Tax Research and Practice
Chapter Exam Questions
Course Introduction
Tax Research and Practice is a comprehensive course designed to develop students' ability to identify, interpret, and apply complex tax laws to real-world scenarios. Through a combination of theoretical instruction and hands-on case studies, students learn to utilize research tools, analyze primary and secondary tax authorities, and effectively communicate their findings in written and oral formats. The course emphasizes ethical considerations in tax practice, problem-solving strategies, and professional standards expected of tax practitioners. By mastering these skills, students are equipped to address tax issues faced by individuals and businesses and to support informed decision-making in a dynamic regulatory environment.
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) 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
Q2) 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
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Chapter 2: Fundamentals of Tax Planning
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Q1) Which of the following scenarios illustrates a potential tax avoidance scheme?
A)Property transferred between arm's-length parties is valued at fair market value.
B)Dividends received from shares transferred from a wife to her husband are taxed in the hands of the wife.
C)A shareholder owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies.
D)A man transfers property to his child at a value less than fair market value.
Answer: D
Q2) Andrew has $10,000 to invest.He wants to put his money in a one-year investment earning an annual interest rate of 12%.Andrew is in a 42% tax bracket. Required:
a)Calculate the total value of Andrew's investment,after-tax,at the end of the year.
b)Calculate the amount of taxes Andrew will have to pay on his investment.
Answer: a)$10,000 + ( ($10,000 *12)* (1 - .42))= $10,696
b)$10,000 * .12 * .42 = $504
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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)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
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) 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.
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 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
Q3) 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) Sam runs a proprietorship that generated $75,000 in profits in 20x0.Included in these profits are: a)$10,000 - amortization expense; b)$5,000 - reasonable bad debt expense; c)$55,000 - cost of goods sold (closing inventory at market value); and $8,000 - meals and entertainment with clients.Sam's capital cost allowance has been accurately calculated at $8,500 for the year.How much is Sam's business net income for tax purposes?
A)$73,500
B)$75,000
C)$80,500
D)$89,000
Q2) A taxpayer recognized a $40,000 loss in 20x5 from her small farm (which was a secondary activity to her full-time job as a dentist).What is the maximum deduction that would be allowed from the farm loss for the 20x5 tax year?
A)$0
B)$17,500.
C)$21,250.
D)$40,000.
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) Martha Shine owned the following in 20x8:
Rental properties originally valued at $275,000 (Property 1: land $70,000,building
$55,000)(Property 2: land $90,000,building $60,000)
-Net rental income before CCA was $11,000.
-The UCC on building 1,as of January 1,20x8 was $50,000.
-The UCC on building 2,as of January 1,20x8 was $40,000.
-Property 2 was sold in 20x8 for $250,000 (land $200,000,building $50,000)
Shares in ABC Inc.(a CCPC)valued at $50,000
-Non-eligible dividends paid to Martha in 20x8 totaled $5,000.
Savings of $30,000
-Interest earned in 20x8 was $1,000.
Martha also worked full-time as a baker in 20x8,earning a gross salary of $45,000. Martha is in a 45% tax bracket.
Required:
Calculate Martha's net income for tax purposes in 20x8 in accordance with Section 3 of the Income Tax Act.Martha will take the maximum CCA allowed this year on her rental properties.
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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) When establishing whether the sale of an asset is capital income or business income,which of the following is not one of the factors which the courts typically take into consideration when determining the original intention of a transaction?
A)Period of ownership
B)Canadian residency test
C)Number and frequency of transactions
D)Relation of transaction to taxpayer's business
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Chapter 9: Other Income, Other Deductions, and Special
Rules for Completing Net Income for Tax Purposes
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Q1) Case One
Marsha had total income of $112,000 and earned income of $75,000 in 2017.Her 2017 Notice of Assessment showed unused RRSP contribution room of $12,000.She and her employer each contributed $2,500 to her RPP in 2017.Marsha anticipates a pension adjustment of $5,500 in 2018.
Required:
Calculate the maximum RRSP deduction that Marsha can make for the 2018 taxation year.
Case Two (Independent of Case One)
Marsha is 35 years old.She is considering 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 Marsha retires.
Required:
A.Calculate the valuation 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.
B.How much could Marsha contribute to her RRSP each year if $2,000 is the net cost of her investment after the tax savings from her contribution?
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Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Q1) Which of the following accurately describes a requirement for a business to qualify as a 'qualified small business corporation' (QSBC)?
A)The corporation must be a CCPC that uses at least 50% of the fair market value its assets for active business purposes in Canada at the time the shares are sold.
B)More than fifty percent of the fair market value of the assets of the business must have been used for active business in the past 36 months.
C)The corporation must hire less than 5 full-time employees.
D)The shares must not have been owned by another non-related individual in the past 24 months.
Q2) 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
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Chapter 11: Corporationsan Introduction
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Q1) Which of the following statements accurately describes the tax treatment of Canadian corporations?
A)Public and private Canadian corporations are eligible for the small business deduction.
B)Public and private Canadian corporations are eligible for the general tax reduction.
C)Public corporations are granted beneficial tax treatment on the first $500,000 of business income.
D)Canadian controlled private corporations recognize the general tax reduction on all business income.
Q2) 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.
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Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Q1) 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.
Q2) Which of the following scenarios would be appropriate for a section 85 rollover?
A)A shareholder of a corporation wishes to transfer his vehicle to his corporation.The vehicle originally cost $20,000 and has a market value of $12,000.
B)A corporation wishes to convert land owned by the company into a parking lot.
C)A taxpayer wishes to transfer property worth $200,000, with an ACB of $90,000, to her corporation.
D)A corporation is selling its equipment to another corporation and does not wish to own shares in the other corporation.
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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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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) 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.
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) An investor has $50,000 to invest as a limited partner in a partnership.The individual will be one of several limited partners in the business.The business is not expected to make a profit for at least three years.Why has the investor most likely chosen to invest in this business?
A)The investor will be guaranteed to receive the $50,000 back if the venture fails.
B)The flow-through of losses is an important tax consideration for the investor.
C)The investor plans to use his/her management expertise in the business in order to generate profits.
D)The investor is attracted to the concept of unlimited liability.
Q2) Teresa White is one of 5 limited partners in House Designs Enterprises (HDE).Each limited partner contributed $100,000 five years ago when the enterprise began.During the current year,HDE generated pre-tax profits of $500,000.The only general partner,Betty Carmel,receives 55% of the company's profits.Both Teresa and Betty are subject to a 49% marginal personal tax rate.
Required:
Calculate Teresa's after-tax rate of return on her investment.
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Chapter 17: Trusts
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Q1) 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.
Q2) Briefly answer the following questions:
With regard to non-spousal trusts:
A)What is the purpose of the 21-Year Rule?
B)What event occurs on the 21<sup>st</sup> anniversary of a trust?
C)What types of properties are subject to the 21-Year Rule?
D)How can the consequences of the 21-Year Rule be avoided? With regard to spousal trusts:
E)What is the exception to the 21-Year Rule for spousal trusts?
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Chapter 18: Business Acquisitions and Divestituresassets
Versus Shares
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Q1) Stick Co.owns land with a fair market value of $100,000,a building with a fair market value of $75,000,and equipment with a fair market value of $25,000.These assets are used for active business conducted in Canada.Which of the following would disqualify Stick Co.from being a small business corporation?
A)Stick Co.also owns 40% of the non-eligible shares of Rock Co.(a small business corporation), which have a fair market value of $20,000.
B)Stick Co.also owns portfolio shares in Leaf Co., (with less than 1% ownership), which have a fair market value of $5,000.
C)Stick Co.also has long-term investments valued at $30,000.
D)Stick Co.sold the equipment and used the funds to purchase 35% of the shares of Tree Co., a small business corporation.
Q2) Sam wishes to purchase Kitchen Cabinets,Inc.(KCI)Which of the following is TRUE if Sam purchases the assets of the corporation rather than the shares from the company's sole shareholder,Brent?
A)Payment of the purchase price will flow directly to Brent.
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)Brent will be eligible to use for the capital gains deduction on the sale.
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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 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.
Q2) Which of the following is not a common feature of closely held corporations?
A)The corporations have only one, or relatively few, shareholders.
B)The business of these corporations is often sold due to the owner's wish to retire.
C)The sale of these corporations may be structured in a way that allows family members or employees with minimal funds to buy the business.
D)These corporations pay regular dividends to their public shareholders.
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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) Andrea Houser recently inherited $500,000.She would like to invest the money and receive an annual after-tax return of $30,000 on the investment income.She has a number of investment alternatives available to her.Based on the combination of federal and provincial rates in her province,she would pay 45% tax on interest,28% tax on eligible dividends,37% tax on non-eligible dividends,and 23% tax (rounded)on capital gains. Required:
A)Calculate how much taxable income Andrea would need to receive in (i)interest,(ii)eligible dividends,(iii)non-eligible dividends,and (iv)capital gains in order to realize a $30,000 after-tax return.(Round all answers to zero decimal places.)
B)What is Andrea's pre-tax rate of return on each of the investments? (Round all answers to one decimal place.)
C)Calculate Andrea's after-tax rate of return (rounded to zero decimal places)on each of the investments,using her tax rates given in the problem to arrive at your answers.
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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 zero-rated supplies?
A)Zero-rated supplies are not included in the determination of the mandatory reporting period.
B)GST/HST is charged at a rate of 0%.
C)Prescription drugs and medical devices are examples of zero-rated supplies.
D)Input tax credits may be claimed on expenditures made to provide the zero-rated supplies.
Q2) Galaxy Wholesalers purchased inventory from a local manufacturer for $25,000.Galaxy marked up the price by 35% and sold the inventory to ABC Retailers.ABC marked up the inventory by a further 45% and sold the products to its customers.(Pre-GST costs are used to calculate the marked up prices.)
Required:
Calculate how much GST was remitted by:
A)Galaxy Wholesalers
B)ABC Retailers
(Round all amounts to zero decimal places.)
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