Business Taxation
Pre-Test Questions
Course Introduction
Business Taxation explores the principles, laws, and regulations governing the taxation of businesses. The course covers key concepts such as types of business entities, taxable income, deductions, credits, tax compliance, and planning strategies. Students will gain an understanding of federal, state, and local tax requirements, learn to analyze tax implications for various business decisions, and develop skills to ensure effective tax planning and compliance for organizations. The course integrates practical scenarios and case studies, preparing students to address real-world tax issues faced by businesses.
Recommended Textbook
Canadian Income Taxation 2018 2019 by William Buckwold
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Page 2
Chapter 1: Taxation-Its Role in Decision Making
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Q1) The text book lists four fundamental tax variables which a manager needs to consider when making business decisions.These variables are: 1)primary types of income; 2)entities subject to taxation on income; 3)alternative forms of business and investing structures used by taxable entities structure; and 4)tax jurisdictions.List the relevant variables within these four categories.
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) Two investor corporations may not enter jointly into which of the following?
A)Joint venture
B)Partnership
C)Separate corporation
D)Proprietorship
Answer: D
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3
Chapter 2: Fundamentals of Tax Planning
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Q1) Which of the following statements regarding GAAR is true?
A)The purpose of GAAR is to catch tax evaders.
B)When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances.
C)Canada Revenue Agency states that "A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes."
D)Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR.
Answer: C
Q2) 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
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Chapter 3: Liability for Tax, Income Determination, and Administration of
the Income Tax System
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Q1) 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
Q2) Regarding taxation years,which of the following statements is TRUE?
A)Corporate taxpayers must use the calendar year as their taxation year.
B)The taxation year for an individual taxpayer ends on April 30<sup>th</sup>.
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.
Answer: D
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5
Chapter 4: Income From Employment
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Q1) Sarah borrowed $25,000 from her employer at a rate of 1% interest.At the time the loan was made,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%
Q2) 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
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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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Chapter 6: The Acquisition, Use, and Disposal of Depreciable Property
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Q1) Ben incorporated Miller Co.in 20x7,which then purchased a small business.The incorporation costs were $3,500,and the goodwill acquired from the small business equaled $50,000.What is the ending Class 14.1 UCC balance in 20x8 (assuming there are no other intangible assets in the company)? (Rounded to 0 decimal places)
A)$46,776
B)$47,975
C)$49,554
D)$50,825
Q2) 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.
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Chapter 7: Income From Property
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Q1) On March 1,20x1,Notes Inc.purchased a two-year guaranteed investment certificate (GIC)for $15,000.The interest compounds annually at 8% and will be received at the end of the full term.Notes Inc.has a marginal tax rate of 30%,which will increase to 34% for 20x2 and 20x3.Notes Inc.uses the calendar year as its fiscal year.(These tax rates are used here for illustration purposes only.)
Angela Major also invested $15,000 in a GIC with an 8% annual return,on March 1,20x1,with interest to be paid at the end of each annual period.Angela's marginal tax rate is 40%. (Assume there are no leap years in this time period.)
Required:
Calculate the after-tax interest income for each year for Notes Inc.and for Angela.(Round all numbers.)
Q2) 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: How could Stella minimize her tax liability,assuming only the facts given?
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Chapter 8: Gains and Losses on the Disposition of Capital
Propertycapital Gains
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Q1) Mr.Yee sold a piece of land in 20x0 for $500,000.He originally paid $100,000 for the land.Selling costs totaled $15,000.The land is classified as capital property.The purchaser of the land paid Mr.Yee $80,000 in 20x0,and will pay $84,000 each year for the next five years.
Required:
Calculate the taxable capital gain that Mr.Yee will have to include in his income for tax purposes in 20x0 and 20x1.
Q2) 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)$135,000
D)$216,000
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Sample Questions
Q1) 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)Mr.Grey and his sister's son,Matthew,are negotiating an economic transaction.Are Mr.Grey and Matthew related for tax purposes?
B)Mr.Field is the sole shareholder of Corporation X,and Mrs.Field,(Mr.Field's wife)is the sole shareholder of Corporation Y.Are the two corporations related for tax purposes?
C)Sarah owns seventy percent of the shares of ABC Co.Andrew owns the remaining thirty percent.Sarah and Andrew are not related.Is Andrew related to ABC Co.?
D)Glen owns thirty percent of the shares of Corporation A.Glen's wife also owns thirty percent of the shares of Corporation A.The remaining forty percent of the shares are owned by Steven,who is a friend of the family.Is Glen related to Corporation A for tax purposes?
E)Tammy and her brother's wife,Angela,are negotiating an economic transaction.Are Tammy and Angela related for tax purposes?
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11
Chapter 10: Individuals: Determination of Taxable Income and Taxes Payable
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Q1) Archie Smith works full-time as a dentist and is in a 50% tax bracket.He lives on an acreage where he began a part-time farming operation last year (20x1).During 20x1,Archie incurred farm expenses totaling $38,500 and he received $5,200 in farming revenue.Operations became more profitable this year,and in 20x2 Archie's farm revenues were $20,000 and expenses totaled $16,000.
Required:
a)Name the type of loss that Archie was able to recognize in 20x1? Briefly explain your answer.
b)Calculate the loss from farming operations that Archie was able to apply against his other sources of income in 20x1.
c)What effect will the 20x1 operations have on Archie's 20x2 and future year's taxable income? Show your calculations.
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Chapter 11: Corporationsan Introduction
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Q1) 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.
Q2) 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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13
Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Sample Questions
Q1) 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.
Q2) Green 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.
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Page 14
Chapter 13: The Canadian-Controlled Private Corporation
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Q1) There are several benefits to incorporating a business.Some of the benefits are:
A)Lower tax rates are often recognized; the shareholder may receive compensation; the corporation offers preferable tax rates on the business' investment income
B)The shareholder may choose when they will receive dividend income from the corporation; a capital gains deduction may be available if conditions are met when shares are transferred to the shareholder's children; the small business deduction on the first $500,000 of active business income
C)There is greater flexibility to bring family members on board as owners; non-taxable benefits may be provided to the shareholder; dividend distributions are deductible for tax purposes
D)A tax deferral is available if the shareholder requires the corporation's profits for personal use in the year; the shareholder may participate in a registered pension plan through the corporation; dividend payments may be deferred until after a shareholder has retired.
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15
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) Small Corp.and Big Corp.are equal partners in Medium Enterprises.The partnership has a net worth of $210,000,split 50/50 between the two corporations.Size Corp.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 Corp.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.
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 partners' affairs.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) While partnerships and joint ventures have some similarities,they have significant differences.Which of the following is FALSE with regard to partnerships and joint ventures?
A)Joint ventures and partnerships are not separate taxable entities.
B)All partners in a partnership are subject to the same CCA decision in a given tax year, while members of a joint venture may each decide their own amount of CCA to be deducted.
C)CCPC partners in a partnership and CCPC members in a joint venture are both restricted to their profit-sharing ratio of the $500,000 small business deduction limit. D)Joint ventures are more limited in their use than partnerships, although they have more flexibility with regard to their tax decisions.
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 the year.
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Chapter 17: Trusts
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Q1) 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.
Q2) 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.
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19
Chapter 18: Business Acquisitions and Divestituresassets
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 is, therefore, a low risk investment.
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.
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20
Chapter 19: Business Acquisitions and
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Q1) Mr.and Mrs.Green 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 might Mr.and Mrs.Green consider in order to make the transfer possible without any immediate tax consequences?
A)Sell their shares to their son
B)Sell their shares to a third party who will hire their son
C)Reorganize their shares, exchanging their common shares for preferred shares of equal value, and then issue a new class of common shares to their son for a nominal value
D)Sell the assets in the corporation that have appreciated in value
Q2) Corporation A is selling a depreciable asset to Corporation B.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 sale in a manner that will defer all taxes at this time.Corporation A has no unused losses.Which of the following is FALSE?
A)For legal purposes,the asset will be sold for $200,000.
B)The elected value for tax purposes will be $175,000.
C)The sale can include cash or a note receivable to a maximum value of $160,000.
D)Corporation A will receive shares from Corporation B in the transaction.
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Chapter 20: Domestic and International Business Expansion
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Q1) Andy Griffin would like to invest $150,000 in Foreign Co.,which was founded and operates in a foreign country.This investment would give Andy 25% ownership of the company.An annual dividend of $15,000 (Canadian funds)is anticipated.
Andy'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 Andy,personally,will be subject to a 15% withholding tax.
Required:
1)Determine the total tax liability (foreign and Canadian)that Andy will be subject to upon receiving dividends from Foreign Co.
2)How would your answer in part 1 change if Andy established a Canadian holding company to purchase the shares,(subject to a 5% withholding tax on dividends received)?
3)What would Andy's after-tax proceeds be if he received eligible dividend income from the holding company?
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Chapter 21: Tax Aspects of Corporate Financing
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Q1) 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.
Q2) During the year,The Light Corporation paid $550,000 in preferred share dividends to ABC Inc.Both companies are Canadian corporations.Which of the following is TRUE?
A)ABC Inc.is subject to Part VI.1 tax.
B)The Light Corporation 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.
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Page 23
Chapter 22: Gsthst Overview
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Q1) 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
Q2) 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.
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