Tax Planning and Compliance Practice Exam
Course Introduction
This course provides a comprehensive overview of tax planning and compliance principles for individuals and businesses. It emphasizes strategies for minimizing tax liabilities through effective planning and understanding current tax laws and regulations. Students will learn to identify tax-saving opportunities, navigate federal and state tax codes, and ensure compliance with reporting requirements. Through case studies and practical applications, the course equips students with the analytical and problem-solving skills necessary for ethical and efficient tax management in a variety of professional contexts.
Recommended Textbook
Canadian Income Taxation 2018 2019 by William Buckwold
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Chapter 1: Taxation-Its Role in Decision Making
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Q1) 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) Explain what is meant by the statement that 'tax should be treated as a 'controllable cost''.
Answer: Just as decision makers in business must control costs such as product,occupancy,selling,and many others,so should tax costs be regarded as controllable.The actions and activities of the organization must be analyzed at all levels,and across departments,to determine the impact on the overall tax cost.
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3
Chapter 2: Fundamentals of Tax Planning
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Q1) For each of the three examples listed below (1-3),identify the category of tax planning (A-C)that has been applied.
1.Jack has run a successful proprietorship for the past four years,and has now decided to incorporate his company.
2.Karen has decided not to pay herself a dividend from her corporation,(of which she is the sole shareholder),but has chosen to sell a portion of her shares to an associate instead.
3.XYZ Corporation has chosen to delay the recognition of a discretionary reserve until the following year.
A.Shifting income from one time period to another
B.Shifting income from one entity to another
C.Shifting income from one type of income to another.
Answer: 1.B.Shifting income from one entity to another
2.C.Shifting income from one type of income to another
3.A.Shifting income from one time period to another
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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) Section 3(a)of the Income Tax Act includes which of the following?
A)Income from: employment, property, and capital transactions.
B)Income from: employment, property, business, and capital transactions.
C)Income from: business, other items, and capital transactions.
D)Income from: employment, property, business, and other items.
Answer: D
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5
Chapter 4: Income From Employment
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Q1) Which of the following,when provided by an employer,is NOT a tax-deferred or tax-free benefit for the employee?
A)Premiums for private health care plans providing extended health coverage beyond a public plan
B)Counselling services to prepare the employee for retirement
C)Contributions to the employee's registered pension plan
D)A near-cash gift for the employee's wedding
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
Q3) An individual has the option to receive a $1000 annual bonus and invest the after-tax amount for 25 years,or receive $1000 per annum in a registered pension plan for the next 25 years.Assuming a constant rate of return of 8% and a tax rate of 40%,what will be the total after-tax difference between the two plans? Show all of your work.
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Chapter 5: Income From Business
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Q1) TriStar Industries was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its annual tax return.Which of the following general limitations to business profit determination best describes the reason for Canada Revenue Agency's decision?
A)Exempt-income test
B)Personal-expense test
C)Insurance proceeds exemption
D)Reserve test
Q2) Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act?
A)Maintenance fees on a yacht at Yellow Yacht Leasing Inc.
B)Legal and accounting fees incurred during the construction of a building.
C)Advertising costs in a non-Canadian newspaper directed at an American market.
D)Work space in a home used as a taxpayer's principal place of business.
Q3) List the six general limitations to business profit determination and give an example for three of the items
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Q1) Which of the following situations would not be permitted to defer the recognition of any recapture that might arise from the disposition of an asset?
A)A building that was used for income earning purposes was destroyed in a fire.Insurance proceeds were received which generated recapture.A new building was built one and a half years later.
B)A half-ton truck that belonged to a construction company was stolen in 20x0.Insurance proceeds were received which generated recapture.The truck was replaced in 20x1.
C)A customized half-ton truck that belonged to a construction company was sold in 20x0.The proceeds from the sale generated recapture.A new customized truck was purchased fourteen months later in order to carry out the duties of a large contract awarded to the company.
D)A building that was used for income earning purposes was sold in December 20x0.The proceeds from the sale generated recapture.A new building was purchased in April 20x1.The company's fiscal year-end is December 31<sup>st</sup>.
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Chapter 7: Income From Property
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Q1) 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) Mandy holds shares in Y Co.Recently,the shares have been experiencing a decline in market value.She originally purchased 1000 shares in 20x0 at $5 per share.On September 22<sup>nd</sup> of 20x1 she sold the shares when they were trading for only $3 per share.On October 3<sup>rd</sup> she felt optimistic that the market value would rise substantially by the end of the year,so she repurchased 1000 shares of Y Co.at $2.50 per share.Which of the following is true for Mandy?
A)Mandy can recognize a $2,000 capital loss on the sale of her shares on her 20x1 tax return.
B)Mandy can recognize a $2,000 superficial loss on the sale of her shares on her 20x1 tax return.
C)The adjusted cost base of Mandy's new shares is $4,500.
D)The adjusted cost base of Mandy's new shares is $2,500.
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Chapter 9: Other Income, Other Deductions, and Special
Sample Questions
Q1) Which of the following is FALSE regarding Tax Free Savings Accounts (TFSAs)?
A)There is no mandatory age by which a TFSA must be wound up.
B)TFSA contributions are tax deductible.
C)Any unused amounts not contributed in a year may be carried forward indefinitely to future years.
D)Capital gains earned within TFSAs are not taxed.
Q2) Which of the following deductions are allowed as 'other' deductions for tax purposes?
A)Contributions to a child's RESP, 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, allowable 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 allowable moving expenses against income at the new location
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Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Q1) Samantha received an eligible dividend in the amount of $2,000.She is in a 50% tax bracket for regular income.How much is Samantha's dividend tax credit? (Assume a dividend tax credit rate of 15%.)
A)$300
B)$414
C)$1,000
D)$2,760
Q2) Which of the following is FALSE with respect to the final tax returns of deceased taxpayers?
A)Unused net capital losses less any capital gains deductions previously claimed are deductible against any income.
B)Non-refundable tax credits are prorated to the date of death on the final tax return.
C)A Rights or Things return may be filed in addition to the final tax return.
D)Of the tax returns available for a deceased taxpayer, only the final tax return must be filed.
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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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Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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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) Tony Brown sold 5000 of his shares back to ABC Co.for $25,000 during the current fiscal year.He purchased these shares from Carrie White three years ago for $15,000.Carrie had originally purchased the shares from the corporate treasury for $10,000.Which of the following tax consequences will Tony recognize?
A)He will recognize a deemed dividend of $10,000 and no capital gain or loss.
B)He will recognize a deemed dividend of $15,000 and a capital loss of $5,000.
C)He will recognize a deemed dividend of $15,000 and a capital gain of $10,000.
D)He will recognize a deemed dividend of $10,000 and a capital gain of $10,000.
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Chapter 13: The Canadian-Controlled Private Corporation
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Q1) Which of the following scenarios are not associated corporations (in a de jure context)? (There is no specified corporate income in any of the scenarios.)
A)Blue Corp.owns 90% of the shares of White Corp.
B)Yellow Corp.is wholly owned by Mrs.Smith.James Smith (Mrs.Smith's son), owns 65% of the shares of Green Corp.His mother owns the remaining 35% of the shares.
C)Kelly Booker owns 100% of the shares of Read Co.His mother and father each own 30% of the shares of Write Co.A friend, Mr.Words, owns 10% of Write Co., and Kelly owns the remaining shares.
D)Mr.and Mrs.Field each own 50% of the shares of Green Co.Their children, Sue and Tim, each own 40% of Brown Co., and Mrs.Field owns the remaining 20% of the shares.
Q2) Which of the following types of corporate income are subject to the special refundable tax of 10 2/3%,and a tax reduction of 30 2/3% upon distribution of the income to shareholders?
A)Business income and net property income.
B)Specified investment income and dividend income.
C)Specified investment income and taxable capital gains.
D)Dividend income and net taxable capital gains.
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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 (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.
Q2) John Green began a group of companies in 20x0 which he refers to as the 'Green Group'.The companies earn only active business income.The parent company of the group is Green Co.,which is a successful CCPC with $300,000 of taxable income in 20x1.Green Co.has two wholly owned subsidiaries; Black Co.(with taxable income of $50,000 in 20x1),and Red Co.(with a loss of $20,000 in 20x1 and unused losses from 20x0 of $15,000).Green Co.and Black Co.did not incur losses in 20x0.The corporate tax rate is 13%.What is the combined tax liability for the Green Group corporations in 20x1?
A)$39,000
B)$40,950
C)$42,900
D)$45,500
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Chapter 15: Partnerships
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Q1) John Brown and Alice Green want to start a business together.They will have equal ownership of the company.Alice would like to know whether a partnership or a corporation would be the best form of business for her particular situation,strictly from a tax perspective.Alice would not take any form of payment from the company in the first year.
The following information is available for Alice:
Employment income = $100,000
Interest income = $5,000
A business loss of $25,000 is anticipated in Year 1 for the new company.
Personal tax rate = 41% and corporate tax rate = 13%
Required:
Based solely on minimizing Alice's Year 1 tax liability,which form of business will be most beneficial to Alice from a tax liability perspective? Support your answer with calculations.
Q2) Which of the following statements regarding partnerships is TRUE?
A)Partnership income is taxed in the partnership.
B)Partnership losses cannot be offset against the partners' other income.
C)Partnership income does not have to be reported to Canada Revenue Agency.
D)Partnerships may earn business income, property income, and capital gains.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) Three Hills Partnership had profits of $210,000 in 20x1.Shawna Hill invested $100,000 as a limited partner,and her partnership interest is 30%.Shawna is in a 45% tax bracket.What is Shawna's after-tax return on her investment in the partnership? (Rounded)
A)17%
B)35%
C)48%
D)63%
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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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 remained in the trust.
Required:
a)Determine Jasmine's personal federal tax.
b)Calculate the federal tax for the trust.
(Round all amounts to zero decimal places,and apply tax rates and rules applicable to 2018.)
Q2) Which of the following accurately describes one of the rules pertaining to inter vivos trusts?
A)Inter vivos trusts may use the graduated tax rate scale.
B)Inter vivos trusts are allowed the $40,000 exemption in the alternative minimum tax calculation.
C)Inter vivos trusts can deduct personal tax credits.
D)Inter vivos trusts are required to remit quarterly tax instalments.
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Page 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) Which of the following lists are acceptable methods for 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) The Running Shoe Corp.is a Canadian corporation which plans to expand internationally.The company has decided to establish a branch in a foreign country.Which of the following is FALSE?
A)The profits of the branch will be subject to income tax in the foreign country.
B)The branch profits will be included in the Canadian corporation's worldwide income.
C)A foreign tax credit can reduce the Canadian taxes payable.
D)If the foreign country has a lower tax rate, a tax benefit will be recognized.
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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) With regard to debt and equity securities,which of the following statements is TRUE? (Assume the corporations are not in the business of lending money.)
A)A premium on an equity issue has a tax impact on the issuing corporation.
B)A discount on an equity issue has a tax impact on the issuing corporation.
C)A premium on a debt security is taxed in the hands of an issuing corporation that is not in the business of lending money.
D)A discount on a debt security is fully or partially deductible for tax purposes, depending on the discount rate.
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Chapter 22: Gsthst Overview
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Q1) With respect to GST/HST,supplies fall under different categories with different sets of rules.Which of the following is FALSE with regard to exempt supplies?
A)Exempt supplies are not included in the determination of the mandatory reporting period.
B)GST/HST is not applicable.
C)Childcare services and music lessons are examples of exempt supplies.
D)Input tax credits may be claimed on expenditures made to provide the exempt supplies.
Q2) Blue Co.earned $80,000 in revenue and paid $45,000 in operating expenses.If Blue Co.elects to use the quick method,how much is the net HST remittance? (Blue Co.is in a province with 13% HST and an 8.8% remittance rate.)
A)$3,080
B)$4,550
C)$6,740
D)$7,040
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