapshot of a portion of Trico Inc.'s T2 Summary shows the following: Taxable income Net income for tax purposes

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$352,500

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Charitable donations and gifts

(70,000)

Taxable dividends

(12,500)

Losses of prior years

0

Other adjustments

0

Taxable income =

$270,000

Part I tax 38% of taxable income

$102,600

Surtax

0

Recapture of investment tax credit

0

Refundable tax on CCPC investment income

2,133

Active business income 320,000 Small business deduction

(39,900)

Federal tax abatement

(27,000)

Manufacturing and processing deduction

0

Foreign tax credits

0

Investment tax credits

0

Other deductions and credits

(5,200)

Part I tax =

$32,633

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Other information includes: 1) Trico had a non-eligible RDTOH (NERDTOH) balance of $9,000 at the end of the previous year.

2) The dividend refund from the NERDTOH in the previous year was $3,000.

3) The dividends received this year were non-eligible, and were paid by Greens Inc., a connected CCPC. Trico owns 25% of Greens. Greens received a dividend refund of $40,000.

4) Trico paid taxable non-eligible dividends of $15,000 at the end of the year.

5) Trico is associated with Card Co., which has only active business income.

6) Trico’s aggregate investment income is $20,000.

7) The amount in ‘Other deductions and credits' in the T2 Summary represents the General Rate Reduction.

(The total taxable capital of Trico and Card is less than $50 million and there is no specified corporate income or excessive income from passive investments.)

Required: A. How much is Trico's Part IV tax?

B. Calculate the amount of the small business deduction allocated to Card.

C. Determine Trico's NERDTOH balance at the end of the year.

D. Calculate Trico's dividend refund.

E. Prove the amount shown in the T2 summary for the General Rate Reduction.

(Round intermediate and final answers to the nearest whole dollar.)

21) Tanni Tamaki and Gerald Malada are a married couple and they equally own and operate Red Bird Inc. Tanni's sibling, Marti, is starting a new company, Flightseekers Co., and has asked Tanni to be a 35% common shareholder. Marti will own 45% of the shares, and the remainder of the shares will be owned equally by the siblings’ two parents.

Required: Determine if the two corporations are associated. If they are, identify the section of the Income Tax Act that applies.

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Answer Key Test name: Chap 13_2022-23 1) C 2) B 3) C 4) D 5) C 6) A 7) B 8) B 9) A 10) B 11) C 12) A 13) C 14) A 15) C 16) A 17) D

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CHAPTER 14 1) Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free/deferred combination?

A) One of the corporations must be a Canadian Corporation.

B) Fifty percent of the assets and liabilities of the old corporation must become assets and liabilities of the new corporation.

C) The two corporations must be in a similar line of business.

D) All of the shareholders of the old corporations must become shareholders of the new corporation.

2) Y Co. is a profitable CCPC which earns only active business income. The company is growing and dividend payouts are increasing for the two equal shareholders of the company who have heard that 'holding corporations' might better suit their needs. Which of the following would apply if they each created a holding corporation, and each holding corporation owned 50% of Y rather than the individuals?

A) Dividends received by the holding corporations from the operating company must be invested in the same ventures.

B) The holding corporations would receive the dividends from the operating company free of tax, to be invested in the shareholders' separate choices.

C) The establishment of holding corporations would allow the shareholders to access the profits of the operating company for personal use without paying a second level of tax.

D) Dividends would flow from the operating company to the shareholders, and then to the holding corporations.

3) Kanaaq began a group of companies in Year 1 which are referred to as the ‘KQ Group'.

The companies only earn active business income. The parent company of the group is KQ Co. which had $300,000 of taxable income in Year 2. KQ Co.'s wholly owned subsidiaries are Kan Co. which has taxable income of $50,000 for Year 2, and Aaq Co. which has a loss of $20,000 for Year 2 and unused losses from Year 1 of $15,000. KQ Co. and Kan Co. have no loss carryovers. The corporate tax rate is 13%. What is the total tax liability for the KQ Group in Year 2?

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A) $39,000 B) $40,950 C) $42,900 D) $45,500

4) An individual residing in Saskatoon has created a holding company to own the shares of their CCPC (which earns only active business income). The use of the holding company will permit which of the following?

A) The corporation's income will not be taxed.

B) The individual will receive dividends from the holding company, free of tax.

C) The holding company will receive dividends from the corporation, free of tax.

D) The individual will receive dividends from the corporation, free of tax.

5) Ilima is the sole shareholder of Foods Co. Ilima owns one class of common shares which have a value of $200,000. Ilima is approaching retirement age and would like two key employees to take over Foods. At this point in time, the employees do not have enough excess cash to buy Ilima's shares. A reorganization of share capital would allow Ilima to convert common shares to fixed value preferred shares, while also issuing nominal value common shares to the employees, resulting in

A) an immediate tax consequence for Ilima.

B) an immediate tax consequence for the employees.

C) an immediate tax consequence for the corporation.

D) no immediate tax consequences.

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6) Brent is the sole shareholder of Ag Co., owning only common shares which have an ACB and PUC of $200. Brent has successfully operated the business for twenty-five years, and the shares now have a value of $900,000. Brent would like to transfer the business to his oldest child, Ronan, using Section 86, to defer taxes. Following the transfer, which of the following could NOT apply in this transaction?

A) Brent will receive preferred shares in Ag Co., redeemable for $900,000.

B) Brent's new shares will have an ACB of $900,000.

C) Ronan will acquire newly issued common shares of Ag Co. for $200.

D) Ronan's shares will have an ACB of $200.

7) Jan is the sole shareholder of Jan Ltd. Summer is the sole shareholder of SKY Co. Both of the companies are CCPCs. Jan and Summer will amalgamate their corporations as per Section 87(1) on July 21st, forming JS Ltd. Jan's shares in Jan Ltd. have an ACB of $1,000 and a fair market value of $24,500. Summer's shares in SKY Co. have an ACB of $1,500 and a fair market value of $45,500. Which of the following will apply with respect to the planned amalgamation?

A) JS Ltd.'s first taxation year will commence on July 22nd.

B) All carry forward balances in Jan Ltd. and SKY Co. are deemed to have expired prior to the amalgamation.

C) The ACB of Jan's and Summer's shares in JS Ltd. will be $24,500 and $45,500, respectively.

D) Summer will control JS Ltd. after the amalgamation.

8) The shareholders of Duo Co. and Tri Co. (both CCPCs) wish to combine the business activities of the two companies through a business combination. Duo Co. owns 85% of the shares of Tri Co. Both companies have assets that have appreciated in value above their capital cost. If planned correctly, which of the following could result in a tax-deferred combination?

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A) Amalgamation B) Wind-up C) Asset transfers at fair market value D) Section 88(1)

9) Quatro Co. owns 95% of the shares of Cinco Co. (both CCPCs). Both companies have assets that have appreciated in value above their capital cost. If planned correctly, which of the following could result in a tax-deferred corporate reorganization?

A) Only an amalgamation B) Only a wind-up C) Either an amalgamation or a wind-up D) Neither an amalgamation nor a wind-up

10) Large Co. is a CCPC that acquired 100% of the shares of Small Co. in Year 1 for $50,000. Big Co., an arm's length corporation, is now interested in purchasing Large Co.'s investment in Small Co. Small Co.'s shares are currently worth $500,000 and the retained earnings of the company are $200,000. To reduce the fair market value of the shares, Small Co. will pay a dividend of $450,000 to Large Co. and Large Co. will then sell the shares to Big Co. for $50,000. Small Co.'s RDTOH balances are nil. Applying the anti-avoidance rules of Subsection 55(2), how much is the capital gain on the sale of the shares to Big Co.?

A) $0 B) $50,000 C) $300,000 D) $450,000

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11) ABC Co. is a Canadian controlled private corporation that acquired 100% of the shares of XYZ Co. in Year 1 for $50,000. New Co., an arm's length corporation, is now interested in purchasing ABC Co.'s investment in XYZ Co. XYZ Co.'s shares are currently worth $400,000 and the retained earnings of the company are $100,000. To reduce the fair market value of the shares, XYZ Co. will pay a dividend of $350,000 to ABC Co. and ABC Co. will then sell the shares to New Co. for $50,000. XYZ Co.'s RDTOH balances are nil. Applying the antiavoidance rules of Subsection 55(2), what is the tax effect of the $350,000 dividend?

A) Capital gain of $350,000 and tax-free dividend of $50,000 B) Capital gain of $250,000 and tax-free dividend of $100,000 C) Tax-free dividend of $350,000 and capital gain of $50,000 D) Tax-free dividend of $250,000 and capital gain of $100,000

12) During a wind-up between Parent Co. and Sub Co. the ‘step-up' or ‘bump' in Sub Co.'s tax values will apply to

A) only the non-depreciable assets and cannot exceed the FMV of the assets at the time Sub Co. was acquired by Parent Co. B) only the non-depreciable assets and cannot exceed the FMV of the assets at the time of the wind-up.

C) only the depreciable assets and cannot exceed the FMV of the assets at the time Sub Co. was acquired by Parent Co. D) only the depreciable assets and cannot exceed the FMV of the assets at the time of the wind-up.

13)

Corporate reorganizations must be

A) within a related group.

B) between two or more corporations.

C) between companies having common ownership.

D) between companies operating within the same business.

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14)

In the wind-up of a subsidiary, the assets are transferred for tax purposes at:

A) fair market value of all assets transferred and no bump on any assets.

B) original capital cost of all assets transferred and a bump on non-depreciable assets.

C) tax value of the assets transferred.

D) tax values if depreciable and may be bumped up if non-depreciable.

15) X Co. and B Co. are both Canadian controlled private corporations (CCPCs). X Co. owns 30% of B Co. and receives a dividend of $40,000 from B. Co. How will the dividend be taxed?

A) Since both corporations are CCPCs, X Co. will not pay tax on the dividend.

B) X Co. pays tax at the high rate on the dividend.

C) X Co. pays the small business rate since they are both CCPC's.

D) Part IV Tax equal to 30% of the dividend refund received by B Co., if any, will apply.

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16) The following is a before and after picture of Shareholder X and the corporations owned 100% by X. What type of combination did Shareholder X undertake?

Before:

After:

A) Vertical amalgamation B) Horizontal amalgamation C) Vertical asset transfer D) Horizontal asset transfer

17) Hippo Co. is a holding company. It holds all the shares of Opco. Shareholder H holds all the shares of Hippo Co. What should Opco be directed to do prior to a sale of Opco in order to minimize taxable capital gains?

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A) Transfer all assets to Hippo Co. before the sale B) Transfer all shares in Opco to Shareholder H prior to the sale C) Transfer all the shares of Hippo Co. to shareholder H prior to the sale D) Pay a tax-free dividend to Hippo Co. from Opco prior to the sale

18) River Green is the sole shareholder of Chinook Ltd. Chinook purchased all of the shares of Marble Inc. in 2018 for $500,000. Marble incurred a non-capital loss of $25,000 in the year ended December 31, 2019. River has decided to initiate a Section 88 wind-up of Marble into Chinook on June 23, 2022. Due to the seasonal nature of the sales, River would like to maintain the April 30th year end that has been used since Chinook began.

River's accountant has prepared the following balance sheet for Marble Inc. as of June 22, 2022.

The fair market value of the assets on both June 22, 2022, and the date of acquisition in 2018 are presented in the following table: June 22, 2022 (Cost)

FMV June 22, 2022

FMV 2018 $70,000

Shares in Pub Co.

$25,000

$80,000

Accounts Receivable (net of $2,000 for doubtful accounts)

$18,000

$18,000

Land

$125,000

$500,000

$300,000

Building (UCC)

$100,000

$300,000

$210,000

Total Assets

$268,000

Bank Loan

$70,000

Common shares

$10,000

Retained earnings

$188,000

Total shareholder’s equity and liabilities

$268,000

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Marble paid dividends of $8,000 to Chinook in 2022.

Required: A. Determine the deemed asset values for the below as a result of the wind-up of Marble into Chinook.

Shares in Pub Co.

$

Accounts receivable

$

Land

$

Building

$

B. Calculate the value of the section 88(1)(d) ‘bump' available on the ACB for the nondepreciable capital property.

C. Identify the assets which may use the bump, and the amount of the bump available for each asset identified. Also identify any unusable bump amount.

D. When will Chinook be able to use the non-capital loss from Marble?

19)

The following is a list of types of corporate reorganzations:

Amalgamations Wind-ups Asset transfers Share reorganizations Required: Match the types of corporate reorganizations to the correct sections of the Income Tax Act, selecting from ITA85, ITA86, ITA87, and ITA88(1).

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Answer Key Test name: Chap 14_2022-23 1) D 2) B 3) D 4) C 5) D 6) B 7) D 8) A 9) C 10) A 11) B 12) A 13) B 14) D 15) D 16) B 17) D

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CHAPTER 15 1)

Which of the following statements regarding partnerships is true?

A) Partnership income is taxed in the partnership.

B) Partnership losses cannot be offset against the partners' other income.

C) Partnership income is included in a partner's income in the year of disbursement.

D) Partnerships may earn business income, property income, and capital gains.

2) B Co. and S Co. have entered into a partnership for business purposes. Both companies are CCPCs and they share the profits and losses of the business equally. During the year, the partnership earned $200,000 of active business income, and B earned $450,000 in business income from operations other than the partnership. All of the companies have a December 31st year-end. How much of B's share of the partnership profits will be eligible for the small business deduction (assuming all of the $450,000 is allocated to the deduction)?

A) $0 B) $50,000 C) $100,000 D) $200,000

3) Y Co. and N Co. are equal partners in M Enterprises. The partnership has a net worth of $210,000, split 50/50 between the two corporations. D Co. has been asked to join the partnership.

When the transaction is complete, all three partners will have an equal interest. To accomplish this structural change, D will contribute $105,000 to the partnership treasury. This transaction will

A) dilute the original partners' interests.

B) increase the original partners' interests.

C) result in a capital gain for the partners.

D) result in a capital loss for the partners.

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4) Gia is a 40% partner in XYZ. The ACB of Gia's partnership interest at the beginning of Year 1 was $50,000. During Year 1, the partnership earned business income of $200,000 and a taxable capital gain of $12,000. Gia withdrew $10,000 from the partnership for personal expenses during the year. What is the ACB of Gia's partnership interest at the beginning of Year 2?

A) $124,800 B) $129,600 C) $252,000 D) $264,000

5)

Which of the following statements regarding partnerships is true?

A) Partners must contribute equal portions of capital to the partnership.

B) It is possible that a minority partner will have significant influence over the partnership.

C) A holding corporation cannot act as a partner.

D) A general partnership is a protected legal entity, separate from the partners' affairs.

6) Franz and Wade are equal general partners in The Fish Store. Franz contributed 80% ($80,000) of the required funds to start the partnership and Wade contributed 20% ($20,000).

Wade carries out 75% of the day-to-day operations of the business. Which of the following is accurate with respect to the partners' liability exposure?

A) Wade is liable for 75% of any claims made.

B) Franz is liable for 80% of any claims made.

C) Any claims against the business will be limited to $100,000.

D) The partners have equal and unlimited liability in the business.

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7) Mo and Al are equal partners in a partnership which received the following income in Year 1: business income of $150,000, non-eligible dividends of $4,000, and a capital gain of $10,000. Mo withdrew $20,000 from the partnership during Year 1 and Al withdrew $25,000.

Neither partner has income from any other sources. Which of the following is correct for the Year 1 taxation year?

A) Mo's net income for tax purposes is $59,800 and Al's net income for tax purposes is $54,800.

B) Both partners have a net income for tax purposes of $79,500.

C) Both partners have a net income for tax purposes of $79,800.

D) Both partners have a net income for tax purposes of $82,300.

8) G Co. and B Co. are equal partners in The Bookstore which had a net income for tax purposes this year of $300,000 before deducting capital cost allowance of $72,000. Both corporate partners had a net income for tax purposes before the partnership income of $200,000.

The partners minimize taxes whenever possible. The partnership net income for tax purposes is

A) $72,000 B) $228,000 C) $300,000 D) $328,000

9) T Co. and Y Co. are equal partners in LMN. LMN had a net income for tax purposes this year of $350,000 which did not include the available capital cost allowance of $50,000. Prior to the partnership income, each corporate partner had a loss of $150,000, and each has a $25,000 non-capital loss which will expire in two years. To maximize the use of the losses, the partnership net income for tax purposes is

A) $50,000 B) $175,000 C) $300,000 D) $350,000

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10)

A typical general partnership agreement focuses on all but which of the following?

A) The required contribution of the partners to the partnership B) Decision-making and management responsibilities of the partners C) The rate of return on investments made by the partnership D) Profit and loss allocation to the partners

11) S Co. and L Co. are partners in W Partnership. The fiscal year-end of the partnership is April 30. (The year is Year 1.) The filing due date for the partnership's annual T5013 is

A) April 30, Year 1 B) September 30, Year 1 C) December 31, Year 1 D) March 31, Year 2

12) Theo and Alam are partners in ABC. The fiscal year-end of the business is December 31.

(The year is Year 1.) The filing due date for the partnership's annual T5013 is

A) December 31, Year 1 B) March 31, Year 2 C) April 30, Year 2 D) December 31, Year 2

13)

How are partnership profits and losses taxed?

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A) In the partnership B) Each partner is taxed on their share of the profit or loss C) Each partner is taxed on the amount withdrawn from the partnership D) Each partner is taxed on the amount contributed into the partnership

14) W Co. becomes a member of a partnership in July 2022. W Co. has a June 30 year-end while the partnership has a December 31 year-end. In 2022, W Co's share of the partnership income was $40,000. How much must be included in W Co.'s 2023 net income for tax purposes? (rounded)

A) $40,000 B) $39,671 C) $19,836 D) $59,836

15)

The following partnership structure exists:

Both corporations are eligible for the small business deduction. If the partnership earns income of $700,000 and the two corporations receive an equal amount of this profit, how much of the profit will qualify for the small business deduction in each corporation?

A) $250,000 B) $350,000 C) $275,000 D) $500,000

16) A partnership may be required to file a T5013 partnership information return. When is this return due for a partnership where all partners are individuals?

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A) April 30 of the following year B) March 31 of the following year C) Within 6 months of year-end D) June 15 of the following year

17) A Co. and B Co. form a partnership. They agree that profits and losses are to be shared equally. If the partnership loses $300,000, what impact will that loss have on A Co.?

A) None, since the partnership is a separate entity.

B) It will depend on A Co's investment in the partnership.

C) It will depend on A Co's withdrawals from the partnership.

D) A Co. can claim $150,000 loss.

18) Aubrey Richards and Tashi Pasang would like to start a business in Year 1 with equal contributions of $75,000. They will split any profits and losses equally. Aubrey and Tashi would like to know whether a partnership or a corporation would be the best form of business strictly from a tax perspective in light of other income to be received in Year 1. Neither would take any form of payment from the company in the first year.

The following information (which is the same for both Aubrey and Tashi) is available for Year 1 projections: Employment income = $100,000 Interest income = $5,000 A business loss of $25,000 is anticipated in Year 1 for the new company.

Aubrey and Tashi both have a personal marginal tax rate of 45%. The small business corporate tax rate is 12%.

Required: Which form of business will be most beneficial to Aubrey and Tashi from a tax liability perspective in Year 1?

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19) Aada is a 40% partner in Books and also works full-time as an engineer, earning a gross salary of $100,000 annually. Books' net income for tax purposes in Year 1 was $210,000. During Year 1, Books received $10,000 in non-eligible dividends from a CCPC. Books also sold a capital asset and recognized a gain of $16,000 in Year 1. (The dividend income and taxable capital gain income have been included in the net income for tax purposes.) Aada withdrew $20,000 from the partnership during Year 1. The ACB of Aada's partnership interest was $75,000 at the beginning of Year 1.

Required: A. Calculate the partnership's business income for Year 1.

B. Calculate Aada's net income for tax purposes for Year 1.

Calculate the ACB of Aada's partnership interest at the beginning of Year 2.

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Answer Key Test name: Chap 15_2022-23 1) D 2) B 3) A 4) B 5) B 6) D 7) C 8) B 9) D 10) C 11) B 12) B 13) B 14) D 15) A 16) B 17) D

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CHAPTER 16 1) James is a general partner in J Enterprises and Tanni is a limited partner with a 5% interest in the business. Tanni invested $20,000 in the company for the partnership interest.

Tanni was allocated a $25,000 business loss in the partnership. Which of the following statements regarding this loss is correct?

A) Tanni may claim a loss for tax purposes of $10,000 this year, with a $15,000 carryforward to be used only against future at-risk amounts from the partnership.

B) Tanni may claim a loss for tax purposes of $20,000 this year, with a $5,000 carryforward to be used only against future at-risk amounts from the partnership.

C) Tanni may claim a loss for tax purposes of $25,000 this year.

D) Tanni may claim a loss for tax purposes of $25,000 this year, with a $20,000 carryforward to be used only against future at-risk amounts from the partnership.

2) While partnerships and joint ventures have some similarities, they have significant differences. Which of the following is correct with regard to partnerships and joint ventures?

A) Joint ventures and partnerships are separate taxable entities.

B) All members of a joint venture are subject to the same CCA decision in a given tax year, while partners in a partnership may each decide their own amount of CCA to be deducted.

C) The proportionate allocation of the small business applicable to CCPC partners does not apply to CCPC joint venture members.

D) Joint ventures have less flexibility than partnerships with regard to their tax decisions.

3) An investor has $50,000 to invest as a limited partner in a partnership. The individual will be one of several limited partners in the business. The business is not expected to make a profit for at least three years. Why has the investor most likely chosen to invest in this business?

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A) The investor will be guaranteed to receive the $50,000 back if the venture fails.

B) The flow-through of losses is an important tax consideration for the investor.

C) The investor plans to use their management expertise in the business in order to generate profits.

D) The investor will be able to claim losses in excess of the $50,000 investment.

4) Dana invested $25,000 as a limited partner in a partnership in Year 1. Dana's partnership interest is 30%. The partnership reported a business loss of $100,000 in Year 1. Dana is in the 45% tax bracket. What is the net cash cost of Dana's investment in Year 1?

A) $7,500 B) $11,250 C) $13,750 D) $25,000

5) Meadow Lane Partnership had profits of $210,000 in Year 1. Al invested $100,000 as a limited partner, which represents a 30% partnership interest. Al is in the 45% tax bracket. What is Al's after-tax return on the investment in the partnership? (Round intermediate and final answers to the nearest whole dollar)

A) 17% B) 35% C) 48% D) 63%

6) The ability to flow limited partnership losses through to the partners is especially important in which of the following type of venture?

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A) Zero-risk B) Low-risk C) Medium-risk D) High-risk

7)

Which of the following statements regarding limited partnerships is correct?

A) Limited partners cannot be corporations.

B) Passive investors are permitted limited liability.

C) The limited partner has full responsibility of the management decisions.

D) Limited partners are typically responsible for all liabilities of the partnership.

8)

Joint ventures engage in which of the following?

A) An ongoing business B) An activity with a limited purpose C) An association with the powers and responsibilities of a partnership D) The formation of a separate entity for the purpose of determining net income for tax purposes

9)

Which of the following is correct with respect to a joint venture?

A) Joint ventures operate under a fiscal period.

B) Joint ventures are separate entities for the purpose of determining net income for tax purposes.

C) Joint ventures are governed by a legal statute.

D) The members of a joint venture may individually choose the timing and use of certain expenses including CCA and allowance for doubtful debts.

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10)

The small business deduction has less limitations for CCPC members in a

A) Joint venture B) General partnership C) Limited partnership D) Passive partnership

11)

Which of the following types of business arrangements is best suited for a joint venture?

A) Restaurant B) Veterinary clinic C) Construction project D) Staffing agency

12) Kennedy has a 10% interest in a limited partnership. The adjusted cost base of Kennedy's partnership interest at the beginning of the year was $30,000. During the year, the partnership reported a $10,000 taxable capital gain and $150,000 in business income. At the end of the year, Kennedy had an outstanding loan balance of $10,000 to the partnership. Kennedy's at-risk amount at the end of the year is

A) $19,000 B) $36,000 C) $37,000 D) $47,000

13)

How may limited partnership losses be claimed?

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A) Only in the hands of the limited partnership B) Each partner claims their share of the loss up to their investment C) Each partner's loss will depend on the amount withdrawn from the limited partnership D) Each partner's loss is the amount contributed into the limited partnership

14) The standard partnership and the limited partnership differ in three ways, one of which is the participation in management activities. How do they differ in management?

A) All partners are passive investors.

B) The general partners are passive investors.

C) All partners may participate in management.

D) The limited partners are passive investors, but there is a general partner to run the operation.

15) Why would investors be attracted to a limited partnership when there is a high-risk venture?

A) Investors can write-off their investment in the first year.

B) Investors can have tax refunds because of their investments.

C) Investors will have limited liability and little risk of loss.

D) Investors can share in losses and claim those losses against their other income.

16)

What is the difference between a partnership and a joint venture as it relates to taxation?

A) Each participant in the joint venture calculates net income separately.

B) A joint venture splits its income to the partners.

C) A joint venture is taxed separately, and its after-tax profits are divided among its members.

D) A joint venture determines the net income allocated to each participant.

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17) J Co. and K Co. are both Canadian-controlled private corporations. They formed a joint venture which has income of $900,000. J's share of this income is $450,000. All income earned by the joint venture is eligible for the small business deduction, and J has no other income. How much of this income will be taxed at the low rate?

A) $0 B) $225,000 C) $450,000 D) $500,000

18) Charlie Nader is one of 5 limited partners in Windows and Doors. Each limited partner contributed $100,000 five years ago when the business began. During the current year, Windows and Doors generated pre-tax profits of $500,000. The only general partner, Reese Amano, receives 55% of the company's profits. Both Charlie and Reese are subject to a 49% marginal personal tax rate.

Required: Calculate Charlie's after-tax rate of return on the partnership investment.

(Round intermediate and final answers to two nearest whole dollar)

19) Lance and Monika are equal partners in Edge Gear which is a limited partnership. Lance is the general partner and Monika is the limited partner. Monika's at-risk amount in the partnership is $15,000. Edge Gear experienced a loss of $40,000 in Year 1. Both individuals are in a 45% tax bracket.

Required: Determine the tax savings from the partnership loss for Lance and for Monika in Year 1.

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Answer Key Test name: Chap 16_2022-23 1) B 2) C 3) B 4) C 5) B 6) D 7) B 8) B 9) D 10) A 11) C 12) C 13) B 14) D 15) D 16) A 17) C

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CHAPTER 17 1)

Which of the following statements regarding trusts is correct?

A) Losses that exceed income in a trust are allocated to the beneficiary at the end of the year.

B) The use of a trust results in one level of tax.

C) Income that is payable to a beneficiary cannot be deducted from the trust's income.

D) The residence of a trust is determined by the residence of the trustees.

2) Which of the following applies to a testamentary trust that is designated as a graduated rate estate (GRE)?

A) Tax instalments are required.

B) A non-calendar year may be used for tax purposes.

C) The highest rate of tax will apply to all income.

D) The GRE will become a normal testamentary trust after 48 months.

3) Which of the following accurately describes one of the rules pertaining to testamentary and inter vivos trusts?

A) They may use the graduated tax rate scale.

B) They are allowed the $40,000 exemption in the alternative minimum tax calculation.

C) They can deduct personal tax credits.

D) They are required to remit quarterly tax instalments.

4) Which of the following statements is incorrect with regard to a spousal trust left to a surviving spouse?

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A) Property is deemed to have been sold at its cost amount when transferred to the trust.

B) The trust property is deemed to be sold at market value upon the death of the beneficiary (the spouse).

C) Both the surviving spouse and any adult children may receive the capital of the spousal trust prior to the surviving spouse's death.

D) The 21-year rule is waived for the trust's first 21-year anniversary.

5) A non-spousal trust account holds two buildings as its assets. Building 1 originally cost $150,000 and Building 2 originally cost $210,000. It is now the 21 st anniversary of the trust, and the assets have not been transferred to the beneficiary. The undepreciated capital cost of Building 1 is $85,000 and its market value is $200,000. The undepreciated capital cost of Building 2 is $145,000 and its market value is $190,000. Which costs will be the deemed acquisition values of the buildings for the trust?

A) B1 = $150,000 and B2 = $210,000 B) B1 = $85,000 and B2 = $145,000 C) B1 = $200,000 and B2 = $190,000 D) B1 = $200,000 and B2 = $210,000

6) A parent transfers their common shares in their business to non-participating fixed value preferred shares. Common shares in the business are then issued to the parent's child who is taking over the operations of the company. This is an example of which of the following?

A) A measure to reduce the tax impact on the growth of the child's shares B) An estate freeze C) Income splitting D) A specified investment flow-through

7)

Which of the following statements regarding the use of trusts is incorrect?

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A) Trusts may be useful for managing the property of those who require assistance managing their affairs.

B) Trusts may be useful to manage the outcomes of an individual's property following their death.

C) Trusts may be useful to hold assets for unborn grandchildren.

D) Trusts may be useful for an additional deduction of personal tax credits for the beneficiary.

8) Upon an individual's passing, their assets (other than those bequeathed to a spouse or spousal trust) are deemed to be sold at

A) tax cost.

B) fair market value.

C) exempt value.

D) beneficiary value.

9) their

Properties can be transferred to beneficiaries from a trust prior to the 21 st anniversary at

A) tax cost.

B) fair market value.

C) exempt value.

D) beneficiary value.

10)

With regard to commercial trusts, which of the following statements is correct?

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A) Real estate investment trusts (REITs) are technically referred to as specified investment flow-throughs (SIFTs).

B) Investment and royalty trusts are technically referred to as specified investment flowthroughs (SIFTs).

C) Real estate investment trusts (REITs) are not allowed to be treated as normal inter vivos trusts.

D) Investment and royalty trusts are allowed to deduct most distributions to beneficiaries.

11)

With regard to trusts and beneficiaries, which of the following statements is correct?

A) Depreciable property transferred from a trust to a beneficiary cannot result in further recapture.

B) Property transferred from a trust to an income beneficiary is deemed to be sold by the trust at its market value.

C) Property transferred from a trust to a capital beneficiary is deemed to be sold by the trust at its market value.

D) Property transferred to a trust normally occurs at cost.

12) Amelia is the beneficiary of an inter vivos trust. During Year 1 the trust received the following income: Capital gains: $10,000, Interest: $8,000, and non-eligible dividends: $5,000.

One half of the trust's income from Year 1 was paid to Amelia and the remainder of the income remained in the trust. What is the federal tax for the trust in Year 1? (Round your intermediate calculations to the nearest whole dollar.)

A) $0 B) $764 C) $1,148 D) $2,835

13)

A testamentary trust is created by

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A) the last will and testament upon the death of a taxpayer.

B) a financial institution under the direction of a taxpayer.

C) investing in real estate.

D) commercial trusts for tax planning purposes.

14)

An inter vivos trust is created

A) by a taxpayer who wants to hold assets for family members during the taxpayer's lifetime.

B) upon the death of a taxpayer at the request of the trustees.

C) only to hold real estate investments.

D) only for limited uses to shift income to another entity to reduce taxes.

15)

The year-end of a trust is

A) a fiscal year-end chosen in the year it is set up.

B) not important since income is distributed to beneficiaries.

C) the calendar year since trusts are considered individuals.

D) different for testamentary trusts than for inter vivos trusts.

16) During the current year, a trust had the following income (losses): Capital gains of $80,000 and capital losses of $10,000. In addition, there are net capital losses being carried forward in the amount of $10,000. How much can be allocated to the sole beneficiary?

A) $30,000 B) $40,000 C) $25,000 D) $60,000

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17) Charlie is the beneficiary of a trust. The trust has experienced an allowable capital loss of $40,000 and a business loss of $10,000. Charlie pays taxes at the top marginal rate and would like to claim any losses that can be allocated out of the trust to herself. How much can be allocated?

A) 0 B) $50,000 C) $30,000 D) $25,000

18) Ira passed away this year leaving a will bequeathing Ira's spouse, Cleo, with $80,000 in cash, in addition to stocks and land, to be held in a spousal trust on Cleo's behalf. The trust will pay Cleo the annual income generated by the trust during Cleo's lifetime.

Additionally, Ira's 33-year-old child Arthur is to receive a building to be held in a trust until Arthur reaches the age of 45. Arthur will also receive the assets in Cleo's trust upon Cleo's death.

The assets transferred to Cleo consist of land with an ACB of $100,000 and a FMV of $300,000, and stocks valued at $200,000 with a cost base of $150,000.

The building transferred to Arthur has an ACB of $200,000, UCC of $180,000, and FMV of $300,000.

Required: A. Determine the immediate tax consequences (identify the income type and amount) for Ira. B. Determine the immediate tax consequences for the assets received by the trust for Cleo.

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19) Chakrit Singh is the beneficiary of an inter vivos trust. During Year 1 the trust received the following income: Capital gains: $16,000 Interest: $10,000 Non-eligible dividends: $8,000 One half of the trust's income from Year 1 was paid to Chakrit who does not currently have any other sources of income. The remainder of the income remained in the trust.

Required: A. Determine Chakrit's personal federal tax.

B. Calculate the federal tax for the trust.

(Round your intermediate calculations to the nearest whole dollar.)

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Answer Key Test name: Chap 17_2022-23 1) B 2) B 3) D 4) C 5) D 6) B 7) D 8) B 9) A 10) B 11) B 12) D 13) A 14) A 15) C 16) C 17) A

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CHAPTER 18 1) Jesse is negotiating a purchase of Zed Inc. Which of the following is true if Jesse purchases the assets of the corporation rather than the shares from the company's sole shareholder, Jude?

A) Payment of the purchase price will flow directly to Jude.

B) Jesse will have no choice but to assume the liabilities of Zed Inc. C) Zed Inc. may be subject to business income and capital gains.

D) Jude will be eligible to use for the capital gains deduction on the sale.

2) X Co. is for sale. The corporation will be a small business corporation at the time of sale.

X Co. has never held investments in other corporations. Which of the following statements applies specifically for X Co. regarding the conditions necessary in the 24 months preceding the sale of shares to meet the qualified small business corporation rules?

A) X Co. must be a public company.

B) More than 90% of the fair market value of the assets must be an investment in the shares of a connected corporation meeting the 50% test.

C) More than 50% of the fair market value of the assets must be used in active business.

D) The shares for sale must not have been owned by a person related to the seller.

3) A purchaser has agreed to purchase all of the shares of Y Ltd., a CCPC. Y Ltd. owns fifteen significant capital assets, all of which have appreciated in value. Which of the following statements is correct?

A) The purchaser will obtain a cost base of the assets equal to their fair market values.

B) Capital cost allowance will be based on fair market values of the assets for the purchaser.

C) The sale will result in business income for the vendor.

D) The purchaser will acquire the liabilities of Y Ltd.

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4) T Ltd. owns land with a fair market value of $100,000, a building with a fair market value of $75,000, and equipment with a fair market value of $25,000. These assets are used for active business conducted in Canada. Which of the following would disqualify T from being a small business corporation?

A) T Ltd. also owns 40% of the non-eligible shares of Rock Co. (a small business corporation), which have a fair market value of $20,000.

B) T Ltd. also owns portfolio shares in Leaf Co., (with less than 1% ownership), which have a fair market value of $5,000.

C) T Ltd. also has long-term investments valued at $30,000.

D) T Ltd. sold the equipment and used the funds to purchase 35% of the shares of Tree Co., a small business corporation.

5) A purchaser has agreed to purchase the assets of a qualified small business corporation.

Which of the following will apply?

A) The seller may be eligible for the capital gains deduction.

B) The purchase will include all of the corporation's liabilities.

C) The sale will result in the immediate taxation of the corporation, and the after-tax proceeds will be paid to the seller.

D) The purchaser will assume the asset's current UCC values.

6) When the sale of a business involves the sale of shares rather than the sale of assets, which of the following will apply?

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A) The corporation will continue to exist following the sale of the assets.

B) If the proper conditions are met, the vendor may be able to use the capital gain exemption on the sale of the shares.

C) The vendor may be left with assets that might be difficult to sell.

D) The sale of the assets may result in capital gains and business income for the corporation.

7) Following the purchase of shares of a subsidiary corporation by the parent corporation, the parent company

A) must maintain the subsidiary as a separate taxable entity.

B) must wind-up the subsidiary into the parent.

C) must amalgamate the subsidiary with the parent.

D) may choose the business structure they wish to use.

8) Ben is purchasing all of the shares of a local CCPC. What is a tax consideration for Ben regarding the purchase?

A) The change in control will restrict the use of any pre-acquisition unused losses.

B) The change in control will restrict the use of any post-acquisition unused losses.

C) Ben may recognize a capital gain or loss at the time of purchasing the shares.

D) The cost base for the acquired assets will be based on their market values.

9) Bilal is purchasing all of the assets of a local CCPC. What is a tax consideration for Bilal regarding the purchase?

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A) Bilal may recognize a capital gain deduction at the time of purchasing the assets.

B) Bilal may recognize a capital gain or loss at the time of purchasing the assets.

C) CCA on the acquired assets will be based on the assets' market values.

D) CCA on the acquired assets will be based on the assets' tax costs.

10) The assets of S Ltd. are being sold. The proceeds available for distribution after the corporate tax has been deducted and the dividend refund is applied is $380,000. The sale of the assets resulted in a capital dividend account balance of $30,000 and business income of $200,000. The paid up capital (PUC) and adjusted cost base (ACB) of the sole shareholder’s shares is $1,000. How much is the minimum taxable dividend from the sale of the assets?

A) $0 B) $349,000 C) $379,000 D) $380,000

11) Eman is selling the assets of Triangles Ltd. (TL). The proceeds available for distribution after the corporate tax has been deducted and the dividend refund is applied is $300,000. The sale of the assets resulted in a capital dividend account balance of $30,000 and business income of $200,000. TL is associated with another corporation that has been allocated $400,000 of the small business deduction. The paid up capital (PUC) and adjusted cost base (ACB) of Eman's shares is $1,000. The GRIP balance of TL was $0 at the end of the previous year. How much is the non-eligible dividend available to Eman?

A) $72,000 B) $100,000 C) $197,000 D) $269,000

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12) Aidan is selling the assets of Circles Ltd. (CL). The proceeds available for distribution after the corporate tax has been deducted and the dividend refund is applied is $250,000. The sale of the assets resulted in a capital dividend account balance of $20,000 and business income of $250,000. CL is associated with another corporation that has been allocated $300,000 of the small business deduction. The paid up capital (PUC) and adjusted cost base (ACB) of Aidan's shares is $1,000. How much is the eligible dividend available to Aidan?

A) $36,000 B) $50,000 C) $193,000 D) $229,000

13) that

When acquiring shares of a small business corporation, the purchaser should be aware

A) the vendor is selling the shares at fair market value and all assets will have to be revalued.

B) the vendor is selling the shares and the balance sheet of the company will not change.

C) the vendor is selling all assets at cost and liabilities will have to be paid prior to the transfer date.

D) the vendor is selling all assets at fair market value and the purchaser will have to assume all appraisal costs.

14) Which of the following scenarios is true when a purchaser buys assets of an existing corporation?

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A) The vendor must sell all the assets at an agreed upon value, usually fair market value, and the vendor is taxed on capital gains and recapture.

B) The vendor sells all the assets at cost and the purchaser will be responsible for any subsequent gains.

C) Unless assets consist of real estate, current assets are valued at cost and the vendor claims recapture and taxable capital gains as income.

D) The purchaser values the assets at fair market value and pays goodwill to the vendor.

15) When a purchaser acquires all the outstanding shares of a company, which of the following is true?

A) The shares have to be revalued and the shareholders' equity section of the corporation's balance sheet must be updated.

B) The transaction is off the balance sheet and the financial position of the company does not change.

C) The corporation must record goodwill on the balance sheet.

D) The purchaser records goodwill as an asset and may depreciate it on his personal books.

16) During the current year, Berry Co. sold all its assets at fair market value and recorded a capital gain of $180,000. How much may be distributed to the shareholders of Berry Co. taxfree?

A) $180,000 B) $160,000 C) $90,000 D) $0

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17) T Co. owns land with a fair market value of $80,000, a building with a fair market value of $150,000, and equipment with a fair market value of $20,000. All the above assets are used for active business in Canada. Which of the following would disqualify T Co. from being a small business corporation?

A) T Co. owns 40% of H Co., another small business corporation.

B) T Co. owns portfolio shares of various public corporation valued at $50,000.

C) T Co. sold the equipment for $20,000 and has the cash sitting in a bank account.

D) T Co. purchased new equipment for $25,000 to be used in its offices.

18) M Co. is a Canadian-controlled private corporation. Sari is the sole shareholder. The paid up capital (PUC) and adjusted cost base (ACB) of Sari's shares is $10,000. Sari has recently been offered $450,000 for the business by an arm's-length competitor. Sari has asked you to begin the process of calculating amounts that will pertain to either a sale of assets or a sale of shares, as Sari is not sure which method to use. (A hybrid sale will not be utilized.)

The year-end balance sheet for M is as follows: Current assets

$300,000

Land

350,000

Building

175,000

Accumulated Amortization

-25,000

Goodwill

0

150,000 0

Total Assets

$800,000

Current liabilities

$200,000

Mortgage on land and building

150,000

Shareholder's equity: Share capital

10,000

Retained earnings

440,000

450,000 $800,000

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The following additional information has been provided: 1) The current assets consist of accounts receivables and inventory, which have costs equal to their market values.

2) The UCC of the building is $160,000.

3) The land is currently valued at $450,000.

4) The building has a FMV of $205,000.

5) Goodwill has a FMV of $100,000.

6) Sari has used all of the entire capital gains exemption on previous QSBC share sales.

7) M is not associated with any other corporations for tax purposes.

8) Sari is in a 45% tax bracket on regular income, 28% on eligible dividends, and 37% on noneligible dividends.

9) The tax rate on earnings subject to the small business deduction is 13%, and 27% on additional business income.

10) The combined (federal and provincial) tax rate on corporate investment income is 50 2/3% and the refundable rate is 30 2/3%.

11) The eligible and non-eligible RDTOH balances prior to the sale were NIL. Due to the timing of the sale, if assets are sold, the small business deduction will be available for all business income.

Required: A. Determine the after-tax proceeds of the sale if the shares of M are sold.

B. Determine the net cash available for wind-up from M in an asset sale. (A dividend will be distributed.)

C. Determine the balance in M's Capital Dividend Account follow the sale of the assets.

Is your answer in B. the amount of Sari's after-tax proceeds from an asset sale? Briefly explain why or why not?

(Round your answers to nearest whole dollar.)

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19) It is the end of Year 3 and C Co. (a CCPC) is for sale. Matias is the sole shareholder and would like to know if the company is currently a qualified small business corporation. Matias has provided you with the following information: All of the business activities of C have taken place in Canada.

The following amounts represent fair market values of the company's assets: Equipment used for active business activities

$50,000

Land used for active business activities

$300,000

Shares in non-connected public corporations

$50,000

Shares in J Ltd.*

$450,000

Long-term investments

$25,000

Goodwill

$35,000 $910,000

*C owns 35% of the shares of J Ltd., which is a small business corporation with 100% of the fair market value of its assets consistently used in active business.

Additional information: 1) Neither the shares of C Co. nor J Ltd. have changed hands since the companies each began operations four years ago. (The two corporations are not related for tax purposes.)

2) The land was acquired at the end of the year with a five-year mortgage.

3) All of the other asset values have remained constant over the past three years.

Required: A. Determine if C Co. is a 'small business corporation' (SBC).

B. Determine if C Co. is a 'qualified small business corporation' (QSBC).

(Round your answers to nearest whole dollar.)

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Answer Key Test name: Chap 18_2022-23 1) C 2) C 3) D 4) C 5) C 6) B 7) D 8) A 9) C 10) B 11) C 12) A 13) B 14) A 15) B 16) C 17) B

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CHAPTER 19 1) Hayden owns 100% of the shares of ABC Co. Hayden's spouse owns 100% of the shares of XYZ Co. The shares of ABC Co. are valued at $50,000 with an ACB and PUC of $1000. The couple is planning for XYZ Co. to pay Hayden $50,000 in cash for the shares in ABC Co. Which of the following will result from this sale?

A) Hayden will recognize a capital gain of $50,000.

B) Hayden will recognize a capital gain of $49,000.

C) Hayden will recognize a deemed dividend of $50,000 and a capital gain of $0.

D) Hayden will recognize a deemed dividend of $49,000 and a capital gain of $0.

2) Which of the following statements most accurately describes an aspect of a tax-deferred sale of a business to a group of employees, through share reorganization?

A) The employees will purchase the corporation's original common shares from the vendor.

B) There is a risk to the original shareholder, as the value of their preferred shares following the reorganization depends on the future success of the corporation.

C) This method of sale is appropriate when the vendor is unsure of the purchaser's ability to manage the business.

D) The vendor generally does not participate in the financing of the sale of the business.

3) Parents of a child would like to transfer their family business to the child who does not have the required funds to purchase the company at this time. Which of the following might the parents consider in order to make the transfer possible without any immediate tax consequences?

A) Sell their shares to the child.

B) Sell their shares to a third party who will then hire the child.

C) Reorganize their shares, exchanging their common shares for preferred shares of equal value, and then issue a new class of common shares to the child for a nominal value.

D) Sell the assets in the corporation that have appreciated in value.

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4) P Co. is transferring a depreciable asset to B Co. The asset has a fair market value of $200,000. The original cost of the asset was $175,000 and the undepreciated capital cost is $160,000. The two corporations wish to structure the transfer in a manner that will defer all taxes at this time. P Co. has no unused losses. Which of the following will not be one of the results of the transfer?

A) For legal purposes, the asset will be sold for $200,000.

B) The elected value in the transfer for tax purposes will be $175,000.

C) The transfer can include cash or a note receivable to a maximum value of $160,000.

D) P Co. will receive shares from Berry Co. in the transaction.

5) The following statements are distinctive characteristics of closely held corporations EXCEPT

A) the corporations have only one, or relatively few, shareholders.

B) the business of these corporations is often sold due to the owner's wish to retire.

C) the sale of these corporations may be structured in a way that allows family members or employees with minimal funds to buy the business.

D) these corporations pay regular dividends to their many public shareholders.

6) S Co. is buying an asset from M Co. with a fair market value of $150,000. The tax cost of the asset is $80,000. Neither CCPC has loss-carryovers. The arm's-length companies have elected to structure the sale of the asset in a manner which will defer any taxes at this time. M Co. would like to take the maximum note receivable on the transfer. Which of the following is correct?

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A) Sale of asset = $80,000, Non-share consideration = $70,000, Share consideration = $10,000 B) Sale of asset = $150,000, Non-share consideration = $80,000, Share consideration = $70,000 C) Sale of asset = $80,000, Non-share consideration = $10,000, Share consideration = $70,000 D) Sale of asset = $150,000, Non-share consideration = $70,000 Share consideration = $80,000

7) Sue owns 100% of the shares of S Co., and Misha owns 100% of the shares of M Co. Sue and Misha are not related for tax purposes. Misha would like to sell all of the shares of M Co. to S Co. The shares have a cost base of $50,000 and a market value of $250,000. Sue and Misha are meeting with an advisor to structure the sale in a manner which will defer any taxes at this time.

Misha would like to take as large a note receivable as possible in the sale. Which of the following statements is correct pertaining to the sale of M Co. to S Co.?

A) Misha will receive a note receivable from S Co. for $250,000.

B) Misha will receive a note receivable from M Co. for $250,000.

C) Misha will receive shares in S Co. valued at $200,000 and a note receivable for $50,000.

D) Misha will receive shares in S Co. valued at $50,000 and a note receivable for $200,000.

8) Bonnie owns all of the common shares of B Co., a CCPC. The shares have a FMV of $150,000, and an ACB and PUC of $5,000. Bonnie would like to retire soon, and Bonnie's only child, Helen has expressed interest in taking over the business. Helen does not have a lot of disposable income at this time, and as such, a Section 86 reorganization of share capital has been recommended. Bonnie's common shares will be converted to preferred shares, redeemable for $150,000 and Bonnie will not take any non-share consideration in the exchange. Helen will then purchase a new class of common shares at a nominal value. Which of the following is an immediate outcome as a result of the reorganization?

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A) A capital gain will be recognized on the exchange of the shares.

B) A deemed dividend will occur.

C) The ACB of the new preferred shares will be $150,000.

D) The PUC of the new preferred shares is equal to the $5,000 PUC of the old common shares.

9) A Co. and B Co. have decided to amalgamate and form AB Co. A Co. has a net worth of $900,000 and B Co. has a net worth of $100,000. Which of the following is correct?

A) This scenario cannot result in a tax-deferred exchange of the shares and companies' assets.

B) This scenario might be considered a take-over by A Co. and its shareholders.

C) This type of scenario is most common for CCPCs rather than public corporations.

D) B Co. is the dominant shareholder in this scenario.

10) Which of the following is accurate with regard to a section 85.1(1) share-for-share exchange and a section 85(1) rollover?

A) Both are typically used when there are many employees involved.

B) S.85(1) is the most appropriate choice for public corporations with many shareholders.

C) Both require that an election be filed.

D) Both may result in a tax deferral on the sale for the vendor.

11) A tax planning tool that values the ACB of the purchaser's shares at the lesser of the share's PUC or FMV is

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A) a S.85.1 share for share exchange.

B) a S.86 share reorganization.

C) a S.87 amalgamation.

D) a S.85 rollover.

12) The type of tax-deferred sale of a business whereby a shareholder's common shares are converted to fixed-value preferred shares, and new common shares are then issued to the purchaser, often at a nominal value is

A) a S.85.1 share for share exchange.

B) a S.86 share reorganization.

C) a S.87 amalgamation.

D) a S.85 rollover.

13)

A tax-deferred sale of a business requires that the vendor

A) sell the assets for their book value instead of market value.

B) accept all or a specified portion of shares in New Co. C) sell the shares of the company for fair market value and have the shareholders pay the tax on the capital gain.

D) sell all assets at fair market value and the purchaser assume all appraisal costs.

14) When assets are transferred at their tax cost instead of their fair market value for tax purposes, the major disadvantage to the purchaser is

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A) the depreciable assets are below market value, thus limiting capital cost allowance and increasing future taxable capital gains.

B) the depreciable assets are recorded at tax cost, thus increasing future capital cost allowance.

C) that while real estate is sold at fair market value, other depreciable assets are valued at cost and the vendor claims recapture and taxable capital gains.

D) the purchaser values the assets at fair market value and pays goodwill to the vendor.

15) Shareholder X has 100 shares of Pear Co., a widely held public company. X paid $4,000 for these shares which now are valued at $6,000. Pear Co. is taken over by Apricot Co., another public company, and X receives 100 shares of Apricot Co. in exchange for their shares in Pear Co. The fair market value of the Apricot Co. shares is $6,000. What are the tax consequences to X?

A) X does not have to recognize a taxable capital gain.

B) The transaction is a share exchange and will trigger a taxable capital gain of $1,000.

C) Pear Co. will have a taxable capital gain, X will not.

D) X will have a deemed dividend of $2,000 and claim this as an eligible dividend after the exchange.

16) During the current year shareholder Y sold all the shares of Seller Co. for $500,000. The tax cost of the shares is $100,000. Y took $100,000 cash and shares of Buyer Co. in exchange for Y's shares of Seller Co. What will be the adjusted cost base (ACB) of the Buyer Co. shares if a tax election is made to defer the capital gain?

A) $400,000 B) $200,000 C) $250,000 D) $0

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17) Teal Co. is wholly owned by shareholder Jay. Teal Co. owns shares and bonds of numerous public corporations. Teal Co. shares had a cost of $10,000 but the market value is $400,000. Jay's spouse owns V Co., whose only asset is cash. Jay wishes to sell the shares to their spouse for $400,000 in exchange for cash. What must Jay report as income as a result of this transfer?

A) A taxable capital gain of $200,000 B) A taxable capital gain of $195,000 C) An eligible dividend of $390,000 and a taxable capital gain of $10,000 D) A deemed dividend of $390,000 and no taxable capital gain

18) Bill C-208 is intended to allow which of the following for the intergenerational transfer of small and medium sized businesses?

A) More generous tax treatment by way of capital gains.

B) Less generous tax treatment by way of dividends.

C) More generous tax treatment by way of dividends.

D) Less generous tax treatment by way of capital gains.

19) Lane Gonzales is the sole shareholder of Lanego Co. Lane has expressed a desire to semiretire from the business soon, and three key employees have shown great interest in taking over the company although they do not have the financial resources necessary to make the purchase at this point in time. Lane has heard about something called a 'Section 86 share reorganization' which could achieve the transfer of the business to the employees. Lane's common shares in Lanego have a fair market value of $800,000 and an adjusted cost base (ACB) and paid up capital (PUC) of $5,000. Lane will not take any non-share consideration in the reorganization.

Required: A. Identify the type, value, PUC, and ACB of Lane's shares in both the old and new structures.

B. What is a significant risk factor for Lane with the restructuring?

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20) Peyton Antle is the sole shareholder of Antlers Co. (a CCPC). Peyton's spouse, Dana Tse, is the sole shareholder of Trinkets Inc. Peyton and Dana have decided that Trinkets will purchase Antlers due to Trinkets strong cash position and Antlers need for cash for expansion. Antlers' shares are currently worth $400,000 and have an adjusted cost base (ACB) and paid up capital (PUC) of $50,000. Trinkets will pay Peyton $400,000 for the shares in Antlers.

Required: A. Calculate the amount of the deemed dividend and the taxable capital gain that Peyton will realize from this transaction.

B. Which section of the Income Tax Act impacted your answer in part A due to the related status of the parties involved?

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Answer Key Test name: Chap 19_2022-23 1) D 2) B 3) C 4) B 5) D 6) B 7) C 8) D 9) B 10) D 11) A 12) B 13) B 14) A 15) A 16) D 17) D 18) A

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CHAPTER 20 1)

Which of the following statements is true concerning domestic expansion of a business?

A) Cash funding requirements will be lower to establish a new corporation than a corporate division if the expansion activity incurs substantial start-up losses.

B) Cash funding requirements will be higher to establish a new corporation than a corporate division if the expansion activity incurs substantial start-up losses.

C) Obligations of a new division will have no impact on the founding corporation.

D) The main advantage of incorporating an expansion activity is the use of start-up losses from the new corporation against income from the founding corporation.

2) In the Canada-U.S. tax convention, the definition of a 'permanent establishment' does not include

A) a place of management.

B) a factory.

C) a storage facility.

D) an office.

3) R Co. is a Canadian corporation which plans to expand internationally. The company has decided to establish a branch in a foreign country. Which of the following is not an impact of the international expansion?

A) The profits of the branch will be subject to income tax in the foreign country.

B) The branch profits will be included in the Canadian corporation's worldwide income.

C) A foreign tax credit can reduce the Canadian taxes payable.

D) If the foreign country has a lower tax rate, a tax benefit will be recognized.

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4) B Co. is a Canadian corporation which plans to expand internationally. The company has decided to establish a wholly owned foreign subsidiary corporation in another country. Which of the following is not an impact of the international expansion?

A) The subsidiary will be subject to taxes in the foreign country.

B) The subsidiary's profits will be included in the Canadian corporation's worldwide income.

C) Dividends received by the Canadian corporation from the foreign subsidiary are excluded from the Canadian corporation's taxable income.

D) Dividends received by the Canadian corporation from the foreign subsidiary are most often subject to a withholding tax in the foreign jurisdiction.

5) Acceptable intercompany transfer pricing methods between a Canadian parent and its foreign subsidiary corporations include all but which of the following?

A) Comparable arm's-length selling price method B) Profit-margin method C) Resale price method D) Cost-plus method

6) Trim Co. is a CCPC based in Province/Territory 1 (PT1). The company is planning to expand into Province/Territory 2 (PT2). Profits of $100,000 are expected in PT1, and $25,000 in PT2. The provincial/territorial rates at the time of the expansion are 12% in PT1 and 11% in PT2. If the expansion is done through direct sales, what is the tax for the PT2 operation?

A) $0 B) $2,750 C) $3,000 D) $5,750

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7) C Co. is a CCPC based in Province/Territory 1 (PT1). The company is planning to expand into Province/Territory 2 (PT2). Profits of $100,000 are expected in PT1, and $25,000 in PT2. The provincial/territorial rates at the time of the expansion are 12% in PT1 and 11% in PT2. If the expansion is done through a branch location in a permanent establishment run by personnel from PT2, which of the following is correct?

A) The profits will be excluded from C Co's income for tax purposes.

B) The tax rate of PT1 will be applied to the PT2 branch profits.

C) The branch profits for tax purposes may potentially differ from what is actually earned at the branch.

D) The branch profits will be taxed as a separate legal entity.

8) Wash Co. is a CCPC based in Province/Territory 1 (PT1). The company is planning to expand into Province/Territory 2 (PT2). Profits of $100,000 are expected in PT1, and $25,000 in PT2. The provincial/territorial rates at the time of the expansion are 12% in PT1 and 11% in PT2. If the expansion is done through a separate subsidiary, what is the tax for the PT2 operation?

A) $0 B) $2,750 C) $3,000 D) $5,750

9) Which of the following is a correct statement and an advantage for utilizing a branch structure for an international expansion?

A) The losses of the branch may be applied against the income of the parent corporation.

B) Foreign branch taxes may apply to the branch profits.

C) Dividends are paid from the branch to the parent company.

D) The branch profits will be taxed at a lower rate if the foreign jurisdiction has a lower tax rate than that of Canada.

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10) Which of the following is a correct statement and a positive aspect to operating a foreign subsidiary?

A) The losses of a subsidiary may be applied against the income of the parent corporation.

B) Dividends may flow tax-free from a foreign affiliate to the Canadian corporation.

C) The profits of the subsidiary will be taxed at a higher rate if the foreign jurisdiction has a higher tax rate than that of Canada.

D) Losses incurred in the foreign subsidiary cannot be applied against the parent corporation's income.

11) Which of the following is a correct statement and a downside to operating a foreign branch?

A) The losses of the branch may be applied against the income of the parent corporation.

B) If the foreign tax rate is higher than the Canadian tax rate, the foreign branch income will be taxed at the higher rate.

C) Dividends are paid from the branch to the parent company.

D) The branch profits will be taxed at a lower rate if the foreign jurisdiction has a lower tax rate than that of Canada.

12) Foreign Co. is a subsidiary of Can Co., a Canadian corporation. Foreign Co. earned $100,000 in Year 1. The tax rate in the foreign jurisdiction is 25% and the withholding tax rate on dividends paid to Can Co. is 5%. The Canadian shareholders pay tax of 35% when the income is distributed as eligible dividends. How much is the after-tax cash paid to the shareholders?

(Round your final answer to the nearest whole dollar.)

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A) $24,938 B) $26,250 C) $46,313 D) $48,750

13) Foreign Co. is a subsidiary of Can Co., a Canadian corporation. Foreign Co. earned $100,000 in Year 1. The tax rate in the foreign jurisdiction is 25% and the withholding tax rate on dividends paid to Can Co. is 5%. The Canadian shareholders pay tax of 35% when the income is distributed as eligible dividends. What is the effective tax rate of the foreign income? (Round your final answer to the nearest whole number.)

A) 25% B) 30% C) 54% D) 65%

14) When a company expands into another province by direct sales, the provincial income tax is determined by

A) the rate in each province after splitting the profit according to sales and payroll.

B) the rate in the original province where it was established.

C) the rate in each province according to the profit earned in each province.

D) the rate in the new province since it is a new business.

15) What is the major difference between domestic expansion by setting up a branch in a new province and setting up a subsidiary company in a new province?

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A) Nothing. Both alternatives offer the same tax treatment of profits and losses.

B) Losses in a branch can be used by the company whereas losses in a subsidiary cannot be used.

C) A branch can be taxed in the province on its own profits and losses.

D) A subsidiary does not have to pay tax in the province in which it operates. The parent company will pay all the taxes.

16) X Co. invests $100,000 in an expansion project. If the company uses a subsidiary structure and the subsidiary loses $30,000, explain the consequences to X Co.

A) X Co. cannot use the loss in the subsidiary.

B) X Co. will be able to claim the $30,000 against its other profits.

C) X Co. will have an allowable business loss of $15,000 to claim against its other income.

D) X Co. will have an allowable capital loss of $15,000 which it can use against any taxable capital gains.

17) Collab Co. would like to expand its operation into the United States to take advantage of the lower taxes in the U.S. How must Collab Co. structure its operation to do that?

A) Direct sales into the U.S. B) Set up a warehouse in the U.S. from which to ship the goods sold by Canadian salespeople C) Establish a foreign branch office in the U.S. and hire U.S. salespeople D) Incorporate a separate U.S. company

18) Tulip Co. is a subsidiary company of Jasmine Co., which is a U.S. company. Tulip Co. relies on Jasmine Co. for management services. A reasonable management fee would be

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A) any fee to reduce Tulip Co.'s taxable income.

B) a fee that reflects the work done at an acceptable rate.

C) a fee that is negotiated between the two companies.

D) a fee that reflects the fair market value of the services.

19) Andreas Griffin would like to invest $150,000 in Foreign Co. (founded and operated in a foreign country). This investment would give Andreas 25% ownership of the company. An annual dividend of $15,000 (Canadian funds) is anticipated.

Andreas's personal marginal tax rate is 45% on regular income, 28% on eligible dividends, and 37% on non-eligible dividends. The foreign company is subject to a tax rate of 38% on all business income. Any dividends received by Andreas, personally, will be subject to a 15% withholding tax.

Required: A. Determine the total tax liability (foreign and Canadian) that Andreas will be subject to upon receiving dividends from Foreign Co. B. How would your answer in A change if Andreas established a Canadian holding company to purchase the shares, subject to a 5% withholding tax on dividends received?

C. Determine Andreas's after-tax proceeds be if he received eligible dividend income from the holding company.

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20) L Co. is a CCPC located in Vancouver, British Columbia. L owns a foreign subsidiary, S Co., located in Seattle, Washington. L manufactures components which are then sold to S for assembly. L is subject to a higher corporate marginal tax rate than S. The CEO of L has mentioned that due to the lower tax rate in the foreign country, the profits of L could be shifted to S by adjusting the selling price of the component parts.

Required: A. Can the CEO adjust the selling price of the component parts in order to take advantage of the lower tax rate? Why or why not?

B. What are three methods used to establish transfer prices for non-arm's length transactions?

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Answer Key Test name: Chap 20_2022-23 1) B 2) C 3) D 4) B 5) B 6) C 7) C 8) B 9) A 10) B 11) B 12) C 13) C 14) B 15) B 16) A 17) D 18) D

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CHAPTER 21 1)

Which of the following statements regarding debt and equity financing is false?

A) Interest payments on debt financing are usually fully deductible by the corporation for tax purposes.

B) Interest income from debt financing is taxable in the hands of the investor.

C) Dividend payments on equity financing are deductible by the corporation for tax purposes.

D) Dividends are paid from after-tax corporate income.

2) Which of the following accurately describes the similarities in the tax treatment of leasing an asset or purchasing the asset with debt?

A) Both methods allow for deductions that reduce taxable income.

B) The after-tax net present value of the two methods will usually be identical.

C) The timing of cash payments and tax savings is the same under both alternatives.

D) Capital cost allowance is always expensed for both alternatives.

3) Marti is deciding where to invest $10,000. The options include receiving a 5% capital gain or a 7% non-eligible dividend as the return on investment. Marti's marginal tax rates are 45% on regular income, 37% on non-eligible dividends, 28% on eligible dividends, and 23% (rounded) on capital gains. Which of the following statements is correct?

A) Marti will receive a higher after-tax rate of return on the capital gain due to the higher tax rate for non-eligible dividends.

B) Marti will receive an after-tax rate of return of 5% on the capital gain and 7% on the non-eligible dividends.

C) Marti will receive an after-tax rate of return of 3.85% on the capital gain and 4.41% on the non-eligible dividends.

D) There is no difference in the after-tax rate of return on the two investments.

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4) During the year, T Co. paid $550,000 in preferred share dividends to O Co. Both companies are Canadian corporations. Which of the following is true?

A) O Co. is subject to Part VI.1 tax.

B) T Co. is subject to Part VI.1 tax.

C) Neither corporation is subject to Part VI.1 tax.

D) Both corporations are subject to Part VI.1 tax.

5) With regard to debt and equity securities, which of the following statements is correct?

(Assume the corporations are not in the business of lending money.)

A) A premium on an equity issue has a tax impact on the issuing corporation.

B) A discount on an equity issue has a tax impact on the issuing corporation.

C) A premium on a debt security is taxed in the hands of an issuing corporation.

D) A discount on a debt security is either fully or partially deductible for tax purposes, depending on the discount rate.

6) Badger Co. plans to raise $200,000 for an expansion project through debt at 10% interest.

Badger's tax rate is 27%. How much corporate income will Badger require to service the cost of the expansion?

A) $0 B) $5,400 C) $20,000 D) $27,397

7) B Co. plans to raise $200,000 for an expansion project through fixed dividend preferred shares at 9%. B’s tax rate is 27%. How much corporate income will B require to service the cost of the expansion?

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A) $0 B) $4,860 C) $18,000 D) $24,658

8) T Co. plans to raise $200,000 for an expansion project, through either debt at 10% or an issue of fixed dividend preferred shares at 9%. T's tax rate is 27%. An individual investor is considering financing T's expansion. The investor’s tax rates are 50% for interest income, 35% for eligible dividends, and 43% for non-eligible dividends. Which of the following statements is accurate for the investor?

A) If T adjusted the preferred dividend return to 10%, the investor would receive the same after-tax rate of return as the debt financing allows at 10%.

B) If T adjusted the preferred dividend return to 7.7% (if eligible) or 8.8% (in noneligible), the investor would receive the same after-tax rate of return as the debt financing allows at 10%.

C) If T adjusted the preferred dividend return to 8.8% (if eligible) or 7.7% (in noneligible), the investor would receive the same after-tax rate of return as the debt financing allows at 10%.

D) The rates currently offered by T will allow the investor to earn an equivalent after-tax rate of return on either type of investment.

9) Gold Inc. requires $50,000 of capital for a proposed expansion. The company's president and CEO is trying to decide whether to issue preferred shares with a fixed dividend rate of 5% or to borrow from the bank at a rate of 7%. Gold Inc. pays a corporate tax rate of 27%. If the expansion is funded with the bank loan, how much corporate income will be required to service the interest?

A) $945 B) $2,555 C) $3,500 D) $4,795

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10) Silver Inc. requires $50,000 of capital for a proposed expansion. The company's president is trying to decide whether to issue preferred shares with a fixed dividend rate of 5% or to borrow from the bank at a rate of 7%. Silver Inc. pays a corporate tax rate of 27%. If the expansion is funded with the preferred share issue, how much corporate income will be required to service the dividends?

A) $675 B) $2,500 C) $3,425 D) $3,500

11) Bronze Inc. requires $50,000 of capital for a proposed expansion and has decided to borrow the funds from the bank at a rate of 7%. The company pays a corporate tax rate of 27%.

What is the cost of the debt (as a percentage) based on the funds required to service the interest?

A) 5.11% B) 7.0% C) 9.59% D) 12.96%

12) Copper Inc. requires $50,000 of capital for a proposed expansion and has decided to issue preferred shares with a fixed dividend rate of 5%. The company pays a corporate tax rate of 27%. What is the actual cost of issuing the preferred shares (as a percentage) based on the funds required to service the dividends?

A) 1.35% B) 5.0% C) 6.85% D) 9.26%

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13) Clean Co. is undergoing a sale/leaseback arrangement on a piece of its excavating equipment. The equipment is a class 38 (30%) asset, with a fair market value of $250,000 (which is lower than the original cost). The equipment currently generates $75,000 in annual pre-tax revenue. Clean Co. will sell the equipment at FMV. Under the leasing terms, the lease agreement will be for five years, with no residual value at the end of the term. The annual leasing cost will be $55,000 per year.

The UCC relating to this piece of equipment is $150,000. Other assets will remain in the asset pool, and there is sufficient UCC in the class that recapture will not occur as a result of the sale.

The company is subject to a corporate tax rate of 27% and achieves a 12% after-tax rate of return. What is the net present value of the cash flow that will result from this sale-and-leaseback arrangement? (Round intermediate calculations to nearest whole dollar.)

A) $250,000 B) $254,416 C) $302,630 D) $350,844

14) A Co. requires $1,000,000 capital to expand into new markets. It can raise the capital with 5% bonds or with 4% preferred shares. Which alternative is better from a tax point of view?

A) Issue preferred shares because the rate is less.

B) Issue bonds because even though the rate is higher, the interest is tax deductible.

C) Issue bonds for a higher return on investment.

D) The company can issue either one because the tax effect is the same.

15) Quin wants to invest $10,000 in the open market. Quin can purchase $10,000 in bonds paying 5% interest or Quin can invest in preferred shares that will pay 3.63% eligible dividends.

Which option is better if Quin pays tax at 50% on interest income and 31% on eligible dividend income?

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A) The net after tax return is the same for both options.

B) Bonds because the interest income is higher.

C) Shares because the dividend is taxed at a lower rate.

D) Shares because the taxable capital gains on sale are less.

16) E Co. has incurred $10,000 in costs to issue bonds. The costs are fees paid to a transfer agent, commission on the sale of bonds, and other related fees and expenses. How should these costs be deducted for tax purposes?

A) Deduct $10,000 over a five-year period, claiming $2,000 per year.

B) Claim $10,000 once all the bonds are sold.

C) Claim $10,000 as an expense once the bonds mature.

D) Deduct $10,000 over a two-year period, claiming $5,000 per year.

17) X Co. issued five-year bonds with a face value of $100,000 and an interest rate of 6%.

They received $95,000 in proceeds for these bonds. How is the discount to be treated for tax purposes?

A) Deducted in full at the time of the bond sale.

B) Amortized at each interest period and deducted over the life of the bond.

C) It is 50% deductible at the bond's maturity.

D) Deducted in full at the bond's maturity.

18) K Co. has negotiated a lease arrangement for equipment that has been classified as a capital lease for accounting purposes. What can be done for tax purposes?

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A) Deduct the value of the equipment in its entirety at the beginning of the lease.

B) This lease cannot be deducted at all. Claim capital cost allowance only.

C) Deduct the value of the equipment in its entirety at the end of the lease.

D) Deduct the monthly payments as incurred.

19) Shiloh Kondo recently inherited $500,000. Shiloh would like to invest the money and receive an annual after-tax return of $30,000 on the investment income. A number of investment alternatives are available to Shiloh. Shiloh's tax rates are 45%on interest, 28% on eligible dividends, 37% on non-eligible dividends, and 23% on capital gains.

Required: A. Determine the amount of taxable income that Shiloh will need to receive in order to realize a $30,000 after-tax return from (i) interest (ii) eligible dividends (iii) non-eligible dividends, and (iv) capital gains (Round your final answers to nearest whole dollar.)

B. Determine Shiloh's pre-tax rate of return for each of the investments.

(Do not round intermediate calculations. Round your final answers to one decimal place.)

C. Determine Shiloh's after-tax rate of return for each of the investments.

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Answer Key Test name: Chap 21_2022-23 1) C 2) A 3) C 4) B 5) D 6) C 7) D 8) B 9) C 10) C 11) B 12) C 13) B 14) B 15) A 16) A 17) C 18) D

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CHAPTER 22 1) With respect to the GST/HST, supplies fall under different categories with different sets of rules. Which of the following is false regarding zero-rated supplies?

A) Zero-rated supplies are excluded from all GST/HST rules for taxable supplies.

B) GST/HST is charged at a rate of 0%.

C) Prescription drugs and medical devices are examples of zero-rated supplies.

D) Input tax credits may be claimed on expenditures made to provide the zero-rated supplies.

2) With respect to the GST/HST, supplies fall under different categories with different sets of rules. Which of the following statements is true regarding exempt supplies?

A) GST/HST is charged on exempt supplies.

B) Legal and accounting services are examples of exempt supplies.

C) Basic groceries and prescription drugs are examples of exempt supplies.

D) Input tax credits may not be claimed on expenditures made to provide the exempt supplies.

3) Island Tours Inc. earned $80,000 in revenue and paid $45,000 in operating expenses. If Island Tours elects to use the quick method, how much is the net HST remittance? (Island Tours is in a province with 13% HST and an 8.8% remittance rate.)

A) $3,080 B) $4,550 C) $6,740 D) $7,040

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4) C Co. earned $20,000 in revenue and paid $15,000 in expenses (that does not include meals and entertainment). C is in a province with 5% GST. How much GST will C remit using the simplified ITC calculation? (Round your intermediate and final answers to nearest whole dollar.)

A) $0 B) $238 C) $250 D) $652

5) An individual earns a salary and commissions and was required to pay for numerous employment expenses in Year 1. The expenses deducted on the individual’s tax return totalled $12,000 which included $2,000 CCA on a vehicle. The expenses all included a 15% HST component, other than the CCA which had a deemed inclusion since HST was originally paid on the vehicle. If the individual applied for an HST rebate in Year 2 when preparing the Year 1 income tax return, what impact would the rebate have on the individual's employment income and UCC in Year 2? (Round your intermediate and final answers to nearest whole dollar.)

A) Increase in employment income of $1,304 and increase in UCC of $261 B) Increase in employment income of $1,304 and decrease in UCC of $261 C) Increase in employment income of $1,565 D) Decrease in employment income of $1,565

6) With respect to GST/HST on residential property, which of the following statements is INCORRECT?

A) GST/HST is charged on the sale of brand-new homes.

B) GST/HST is not typically charged on the sale of used homes.

C) GST/HST is charged on residential rent if the rental is for a term of more than one month.

D) GST/HST is charged on the sale of homes which have undergone substantial renovations to become ‘new' again.

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7) When closely related groups for tax purposes elect not to charge GST/HST to members of the group on supplies that would otherwise have been eligible for the full input tax credit, which of the following applies?

A) There is an actual tax saving for the group.

B) There is an actual tax saving for the member only.

C) An actual tax saving does not take place until the following year.

D) An actual tax saving does not take place.

8) An election may be made to eliminate the GST/HST on the sale of Vendor Co. to Purchaser Co. in all but which of the following situations?

A) Both companies are GST/HST registrants.

B) Neither company is a GST/HST registrant.

C) Vendor Co. is a GST/HST registrant, and Purchaser Co. is not a GST/HST registrant.

D) Vendor Co. is not a GST/HST registrant, and Purchaser Co. is a GST/HST registrant.

9) An individual began a small seasonal business in Prince Edward Island on July 1st, Year 1. The following shows the sales of taxable supplies per quarter for the first fifteen months: Quarter

Sales in Quarter

July – September, Year 1

$2,000

October – December, Year 1

$12,000

January – March, Year 2

$20,000

April – June, Year 2

$8,000

July – September, Year 2

$1,000

The individual will lose the small supplier status on which date?

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A) December 31, Year 1 B) March 31, Year 2 C) April 30, Year 2 D) June 30, Year 2

10) Bo began a small seasonal business in Alberta on July 1st, Year 1. The following shows Bo's sales of taxable supplies per quarter for the first fifteen months: Quarter

Sales in Quarter

July – September, Year 1

$2,000

October – December, Year 1

$12,000

January – March, Year 2

$20,000

April – June, Year 2

$8,000

July – September, Year 2

$1,000

What date must GST start to be collected?

A) July 1, Year 1 B) December 31, Year 1 C) March 31, Year 2 D) May 1, Year 2

11) Raine operates a service business in a province with a 15% HST rate. The company's Year 1 financial information includes the following: Revenue $55,000 General and administrative (G&A) expenses $25,000 Meals and entertainment $3,000 (not included in G&A above) New furnishings $8,000 What is the net HST remittance under the simplified method? (Round your intermediate and final answers to nearest whole dollar.)

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A) $2,478 B) $2,674 C) $2,850 D) $3,075

12) A business owner operates a retail business in a province with a 13% HST rate and 8.8% remittance rate. All business is conducted solely in the province. The company's Year 1 financial information includes the following: Revenue $45,000 Operating expenses $25,000 New equipment $5,000 What is the net HST remittance under the quick method? (Round your intermediate and final answers to nearest whole dollar.)

A) $209 B) $1,426 C) $1,726 D) $3,085

13) The place of supply for services supplied by a vendor in Province A and sold to a customer in Province B is generally based on

A) the billing address of the vendor.

B) the billing address of the customer.

C) the billing address of the manufacturer.

D) the billing address of the legal team.

14) A Co. is located in Alberta and sells products to clients around the world. A recent sale was made to a customer in Ontario. The Ontario customer assumed all ownership and risk when they picked up the order at the Alberta warehouse. Which of the following is correct?

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A) The place of supply for the goods is Alberta.

B) The place of supply for the goods is Ontario.

C) The place of supply for the goods is split between Alberta and Ontario.

D) Title of the goods was transferred in Ontario.

15)

A small supplier is

A) a small business corporation eligible for the small business deduction.

B) any business which has total sales of $30,000 or less in a 12-month period.

C) any business whose net income is $30,000 or less in a 12-month period.

D) any business which has 5 or less employees.

16)

How does a zero-rated business report GST/HST?

A) A zero-rated business charges GST/HST at 0% of sales but is allowed to claim input tax credits.

B) A zero-rated business is exempt from charging GST/HST and cannot claim input tax credits.

C) A zero-rated business will charge the appropriate GST/HST but cannot claim input tax credits.

D) A zero-rated business is any small business with sales under $30,000 and can charge 0% HST/GST.

17) B Co. is defined as an exempt business for GST/HST purposes. It has calculated input tax credits of $40,000 on taxable supplies purchased during the year. How much is the input tax credit that may be claimed in completing the GST/HST return?

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A) None, it is an exempt business and therefore charges no HST/GST and gets no input tax credits.

B) It does not have to charge HST/GST since it is exempt, but it may claim the entire $40,000 as a refund.

C) It will claim the $40,000 as input tax credit, and it will not have to charge GST/HST to its customers.

D) None, because it is a capital related transaction and makes up part of the value of the assets.

18) Amna is a proprietor and GST filer in Alberta who purchased an automobile for $60,000 plus GST during the year. Amna will use this automobile 70% in running the business and 30% for personal use. How much ITC can be claimed?

A) $0 B) $510 C) $1,190 D) $1,700

19) Y Co. operates in Ontario and has filed an election to use the quick method of reporting HST. The applicable quick method rate is 8.8%. During the year Y Co. had the following activities including 13% HST: revenue $125,000, expenses $40,000 and purchase of new equipment $11,300. What is Y Co.'s net HST remittance?

A) $11.000 B) $7,480 C) $6,600 D) $9,400

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20) Billie is employed by H Co. as a salesperson. H Co. is a GST registrant located in Alberta. Billie is required to pay their own expenses. During the year Billie had client meal expenses of $2,500 and automobile expenses of $4,000 including GST. How much GST rebate can Billie claim? Alberta's PST rate is 0%.

A) $0 B) $310 C) $250 D) $500

21) Diamonds is a sole proprietorship and a registrant for GST/HST purposes. If Diamond’s sales are less than $1,500,000 when must Diamonds file its GST/HST return?

A) March 31st of the following year B) June 15th of the following year C) April 30th of the following year D) December 31st of the current year

22) Gem is a sole proprietorship and a registrant for GST purposes. If Gem’s annual sales are less than $1,500,000, when must Gem pay any GST balance owing to avoid interest charges?

A) March 31st of the following year B) June 15th of the following year C) April 30th of the following year D) December 31st of the current year

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23) Galactic Wholesalers Co. purchased inventory from a local manufacturer for $25,000.

Galactic marked up the price by 35% and sold the inventory to Cosmic Retailers Inc. Cosmic marked up the inventory by a further 45% and sold the products to its customers. (Pre-GST costs are used to calculate the marked-up prices.)

Required: A. Determine how much GST was remitted by Galactic Wholesalers.

B. Determine how much GST was remitted by Cosmic Retailers.

Round your intermediate and final answers to nearest whole dollar.

24) X Co. is located in Alberta. X provided a company car to its key employee in Year 1. The car was purchased for $38,000 + 5% GST at the beginning of the year and was available to the employee for all twelve months of Year 1. The employee drove the car 20,000 kms in Year 1, 9,000 of which were for employment purposes. X paid $5,200 for the operating costs of the car during the year. The employee did not receive an automobile allowance from X, nor any reimbursements for any of the operating costs.

Required: A. Determine the employee's total taxable benefit for Year 1.

B. Determine the following for X: 1) Input tax credit (ITC) for Year 1.

2) GST liability for Year 1. (4/104 and 3% apply to this case for the standby charge and operating benefit, respectively.)

Use rates for 2022 and round intermediate and final answers to nearest whole dollar.

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Answer Key Test name: Chap 22_2022-23 1) A 2) D 3) C 4) B 5) B 6) C 7) D 8) C 9) C 10) D 11) B 12) D 13) B 14) A 15) B 16) A 17) A 18) B 19) D 20) C 21) B 22) C

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CHAPTER 23 1) Based on the premise of the capitalization of earnings method, if a business for sale is low risk with good growth potential, the value will be based on which of the following?

A) A high capitalization rate and a low earnings multiplier B) A low capitalization rate and a high earnings multiplier C) A high capitalization rate and a high earnings multiplier D) A low capitalization rate and a low earnings multiplier

2)

The value of a going-concern business is influenced primarily by its

A) length of time in business.

B) shareholders' personal wealth.

C) income-earning potential.

D) location.

3) P Co. is for sale. The company has recognized $50,000 in profits every year since it began three years ago. The industry has a capitalization rate of 25%. What is the value of P Co.?

A) $50,000 B) $150,000 C) $200,000 D) $600,000

4)

The contingent business value method determines the valuation of a business based on

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A) the likelihood of the sale taking place.

B) the occurrence of events following the sale.

C) the fair market value of the assets at the time of sale.

D) the current profits of the business.

5) When a business for sale is no longer a going-concern due to declining profits, a liquidation value can be determined using

A) the earnings method.

B) the contingent business value method.

C) the annual gross revenues earned method.

D) the asset valuation approach.

6) Pro Ltd. is for sale. The company has been successful for many years, and its earnings for the past five years in reverse order beginning with the current year are $500,000, $450,000, $410,000, $390,000, and $320,000. What is the weighted average earnings for Pro?

A) $386,000 B) $414,000 C) $442,000 D) $500,000

7) ABC Co. is for sale and has profits of $90,000 before $20,000 in current building expenses of amortization and insurance. If the business is sold without the property, a fair lease value will be $30,000 per year which represents an 8% net rental yield. The tax rate is 13% and ABC expects to recognize a capitalization rate of 10% on normal earnings. What is the combined value of ABC Co. (business and property) if the value of the sale reflects the real costs of the building?

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A) $772,000 B) $859,000 C) $897,000 D) $984,000

8) S Co. is for sale and has averaged $250,000 in earnings over the past three years. S Co. expects five times the average earning as the selling price, plus price adjustments for the first two years post-sale of earnings in excess of the average. S Co. is using a(n) approach.

A) contingent business valuation B) appreciating business assets C) asset D) excessive reserves

9) Calico Inc. is for sale. Calico is a CCPC with normal annual profits of $120,000. What is the business valuation at a capitalization rate of 20%?

A) $24,000 B) $120,000 C) $240,000 D) $600,000

10) Clippers Inc. is for sale. Clippers is a CCPC with annual profits of $120,000. What is the earnings multiplier at a capitalization rate of 10%?

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A) 5 B) 10 C) 20 D) 25

11) There are several business valuation methods that can be used to determine the sales prices of a business. Which of the follow is likely to be used for a business that is no longer a going-concern?

A) Earnings approach B) Multiple of annual gross revenues earned C) Adjusted book value method D) Earnings and asset approach combined

12) A business valuation of $100,000 based on a 25% rate of return is equivalent to which of the following?

A) Earnings multiplier of 4 × annual profit of $25,000 B) Earnings multiplier of 2.5 × annual profit of $40,000 C) Earnings multiplier of 2 × annual profit of $50,000 D) Earnings multiplier of 1 × annual profit of $100,000

13) Land Co. was sold for $500,000 using a capitalization rate of 20. Which of the following is correct?

A) Normal earnings were $500,000, and the earnings multiplier was 1.

B) Normal earnings were $25,000, and the earnings multiplier was 20.

C) Normal earnings were $100,000, and the earnings multiplier was 5.

D) Normal earnings were $50,000, and the earnings multiplier was 10.

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14) In the earnings approach to a business valuation, what factors must a potential purchaser consider?

A) Annual profits and rate of return B) Annual profits over 5 years C) Annual dividends distributed and rate of return D) Return on shareholders' equity

15) In the asset approach to a business valuation, what factors must a potential purchaser consider?

A) The fair market value of all the assets being sold in the business B) The fair market value of each asset separately C) A value on each asset separately as determined by the potential purchaser D) An appraised value of the assets as a group

16) E Co. has earned net income after tax of $100,000 for the past 5 years. It is anticipated that E Co. will continue to earn profits at this level into the future. How much should a purchaser pay for this company assuming the purchaser requires an after-tax rate of return of 12%? (Round your final answer to the nearest whole dollar.)

A) $500,000 B) $113,636 C) $416,667 D) $833,333

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17) P Co. has the following profits over the last 5 years: Year 1 - $150,000, Year 2 $160,000, Year 3 -$100,000, Year 4 -$130,000 and Year 5 - $200,000, (with Year 5 being the most recent year). What is the weighted-average earning for P Co.? (Round your final answer to the nearest whole dollar.)

A) $128,000 B) $256,572 C) $152,667 D) $143,333

18) Kamal would like to buy a business which will provide a desired after-tax rate of return of 25%. What earnings multiple would Kamal apply to any potential business's profits?

A) 1.33 B) 2.66 C) 2.00 D) 4.00

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19) Alpine Inc. is for sale, and the sole shareholder, Billy, has decided to sell the company.

The business has annual pre-tax financial profits of $55,000. The following items will be omitted in arriving at the business value as they will not meet the prospective buyer's objectives: donations of $2,000, personal travel of $1,500, and part-time wages to Billy's child, Rocky, of $8,000.

The business is run from a small building which has a fair market value of $105,000 (land = $45,000 and building = $60,000). The property was originally purchased for $75,000 (land = $40,000 and building = $35,000). The UCC on the building is $20,000. There is no mortgage remaining on the property.

Businesses similar to Alpine are generating a 15% rate of return.

Billy is selling the operations of the business using the earnings method, and the small store and land will be sold using the asset approach at their fair market values.

The corporate tax rate is 13% for active business income, and 50 2/3% on specified investment business income.

Required: Determine the total value of Billy's company. (Round your intermediate and final calculations to the nearest whole dollar.)

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20) Sam has owned and operated P Co., a profitable CCPC, for five years. P Co. generated $75,000 in pre-tax profits this year. Sam is considering selling the company to a potential buyer and the two are trying to determine an appropriate value. Sam believes the profits will increase steadily in the future, while the buyer is a bit more cautious in the valuation due to a strong competitor coming to town. Sam believes that a capitalization rate of 20% is reasonable, while the buyer believes that 30% would be more realistic for this type of sale. Sam would like to use the after-tax profits from this year in the valuation, but the buyer would like to see the pre-tax profits reduced by 10% to reflect a potential decline in revenues. The corporate tax rate is 13%.

Required: Determine the difference in the two valuations that Sam and the buyer are considering for the sale and purchase of P Co. Co. using the earnings method. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar.)

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Answer Key Test name: Chap 23_2022-23 1) B 2) C 3) C 4) B 5) D 6) C 7) C 8) A 9) D 10) B 11) C 12) A 13) C 14) A 15) C 16) D 17) C 18) D

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