Canadian Tax Law
Solved Exam Questions
Course Introduction
Canadian Tax Law provides a comprehensive overview of the principles, statutes, and regulations that form the foundation of the Canadian taxation system. This course examines the structure and application of federal and provincial taxes, including personal and corporate income tax, GST/HST, and other direct and indirect taxes. Students will analyze statutory interpretation, judicial decisions, and the policy objectives underlying Canadas tax regime. Topics include income determination, tax avoidance, compliance, assessment procedures, tax litigation, and the ethical responsibilities of tax practitioners. The course prepares students to understand the practical and theoretical aspects of tax law relevant to individuals, businesses, and legal professionals in Canada.
Recommended Textbook
Canadian Income Taxation 2018 2019 by William Buckwold
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Chapter 1: Taxation-Its Role in Decision Making
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Q1) Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''.
Answer: Just as decision makers in business must control costs such as product,occupancy,selling,and many others,so should tax costs be regarded as controllable.The actions and activities of the organization must be analyzed at all levels,and across departments,to determine the impact on the overall tax cost.
Q2) Income tax is calculated for which of the following jurisdictional groups?
A)Municipal, provincial, and federal
B)Municipal, federal, and international
C)Provincial, federal, and international
D)Municipal, provincial, and international
Answer: C
Q3) When assessing the value of a corporation,the most relevant information that decision-makers normally consider is
A)the potential for before-tax profits.
B)the potential for after-tax profits.
C)the current corporate tax rate.
D)cash flow before-tax.
Answer: B
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Chapter 2: Fundamentals of Tax Planning
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Q1) The controller of Little Company Ltd.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying tax on capital gains this year.The controller is engaging in A)tax avoidance.
B)tax evasion.
C)tax planning.
D)GAAR.
Answer: C
Q2) Andrew has $10,000 to invest.He wants to put his money in a one-year investment earning an annual interest rate of 12%.Andrew is in a 42% tax bracket. Required:
a)Calculate the total value of Andrew's investment,after-tax,at the end of the year.
b)Calculate the amount of taxes Andrew will have to pay on his investment. Answer: a)$10,000 + ( ($10,000 *12)* (1 - .42))= $10,696
b)$10,000 * .12 * .42 = $504
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Chapter 3: Liability for Tax, Income Determination, and
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Q1) 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.
Answer: D
Q2) Which of the following type of payment is NOT subject to Canadian withholding tax when paid to a non-resident?
A)Dividends
B)Interest paid to an arm's length party
C)Pension benefits
D)Registered retirement income fund payments
Answer: B
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Chapter 4: Income From Employment
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Q1) Which of the following factors are used by the courts in order to determine a taxpayer's status as an employee or a self-employed contractor?
A)control test, ownership of tools test, chance of lawsuit, integration test
B)control test, employer test, chance of lawsuit, integration test
C)control test, ownership of tools test, chance of profit and loss, integration test
D)control test, employer test, chance of profit and loss, integration test
Q2) Which of the following,when provided by an employer,is NOT a tax-deferred or tax-free benefit for the employee?
A)Premiums for private health care plans providing extended health coverage beyond a public plan
B)Counselling services to prepare the employee for retirement
C)Contributions to the employee's registered pension plan
D)A near-cash gift for the employee's wedding
Q3) An individual has the option to receive a $1000 annual bonus and invest the after-tax amount for 25 years,or receive $1000 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? Show all of your work.
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Chapter 5: Income From Business
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Q1) Alice Smith has provided you with the following information pertaining to her 20x0 taxes:
The financial statements for Alice's dental practice reported a net income of $110,000. Amortization of $15,000 was reported in the expenses.
Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements.
Alice conducted scientific research and experimental development (SR&ED)in 20x0.She met with a CRA agent who verified that $40,000 of her expenditures were qualified SR&ED activities.These costs were treated as capital items on her financial statements.
Alice raises sheep on her land at her home in the country.She had a farming loss of $9,000 in 20x0.
Required:
Calculate Alice's minimum net income for tax purposes for 20x0.
Q2) List the six general limitations to business profit determination and give an example for three of the items
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Q1) Which of the following situations would not be permitted to defer the recognition of any recapture that might arise from the disposition of an asset?
A)A building that was used for income earning purposes was destroyed in a fire.Insurance proceeds were received which generated recapture.A new building was built one and a half years later.
B)A half-ton truck that belonged to a construction company was stolen in 20x0.Insurance proceeds were received which generated recapture.The truck was replaced in 20x1.
C)A customized half-ton truck that belonged to a construction company was sold in 20x0.The proceeds from the sale generated recapture.A new customized truck was purchased fourteen months later in order to carry out the duties of a large contract awarded to the company.
D)A building that was used for income earning purposes was sold in December 20x0.The proceeds from the sale generated recapture.A new building was purchased in April 20x1.The company's fiscal year-end is December 31<sup>st</sup>.
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Chapter 7: Income From Property
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Q1) Martha Shine owned the following in 20x8:
Rental properties originally valued at $275,000 (Property 1: land $70,000,building
$55,000)(Property 2: land $90,000,building $60,000)
-Net rental income before CCA was $11,000.
-The UCC on building 1,as of January 1,20x8 was $50,000.
-The UCC on building 2,as of January 1,20x8 was $40,000.
-Property 2 was sold in 20x8 for $250,000 (land $200,000,building $50,000)
Shares in ABC Inc.(a CCPC)valued at $50,000
-Non-eligible dividends paid to Martha in 20x8 totaled $5,000.
Savings of $30,000
-Interest earned in 20x8 was $1,000.
Martha also worked full-time as a baker in 20x8,earning a gross salary of $45,000. Martha is in a 45% tax bracket.
Required:
Calculate Martha's net income for tax purposes in 20x8 in accordance with Section 3 of the Income Tax Act.Martha will take the maximum CCA allowed this year on her rental properties.
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Chapter 8: Gains and Losses on the Disposition of Capital
Propertycapital Gains
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Q1) Sarah Green purchased a piece of land in 20x8 with plans to build and operate a greenhouse and evergreen nursery.Sarah is a full-time teacher,but has always dreamed of also running her own business.It is now 20x9 and Sarah has not yet started her business,and upon receiving an offer to teach on a tropical island,has decided to sell the land.Which of the following statements is TRUE?
A)Sarah's primary intent suggests that the income should be treated as a business transaction.
B)Sarah purchased the land with the primary intent to resell it at a profit.
C)Sarah 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.
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Q1) Car Co.is selling its land and building to Truck Co.for $340,000 (Land $200,000; Building $140,000).These values have not been officially appraised,and Truck Co.is arguing 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 TRUE 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.
Q2) Which of the following is FALSE regarding Tax Free Savings Accounts (TFSAs)?
A)There is no mandatory age by which a TFSA must be wound up.
B)TFSA contributions are tax deductible.
C)Any unused amounts not contributed in a year may be carried forward indefinitely to future years.
D)Capital gains earned within TFSAs are not taxed.
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Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Q1) Which of the following is FALSE with respect to the final tax returns of deceased taxpayers?
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)A Rights or Things return may be filed in addition to the final tax return.
D)Of the tax returns available for a deceased taxpayer, only the final tax return must be filed.
Q2) Samantha received an eligible dividend in the amount of $2,000.She is in a 50% tax bracket for regular income.How much is Samantha's dividend tax credit? (Assume a dividend tax credit rate of 15%.)
A)$300
B)$414
C)$1,000
D)$2,760
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Chapter 11: Corporationsan Introduction
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Q1) 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 are eligible for the general tax 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.
Q2) Many corporations carry on business in more than one province.Assuming a corporation from Province A wishes to conduct business in Province B,the corporation will not have to pay tax in Province B if
A)the parent corporation sets up a branch in Province B.
B)the permanent establishment in Province B has a lower sales to wage ratio than the ratio in Province A.
C)a branch treaty exists between the two provinces.
D)business is conducted with the other province by way of direct sales from Province A.
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Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Sample Questions
Q1) There are significant differences in the tax treatment of shareholder debt and shareholder equity from the perspective of both the CCPC and the shareholders.
Required:
List one tax consequences for each of the following:
1)Return on investment - shareholder debt
2)Loss on investment - shareholder debt
3)Return of capital - shareholder debt
4)Return on investment - shareholder equity
5)Loss on investment - shareholder equity
6)Return of capital - shareholder equity
Q2) Which of the following statements is TRUE 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 to the corporate treasury is not allowed in the Income Tax Act.
D)The sale of shares to the corporate treasury may result in a deemed dividend and a capital gain or loss to the shareholder.
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Chapter 13: The Canadian-Controlled Private Corporation
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Q1) 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 income and dividend income.
C)Specified investment income and taxable capital gains.
D)Dividend income and net taxable capital gains.
Q2) Private Co.received a $5,000 eligible dividend from Public Co.,which is a non-connected corporation.Which of the following applies?
A)The dividends can be reinvested by Private Co.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 Co.
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Chapter 14: Multiple Corporations and Their Reorganization
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Q1) Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free combination?
A)At least one of the corporations must be Canadian.
B)50 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.
Q2) Mr.Chan has created a holding company between himself and his corporation (which earns only active business income).This will permit which of the following?
A)The corporation's income will not be taxed.
B)Mr.Chan will receive dividends from the holding company, free of tax.
C)The holding company will receive dividends from the corporation, free of tax.
D)Mr.Chan will receive dividends from the corporation, free of tax.
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Chapter 15: Partnerships
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Q1) Sharon is a 40% partner in Green Nursery.She also works full-time as an engineer,earning a gross salary of $100,000 annually.Green Nursery's net income for tax purposes in 20x0 was $210,000.During 20x0,Green Nursery received $10,000 in non-eligible dividends from a CCPC.Green Nursery also sold a capital asset and recognized a gain of $16,000 in 20x0.(The dividend income and taxable capital gain income have been included in the net income for tax purposes.)Sharon withdrew $20,000 from the partnership during 20x0.The ACB of Sharon's partnership interest was $75,000 at the beginning of 20x0.(Use tax rates and rules applicable for 2019.)
Required:
A)Calculate the partnership's business income for 20x0.
B)Calculate Sharon's net income for tax purposes for 20x0.
C)Calculate the ACB of Sharon's partnership interest for the beginning of 20x1.
Q2) 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 does not have to be reported to Canada Revenue Agency.
D)Partnerships may earn business income, property income, and capital gains.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) A friend of yours is considering entering into a joint venture but knows very little about this form of business structure.You have been asked to provide the following information.
A)What is the purpose of a joint venture?
B)How are joint ventures taxed?
C)Give an example of a joint venture.
Q2) Three Hills Partnership had profits of $210,000 in 20x1.Shawna Hill invested $100,000 as a limited partner,and her partnership interest is 30%.Shawna is in a 45% tax bracket.What is Shawna's after-tax return on her investment in the partnership? (Rounded)
A)17%
B)35%
C)48%
D)63%
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Chapter 17: Trusts
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Q1) Which of the following statements is TRUE regarding trusts?
A)Losses that exceed income in a trust are allocated to the beneficiary at the end of the year.
B)From a tax perspective, there is little benefit to structuring a business as a royalty trust.
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.
Q2) Which of the following applies to a testamentary trust that is designated as a graduated rate estate (GRE)?
A)Tax installments 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.
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Chapter 18: Business Acquisitions and Divestituresassets
Versus Shares
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Q1) Stick Co.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 Stick Co.from being a small business corporation?
A)Stick Co.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)Stick Co.also owns portfolio shares in Leaf Co., (with less than 1% ownership), which have a fair market value of $5,000.
C)Stick Co.also has long-term investments valued at $30,000.
D)Stick Co.sold the equipment and used the funds to purchase 35% of the shares of Tree Co., a small business corporation.
Q2) Sam wishes to purchase Kitchen Cabinets,Inc.(KCI)Which of the following is TRUE if Sam purchases the assets of the corporation rather than the shares from the company's sole shareholder,Brent?
A)Payment of the purchase price will flow directly to Brent.
B)Sam will have no choice but to assume the liabilities of KCI.
C)Kitchen Cabinets Inc.may be subject to business income and capital gains.
D)Brent will be eligible to use for the capital gains deduction on the sale.
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Chapter 19: Business Acquisitions and
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Q1) Samantha is an architect,and she is also the sole shareholder of Sam's Gifts Inc.She wants to semi-retire from the gift business soon and her three employees have all expressed 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.However,Samantha is not in a hurry to receive the proceeds from the business as she will continue with her architectural work for another five years. Samantha has heard about something called a 'share reorganization' and she has asked you to explain what it means and if it would apply to her situation.
Required:
A)Explain what a share reorganization is,and if it would be useful for Samantha in her plans to semi-retire from her gift store.
B)What is a significant risk factor that might be involved with a share reorganization?
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Chapter 20: Domestic and International Business Expansion
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Q1) In the Canada-U.S.tax treaty,the definition of a 'permanent establishment' does not include
A)a place of management.
B)a factory.
C)a storage facility.
D)an office.
Q2) The Great Big Company (GBC)is a CCPC located in Saskatchewan.GBC owns a foreign subsidiary,The Little Company (TLC).GBC manufactures electronic component parts which are then sold to TLC for assembly.GBC is subject to a 27% corporate tax rate and TLC is subject to a 19% corporate tax rate.Fiona Big,the CEO of GBC,has mentioned that due to the lower tax rate in the foreign country,the profits of GBC could be shifted to TLC by adjusting the selling price of the component parts.
Required:
A)Can Fiona Big 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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Page 22
Chapter 21: Tax Aspects of Corporate Financing
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Q1) With regard to debt and equity securities,which of the following statements is TRUE? (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 that is not in the business of lending money.
D)A discount on a debt security is fully or partially deductible for tax purposes, depending on the discount rate.
Q2) Silver Photo Studios Inc.requires $50,000 capital for a proposed expansion.Simon Silver,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%.The company pays a corporate tax rate of 27%.
Required:
A)Determine the amount of corporate income that would be required to finance (i)the interest in the bank loan and (ii)the dividends on the preferred shares.
B)Calculate the actual cost (as a %)of the debt and the actual cost (as a %)of issuing the preferred shares.
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Page 23
Chapter 22: Gsthst Overview
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Q1) With respect to GST/HST,supplies fall under different categories with different sets of rules.Which of the following is FALSE with regard to exempt supplies?
A)Exempt supplies are not included in the determination of the mandatory reporting period.
B)GST/HST is not applicable.
C)Childcare services and music lessons are examples of exempt supplies.
D)Input tax credits may be claimed on expenditures made to provide the exempt supplies.
Q2) Jordan was required to pay her own employment expenses in 20x0,which totaled $12,000,including $2,000 CCA.All of the expenses were deducted on her 20x0 tax return,and all included a 15% HST component,other than the CCA which had a deemed inclusion since HST was originally paid on the vehicle.If Jordan applied for an HST rebate in 20x1 when preparing her 20x0 tax return,what impact would the rebate have on her 20x1 tax return?
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
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