Tax Law
Midterm Exam
Course Introduction
Tax Law is a comprehensive course that examines the principles, policies, and practical applications of taxation within a legal framework. Covering federal, state, and local tax systems, the course introduces the foundational concepts of income, corporate, and property tax, alongside tax administration and compliance. Students will analyze statutory materials, regulatory guidance, and pertinent case law to understand how tax liabilities are determined, challenged, and enforced. Emphasis is placed on the social and economic objectives behind tax legislation, strategies for tax planning, and contemporary issues such as digital commerce and international taxation. Through case studies and practical exercises, students develop skills essential for legal practice and policy analysis in taxation.
Recommended Textbook
Canadian Income Taxation 2014 2015 Edition by William Buckwold
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187 Verified Questions
187 Flashcards
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Chapter 1: Taxation-Its Role in Decision Making
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Q1) Two investor corporations may not enter jointly into which of the following?
A) Joint venture
B) Partnership
C) Separate corporation
D) Proprietorship
Answer: D
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) 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 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) The 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) GAAR can correctly be defined as "Organizing one's affairs in a manner that results in paying the least amount of tax possible."
Answer: C
Q2) The manager 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 manager is engaging in
A) tax avoidance.
B) tax evasion.
C) tax planning.
D) GAAR.
Answer: C
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4
Chapter 3: Liability for Tax, Income Determination, and Administration
of the Income Tax System
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Q1) 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) An individual taxpayer can 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
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) 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%
Q2) 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.
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Page 6
Chapter 5: Income From Business
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Q1) 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.
Q2) Ken Gray runs a small proprietorship (Ken's Fish)that specializes in fishing gear.He has provided you with the following information:
Q3) 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) 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.
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.
Q3) 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:
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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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Sample Questions
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
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Sample Questions
Q1) Indicate whether or not the parties in the following situations are "related" for tax purposes.
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 sold 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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Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Sample Questions
Q1) Which of the following is false with respect to the final 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 and 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) Which of the following is an accurate list of some of the personal federal tax credits available to reduce the federal tax liability?
A) dividend, non-capital loss, charitable donations, age amount
B) caregiver, employment credit, medical expenses, disability
C) education amount, adoption expenses, farming, child fitness credit
D) public transit pass, pension, Canada pension plan, qualified small business deduction
Q3) Susan White incurred the following income,disbursements,and losses in 20X1 and 20X2:
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Chapter 11: Corporations-An Introduction
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Q1) Which of the following is false with regard to dividends,corporations,and shareholders?
A) Corporate taxable income is generally reduced by the amount of dividends received from other taxable Canadian corporations.
B) An individual's taxable income is generally reduced by the amount of dividends received from taxable Canadian corporations.
C) Corporate taxable income is generally reduced by the amount of dividends received from affiliated foreign corporations.
D) Generally, Canadian corporate after-tax profits may be shifted to other Canadian corporations by way of dividends, without a tax consequence.
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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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) 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.
Q2) 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
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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) Stan is the sole shareholder of Hardware Ltd.Hardware purchased all of the shares of Tools Inc.in 20X6 for $500,000.Tools incurred a non-capital loss of $25,000 in the year ended December 31,20X5.Stan has decided to initiate a wind-up of Tools Inc.into Hardware Ltd.on June 23,20X9.Due to the seasonal nature of his sales,Stan would like to maintain the April 30<sup>th</sup> year end that he has used since beginning his business.
Stan's accountant has prepared the following anticipated balance sheet for Tools Inc.as of June 22,20X9.The fair market value of the assets on both June 22,20X9 and the date of acquisition in 20X6 are presented in the following table:
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Chapter 15: Partnerships
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Q1) Green Co.and Blue Co.are equal partners in Turquoise Paint.Turquoise Paint had profits this year of $300,000,before CCA.
Green Co.is a CCPC owned by Bob.Green Co.'s net income for tax purposes is $200,000. Blue Co.is a CCPC owned by Sally.Blue Co.has suffered losses over the past five years.This year Blue Co.had a loss of $150,000.Blue Co.has carry-forward non-capital losses of $200,000.
The capital cost allowance for Turquoise Paint this year is $72,000.
Required:
A)Calculate the partnership's business income for tax purposes that Bob would prefer to use,and explain why.
B)Calculate the partnership's business income for tax purposes that Sally would prefer to use,and explain why.
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 partner's other income.
C) Partnership income does not have to be reported to the Canada Revenue Agency.
D) Partnerships may earn business income, property income, and capital gains.
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Page 17
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) 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.
Q2) 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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Page 18
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) 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) ABC Inc.(a CCPC)is for sale,and Jane,the sole shareholder would like to know if the company is currently a small business corporation.Jane has provided you with the following information:
All of the business activities of ABC Inc.have taken place in Canada. The following amounts represent fair market values.
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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 Shoes Inc.She wants to semi-retire from the shoe business soon and her three employees have all expressed great interest in taking over the company,however,they do not have the financial resources necessary to make the purchase at this point in time.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 Subsection 86(1)share reorganization is,and if it would be useful for Samantha in her plans to semi-retire from her shoe 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) Which of the following statements is true concerning domestic expansion of a business?
A) Cash funding requirements will be lower for a corporation than a corporate division if the expansion activity incurs start-up losses.
B) Cash funding requirements will be higher for a corporation than a corporate division if the expansion activity incurs start-up losses.
C) Obligations of a new division are separate from the parent company due to the limited liability of the division.
D) The main advantage of incorporating an expansion activity is the use of start-up losses against income from other divisions of the founding corporation.
Q2) 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
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22
Chapter 21: Tax Aspects of Corporate Financing
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Q1) Andrea Houser recently inherited $500,000.She would like to invest the money and receive an after-tax return of $30,000 on the investment income.She has a number of investment alternatives available to her and she would pay 45% tax on interest,28% tax on eligible dividends,35% tax on non-eligible dividends,and 23% (rounded)on capital gains.
Required:
Advise Andrea as to how much taxable income she would need to receive in a)interest,b)eligible dividends,c)non-eligible dividends,and d)capital gains in order to realize a $30,000 after-tax return.(Round all answers to zero decimal points.)
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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