Corporate Taxation Practice Exam
Course Introduction
Corporate Taxation explores the federal income tax treatment of corporations and their shareholders, with an emphasis on the Internal Revenue Code, Treasury regulations, and relevant case law. The course examines topics such as the formation of corporations, the tax consequences of corporate operations, distributions and dividends, redemptions, liquidations, mergers, acquisitions, and reorganizations. Students will develop a practical understanding of how tax considerations shape corporate decision-making, planning, and compliance, as well as how to identify and address common tax issues faced by corporations in various business contexts.
Recommended Textbook
Canadian Income Taxation 2014 2015 Edition by William Buckwold
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Page 2
Chapter 1: Taxation-Its Role in Decision Making
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Q1) Which of the following attitudes and actions will help decision-makers develop an efficient approach to taxation?
A) Cash flows should be considered from a before-tax perspective when making decisions.
B) Functional managers should not be held responsible for the tax effects of decisions within their divisions.
C) Tax costs to a business should be regarded as controllable expenses, much like product costs and selling costs.
D) All managers should own a copy of the Income Tax Act.
Answer: C
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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Chapter 2: Fundamentals of Tax Planning
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Q1) 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
Q2) 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
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Chapter 3: Liability for Tax, Income Determination, and Administration
of the Income Tax System
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Q1) Allison Hill moved to Canada on April 30<sup>th</sup> of this year.She was born and raised in Belgium,and moved to Canada to start a career in architecture.She earned $45,000 from May to December of this year from her new employer.Prior to leaving Belgium,Allison earned $10,000 of employment income.She also received $1,000 in dividends in March and $1,000 in dividends in September from stocks in a European corporation.Allison's parents sent her a cheque for $2,000 as a gift for her 25<sup>th</sup> birthday in August.
Required:
Determine Allison's residency status for Canadian tax purposes for the current year.How much income is Allison required to report on her T1 tax return? Explain why any items have not been included in your calculations.
Answer: 'Part-time resident' or 'Resident as of April 30<sup>th</sup>'
$45,000 + $1,000 = $46,000
The following items have been omitted:
Income from employer in Belgium prior to Allison becoming a Canadian resident
Dividends received prior to becoming a Canadian resident
Birthday gift from parents is not taxable
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Chapter 4: Income From Employment
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Q1) Cindy works for Sky Manufacturers,a public corporation.In 20X1 she was offered an option to purchase shares at $15 per share from her employer.The fair market value on that day was $17 per share.The option had a four year exercise time-limit.Cindy exercised her option in 20X3 and purchased 500 shares.The fair market value at that time was $21 per share.What is Cindy's tax treatment of this option in the year 20X3?
A) $1,000 taxable benefit
B) $2,000 taxable benefit
C) $3,000 taxable benefit
D) Not taxable until the shares are sold.
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.
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.
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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) 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.
Q3) Alice Smith has provided you with the following information pertaining to her 20X0 taxes:
Her dental practice generated $110,000 in income.$35,000 of this income consisted of unbilled work in progress.There was no unbilled work in progress in the prior year.Alice has made a Section 34 election.
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.
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Chapter 6: The Acquisition, Use, and Disposal of Depreciable Property
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Q1) Which of the following cases is not eligible for capital cost allowance in the current year?
A) A new engine is installed in a semi-trailer that is used to haul produce to the United States.
B) An employee owns and uses an automobile in the course of her employment duties during the month of December. Her pay for December is not received until January of the following year.
C) A piece of equipment was purchased 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.
Q2) 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.
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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% in 20X2.Notes Inc.uses the calendar year as its fiscal year.
Angela Major also invested $15,000 in a GIC with an 8% annual return,on March 1,20X1.Angela's marginal tax rate in 20X1 is 40%,which is expected to rise to 45% in 20X3. (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:
What would you recommend to Stella,and why,assuming only the facts given?
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Q1) Anne Smith acquired her house in 20X0 for $150,000 and her cottage in 20X4 for $100,000.Due to a rise in real estate prices,she decided to sell both properties and backpack around the world for two years.Both properties were sold in October of 20X8.Anne received $375,000 in proceeds for the house,and $250,000 for the cottage. Required:
Calculate the minimum taxable capital gain that the Anne can report for her house and for her cottage on her 20X8 tax return.
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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10
Chapter
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Sample Questions
Q1) Case One
Marsha had total income of $112,000 and earned income of $75,000 in 2013.At the end of 2013,she had unused RRSP contribution room of $12,000.Her pension adjustment from 2013 was $5,000.She anticipates a pension adjustment of $7,000 in 2014.
Required:
Calculate the maximum RRSP deduction that Marsha can make for the 2014 taxation year.
Case
Two
(Independent of Case One)
Marsha is 35 years old.She has the option of investing $2,000 per year in a savings account at 8%,or $2,000 in an RRSP at 8%.The money will be invested for the next 30 years,and will not be withdrawn until she retires.
Required:
Calculate the amount of each option,net of taxes,if Marsha withdraws all of the money when she turns 65? Assume that her tax rate will be 35% every year until she retires.
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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) In 20X0,Coffee Co.recognized $37,000 in business income and $1,000 in taxable capital gains.In 20X1,the company incurred a business loss of $25,000,a taxable capital gain of $2,000,and an allowable capital loss of $5,000.Business income for 20X2 was $50,000,taxable capital gains were $4,000,and the company received $10,000 in dividends from a taxable Canadian corporation.Assuming Coffee 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?
A) 20X0: $12,000; 20X1: $0; 20X2: $52,000
B) 20X0: $38,000; 20X1: ($28,000); 20X2: $64,000
C) 20X0: $13,000; 20X1: ($2,000); 20X2: $62,000
D) 20X0: $37,000; 20X1: $0; 20X2: $27,000
Q2) 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
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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Page 13
Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Q1) 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?
Q2) Compare shareholder equity to shareholder debt,addressing 1)return on investment,2)loss on investment,and 3)return of capital.
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14
Chapter 13: The Canadian-Controlled Private Corporation
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Q1) Corporation X had an RDTOH balance of $15,000 at the end of 20X0,and the dividend refund to the company that year was $7,000.The company's Part IV tax for 20X1 is $8,000.The company's active business income was $475,000 and its taxable income was $410,000.Corporation Y,which is associated with Corporation X,was allocated $125,000 of the small business deduction in 20X1.Corporation X's aggregate investment income was $50,000 in 20X1.Part I tax for 20X1 was $60,000.The RDTOH balance at the end of 20X1 is (Round all numbers)
A) $ 8,000
B) $16,000
C) $25,335
D) $29,335
Q2) 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.
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Page 15
Chapter 14: Multiple Corporations and Their Reorganization
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Q1) Mr.Chan has created a holding company between himself and his corporation.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.
Q2) The shareholders of Parent Co.and Sub Co.wish to combine the business activities of the two companies through a business combination.Both companies have assets that have appreciated in value above their capital cost.Parent Co.owns 85% of the shares of Sub Co.
Required:
Suggest a business combination (amalgamation or wind-up)that would defer the tax consequences associated with the increased value of the assets,and explain why you did not choose the other option.
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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 Co.has been asked to join the partnership in a manner that will not have a tax consequence to the existing partners.When the transaction is complete,all three partners will have an equal interest.To accomplish this structural change,Size Co.must
A) contribute $210,000 to the partnership treasury.
B) contribute $105,000 to the partnership treasury.
C) pay $105,000 to each of the partners.
D) pay $70,000 to each of the partners.
Q2) 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.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) 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.
Q2) 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) Neither joint ventures nor partnerships are 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) Partners in a partnership and members of 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.
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Chapter 17: Trusts
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Q1) Which of the following statements accurately describes the rules pertaining to testamentary trusts?
A) Testamentary trusts must use the calendar year as their taxation year, and they are subject to the highest federal personal tax rate.
B) Testamentary trusts must use the calendar year as their taxation year, and they may apply the full range of rates from the personal graduated tax rate scale.
C) Testamentary trusts may use the calendar year as their taxation year or choose a taxation year that ends within twelve months of inception of the trust, and they are subject to the highest federal personal tax rate.
D) Testamentary trusts may use the calendar year as their taxation year or choose a taxation year that ends within twelve months of inception of the trust, and they may apply the full range of rates from the personal graduated tax rate scale.
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Chapter 18: Business Acquisitions and Divestitures-Assets
Versus Shares
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Q1) When deciding whether to purchase the shares or assets in business acquisitions,which of the following are the three major tax considerations for the purchaser?
A) Future tax rates, impact on cash flow, potential tax liability after share acquisition if assets are sold
B) Future tax rates, impact on cash flow, potential tax liability after share acquisition if new assets are purchased
C) Future interest rates, impact on cash flow, potential tax liability after share acquisition if assets are sold
D) Future interest rates, impact on cash flow, potential tax liability after share acquisition if new assets are purchased
Q2) Sam Sherwood wishes to purchase Kitchen Cabinets,Inc.(KCI),from its sole shareholder,Steve Oaks.Which of the following is TRUE if Sam purchases the assets rather than the shares of the corporation?
A) Payment of the purchase price will flow directly to Steve Oaks.
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) Sam will have to acquire all of the assets of KCI.
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Chapter 19: Business Acquisitions and
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Q1) 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 would 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.
Q2) 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
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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 his friend Ernie's company,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 is anticipated.
Andy's personal marginal tax rate is 45% on regular income,28% on eligible dividends,and 35% on non-eligible dividends.Ernie's 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 a)the total tax liability (foreign and Canadian)that Andy will be subject to upon receiving dividends from Ernie's company,and b)the after-tax proceeds.
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 proceeds be if he received the dividend income from the holding company?
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Chapter 21: Tax Aspects of Corporate Financing
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Q1) 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. will have to pay Part VI.1 tax on the dividend, regardless of whether or not it has taxable income.
B) The Light Corporation will have to pay Part VI.1 tax on the dividend, regardless of whether or not it has taxable income.
C) ABC Inc. will have to pay Part VI.1 tax on the dividend, only if it has taxable income.
D) The Light Corporation will have to pay Part VI.1 tax on the dividend, only if it has taxable income.
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