Accounting for Income Taxes
Solved Exam Questions
Course Introduction
Accounting for Income Taxes explores the principles, rules, and procedures related to recognizing, measuring, and disclosing income taxes in corporate financial statements, consistent with generally accepted accounting principles (GAAP) and applicable tax regulations. The course covers topics such as deferred tax assets and liabilities, temporary and permanent differences, income tax provision calculations, uncertainty in income taxes, tax planning strategies, and the impact of tax credits and carryforwards. Students will gain a comprehensive understanding of how income taxes affect financial statements and how to analyze and interpret tax-related financial information relevant for decision-making purposes in both domestic and international contexts.
Recommended Textbook
Canadian Income Taxation 2014 2015 Edition by William Buckwold
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Chapter 1: Taxation-Its Role in Decision Making
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Q1) tax jurisdictions.List the relevant variables within these four categories.
Answer: Income: Business,Property,Employment,Capital Gains
Entities: Individuals,Corporations,Trusts
Forms of business: Proprietorship,Corporation,Partnership,Limited Partnership,Joint Venture,Income Trusts
Tax Jurisdictions: Provincial,Federal,Foreign
Q2) Explain what is meant by the principle 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.
Q3) Which of the following is not considered to be a separate entity for tax purposes in Canada?
A) Individuals
B) Proprietorships
C) Corporations
D) Trusts
Answer: B
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Page 3
Chapter 2: Fundamentals of Tax Planning
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Q1) Which of the following scenarios illustrates a potential tax avoidance scheme?
A) Property transferred between arm's-length parties is valued at fair market value.
B) Dividends received from shares transferred from a wife to her husband are taxed in the hands of the wife.
C) A shareholder owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies.
D) A man transfers property to his child at a value less than fair market value.
Answer: D
Q2) The manager at Big Company Corporation has decided to sell a piece of capital equipment after the company's year-end,in order to avoid paying capital gains tax this year.Which tax planning method has the manager used?
A) Transferring income to another entity.
B) Converting the nature of income from one type to another.
C) Shifting income from one time period to another.
D) This is a form of tax evasion and is not allowed.
Answer: C
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Chapter 3: Liability for Tax, Income Determination, and Administration of
the Income Tax System
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Q1) Joe is a Canadian citizen.In March of 20X1,Joe was transferred to the United States with his company.His wife and child moved with him at that time.Joe chose not to sell his house,and instead,lends it to his family during the winter months when they visit Canada from overseas.Joe has five weeks of vacation each summer,at which time he and his family return to Canada and stay in their house.Joe did not cancel his country club membership in order that he could golf with his friends on his vacations.He did close his bank accounts,however.Which of the following statements is true?
A) Joe is a Canadian citizen, and will therefore, automatically be considered a Canadian resident for tax purposes.
B) Joe no longer resides in Canada, and will therefore, automatically be considered a non-resident of Canada.
C) Joe is considered a part-time resident of Canada for the five weeks he vacations in the country.
D) Joe might be considered to have a continuing state of relationship with Canada.
Answer: D
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Page 5
Chapter 4: Income From Employment
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Q1) Susan was provided with a company car to drive during March to December of the current year.The car cost the company $22,000 plus GST and PST totalling 11%.Susan drove the car a total of 15,000 kilometres during the year.11,000 kilometres were for business purposes and the other 4,000 kilometres were for personal use.Susan's employer pays for all of the vehicle's operating costs which totaled $1,100.What is the minimum amount that Susan can report as her total taxable benefit for the use of the car during the year? (Round your answer.)
A) $1,172
B) $1,758
C) $2,252
D) $5,964
Q2) Sarah borrowed $25,000 from her employer at a rate of 1% interest.At the time the loan was made,the CRA's prescribed rate of interest was 3%.Sarah is in a 40% income tax bracket.What is the actual cost (rate)of Sarah's loan? (Assume there are no fluctuations in the prescribed rate of interest.)
A) 1%
B) 1.2%
C) 1.8%
D) 2%
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Page 6
Chapter 5: Income From Business
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Q1) Ken Gray runs a small proprietorship (Ken's Fish)that specializes in fishing gear.He has provided you with the following information:
Q2) Which of the following regarding farming income is TRUE?
A) Farming income must be calculated on an accrual basis.
B) A taxpayer who earns a full-time income as a lawyer recognized a $40,000 loss this year from her recreational farming activities. The maximum deduction allowed this year from the farm loss is $17,500.
C) A taxpayer who earns a full-time income as a lawyer recognized a $40,000 loss this year from her recreational farming activities. The maximum deduction allowed this year from the farm loss is $21,250.
D) A taxpayer who earns a full-time income as a lawyer recognized a $40,000 loss this year from her recreational farming activities. The maximum deduction allowed this year from the farm loss is $40,000.
Q3) Determine whether the transactions concerning the following assets (shown in italics)would be classified as a)income from capital for tax purposes,b)business income for tax purposes,or c)neither; and briefly explain the reason for your decision.
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Chapter 6: The Acquisition, Use, and Disposal of Depreciable Property
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Q1) ABC Corp.leased an office and paid $20,000 on leasehold improvements in January of this year.This cost included dry wall,new carpets,and all new light fixtures.The term of the lease is 2 years plus an option to renew for 2 more years.
Required:
Calculate the maximum CCA that ABC Corp.will be allowed to deduct this year.
Q2) Angela Smith runs a small bakery.The company's year-end is December 31<sup>st</sup>.Angela is trying to calculate the amount of capital cost allowance that she may deduct in 20X0 and has asked for your assistance.She has provided you with the following information:
Assets owned prior to 20X0 and their UCC balances on January 1,20X0:
Q3) Which of the following statements regarding recapture is true?
A) Recapture occurs when there is a positive balance in a class pool and the pool 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 the class pool.
D) Recapture occurs when there is a negative balance in a class pool, even if there are assets remaining in the class pool.
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Chapter 7: Income From Property
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Q1) Stella Flier has received an inheritance of $100,000.She is trying to decide what to do with this money and has come to you for some advice.She has an excellent credit rating and no outstanding debts.She would like to buy a $225,000 house and invest $100,000 in bonds as a safety net.
Required: What would you recommend to Stella,and why,assuming only the facts given?
Q2) A public corporation earns $500,000 in pre-tax profits and pays out all of its after-tax earnings in dividends.The corporate tax rate is 27.5% and the shareholders are all in a 45% tax bracket.The dividend gross-up rate is 1.38 and the total dividend tax credit (federal and provincial)is 27.5%.
Required:
A)Calculate:
1)the total amount of federal tax paid by the corporation,and 2)the total net federal tax paid by the shareholders on the dividends.
B)Briefly explain how this tax structure illustrates the theory of integration.
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Chapter
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Q1) John sold a piece of land in 20X9 for $350,000.The land was recognized as capital property.The original cost of the land was $75,000.The selling costs incurred in 20X9 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.John wishes to report the minimum taxable capital gain allowed each year.How much will he report in 20X9? (Round all numbers to zero decimal places.)
A) $0
B) $27,000
C) $50,000
D) $216,000
Q2) When establishing whether the sale of an asset is capital income or business income,which of the following is not one of the factors that the courts take into consideration when determining the original intention of a transaction?
A) Period of ownership
B) Canadian securities test
C) Number and frequency of transactions
D) Relation of transaction to taxpayer's business
Q3) Greta Snow sold the following items prior to moving to Europe:
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Chapter
Sample Questions
Q1) Which of the following is FALSE regarding the Tax Free Savings Account (TFSA)?
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.
Q2) Which of the following deductions are allowed as 'other' deductions for tax purposes?
A) Contributions to an individual's Canada Savings Bonds, fees for an appeal in relation to an assessment under the Income Tax Act, and contributions to an individual's RRSP.
B) Lump sum support payments to a former spouse, contributions to an individual's RRSP, and fees for an appeal in relation to an assessment under the Income Tax Act.
C) Support payments for a child, moving expenses against income at the previous location and child care expenses.
D) Contributions to an individual's RRSP, fees for an appeal in relation to an assessment under the Income Tax Act, and moving expenses against income at the new location.
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11
Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Q1) Theodore is 37 years old.He earns $92,000 a year at his job as a financial analyst.His CPP and EI contributions totaled $3,340.Last year he enrolled in an accounting program in order to earn his designation.He was enrolled for eight months,part-time (attending evening classes),and his tuition fees totalled $1,500.Theodore donated $2,000 to Ducks Unlimited (a registered charity for tax purposes),and $800 to a political party.(Theodore has made annual contributions to these organizations for the past five years.)He spent a total of $4,200 on eyeglasses,dental care and prescriptions,none of which was reimbursed.Theodore's wife did not work during the year,as she was enrolled in full-time studies for eight months as a nursing student.Her tuition fees for the year were $8,000.She transferred as much of her tuition and education amount allowable to Theodore.Theodore had a $2,000 non-capital loss carry-forward from the previous year that he incurred during the wind-up of his proprietorship.Theodore and his wife do not have any children.
Required:
Calculate Theodore's federal tax payable for the current year.
Q2) Susan White incurred the following income,disbursements,and losses in 20X1 and 20X2:
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Page 12
Chapter 11: Corporations-An Introduction
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Q1) Johnson Co.is a CCPC with active business income of $350,000 in 20X2.The company engages in retail and wholesale activities.Capital gains in 20X0 were $84,000.
Johnson Co.will utilize a net capital loss carry-over of $28,000 on its 20X2
Q2) Bride and Groom Co.is a Canadian controlled private corporation with active business income of $750,000.The company is in the business of producing and selling bridal wear.Dividends were received from a taxable Canadian corporation in the amount of $80,000.
Additional information is as follows:
Net capital loss carry-over balance is $200,000. Non capital loss carry-over balance is $70,000. Required:
Calculate the minimum federal Part I tax payable by Bride and Groom Co.
Q3) Using general terms,explain how a change in control of a corporation can affect the net-capital losses and the non-capital losses.
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Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Q1) Compare shareholder equity to shareholder debt,addressing 1)return on investment,2)loss on investment,and 3)return of capital.
Q2) Ben is incorporating his proprietorship and wishes to transfer the following assets using a Section 85 rollover:
Ben wishes to defer all gains at this time.He will receive the maximum note receivable possible,and the remainder of the transfer in preferred shares.
Required:
1.What is the elected transfer amount for each of the assets under Section 85?
2.What is the value of the note receivable and preferred shares that Ben must receive in order to defer any gains at this point in time?
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14
Chapter 13: The Canadian-Controlled Private Corporation
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Q1) The following diagram depicts the ownership structure of two CCPCs.Bob Light is Lisa Light's son.Sarah Paint and Alan Canvas are not related to Bob and Lisa in any manner,what-so-ever.All of the shares held are common shares.
Q2) Private Co.received a $5,000 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 a tax rate of 33 1/3%.
D) Receipt of the dividend will result in an immediate dividend refund for Private Co.
Q3) Which of the following types of corporate income are subject to the special refundable tax of 62/3%,and a tax reduction of 262/3% upon distribution of the income?
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.
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Chapter 14: Multiple Corporations and Their Reorganization
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Q1) Tom and Bob are equal shareholders of a profitable operating company.The company is growing and dividend payouts are increasing.The two men have heard that 'holding corporations' might suit their needs.Which of the following would apply?
A) Dividends received by the holding companies from the operating company must be invested in the same ventures.
B) The holding companies would receive the dividends from the operating company, free of tax, to be invested in ventures of Tom and Bob's separate choices.
C) The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal expenditures without paying a second level of tax.
D) Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.
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Chapter 15: Partnerships
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Q1) Small Corp.and Big Corp.are equal partners in Medium Enterprises.The total partnership has a net worth of $210,000,split 50/50 between the two corporations.Size 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,Size Co.will contribute $105,000 to the partnership treasury.This transaction which
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.
Q2) 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 partner's affairs.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) Teresa White is one of 5 equal limited partners in House Designs Enterprises (HDE).She contributed $100,000 five years ago when the enterprise began.During the year,HDE generated pre-tax profits of $500,000.The sole general partner,Betty Carmel,receives 55% of the company's profits.Both Teresa and Betty are subject to a 45% marginal personal tax rate.
Required:
Calculate Teresa's after-tax rate of return on her investment.
Q2) Jerome has a 10% interest in a limited partnership.The adjusted cost base of Jerome's partnership interest at the beginning of 20X0 was $30,000.During 20X0 the partnership reported a $10,000 taxable capital gain and $150,000 in business income.At the end of 20X0 Jerome had an outstanding loan balance of $10,000 with the partnership.
Required:
Determine Jerome's "at-risk amount" at the end of 20X0.
Q3) 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.
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Chapter 17: Trusts
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Q1) Jasmine is the beneficiary of an inter vivos trust.During 20X4,the trust received the following income:
Capital gains: $16,000
Interest: $12,000
Non-eligible dividends: $8,000
One half of the trust's income from 20X4 was paid to Jasmine,who does not currently have any other sources of income.The remainder of the income stayed in the trust.
Required:
a)Determine the federal tax payable for Jasmine.
b)Explain how the federal tax liability will differ for the trust.(Support your answer with calculations.)
Q2) A trust that is created upon the death of an individual,and which is taxed applying the full range of tax rates within the individual's progressive scale is a(n):
A) Unit investment trust
B) Inter vivos trust
C) Investment trust
D) Testamentary trust
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Chapter 18: Business Acquisitions and Divestitures-Assets
Versus Shares
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Q1) The Flower Company is for sale.The anticipated average profits for the next five years of the business have been calculated at $150,000.The business has been valued at $750,000 using the earnings method.The net tangible assets have been appraised at $625,000.Which of the following is true for the Flower Company?
A) The company is expected to yield a 20% return for the purchaser, and the cost of the business is too low.
B) The company is expected to yield a 20% return for the purchaser, and goodwill of $125,000 is present.
C) The company is expected to yield a 24% return for the purchaser, and goodwill of $125,000 is present.
D) The company is expected to yield a 24% return for the purchaser, and goodwill of $475,000 is present.
Q2) Identify the tax effects for 1)the vendor and 2)the purchaser when a business divestiture and acquisition involves a)the sale of assets,and b)the sale of shares.
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Page 20
Chapter 19: Business Acquisitions and
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Q1) Mr.and Mrs.Leon would like to transfer their family business to their son.However,their son does not have the required funds to purchase the company at this time.Which of the following can the Leons chose to do in order to make the transfer possible without any immediate tax effect for themselves?
A) A sale of their shares to their son
B) An amalgamation
C) A reorganization of share capital
D) A wind-up
Q2) Which of the following is not a common feature often associated with closely held corporations?
A) The corporation has only one, or relatively few, shareholders.
B) The corporation is often sold due to the owner's wish to retire.
C) The corporation may be sold to family members or employees who do not have enough cash to buy the business.
D) The corporation pays regular dividends to its public shareholders.
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Chapter 20: Domestic and International Business Expansion
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Q1) Which of the following lists are acceptable methods that may be used in adopting a reasonable transfer price between a Canadian parent and its foreign subsidiary corporations?
A) Comparable arm's-length selling price method; cost-plus method; resale price method
B) Cost-plus method; resale price method; profit-margin method
C) Lowest tax rate method; resale price method; comparable arm's-length selling price method
D) Comparable arm's-length selling price method; lowest tax rate method; profit-margin method
Q2) Crispy Chips Inc.is considering an expansion into the United States.Jeff Arthur,the CEO,is not sure how to structure this new venture and would like some general information before he meets with his accountant and lawyer. Required:
Write a memo to Jeff,informing him of the two fundamental approaches he can take to conduct his foreign operations (branch and subsidiary corporation); listing two advantages and two disadvantages of both approaches.
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Page 22
Chapter 21: Tax Aspects of Corporate Financing
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Q1) Joe Genius of ABC Corporation is considering whether to lease or purchase a large capital asset.If he purchases the asset,he will use debt financing.Which of the following is a true statement describing a similarity in the tax treatment of leasing and purchasing with debt?
A) Both allow for a tax deduction.
B) Principal payments are deductible for both alternatives.
C) Cash payments and tax savings will usually occur simultaneously for both alternatives.
D) Capital cost allowance is always calculated for both alternatives.
Q2) Which of the following statements regarding preferred share financing is false?
A) Preferred share dividend payments are non-deductible.
B) There is a special tax on preferred dividends in excess of $500,000 annually, even if the issuing corporation has no taxable income.
C) Current tax laws simplify the nature of preferred share financing for corporations.
D) The preferred share issue may be structured so as to enhance the after-tax return of investors.
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