Taxation and Financial Planning Final
Exam Questions
Course Introduction
This course explores the fundamental principles and practices of taxation and financial planning, equipping students with the knowledge needed to navigate the complexities of tax law and effectively manage personal and business finances. Topics covered include the structure of tax systems, income and corporate tax regulations, tax compliance, and strategic tax planning. Additionally, students will learn how to integrate tax considerations into broader financial planning objectives, such as retirement planning, investment strategies, and estate planning, with an emphasis on ethical decision-making and current regulatory frameworks.
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) 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
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3
Chapter 2: Fundamentals of Tax Planning
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Q1) Part A: List the three key factors of cash flow.
Part B: List the six skills required for tax planning as suggested in the textbook.
Answer: Three key factors of cash flow
1.Amount of money coming in
2.Amount of money going out
3.Timing
Six skills required for tax planning
1.Anticipation
2.Flexibility
3.Speculation
4.Applying the 8<sup>th</sup> Wonder of the World
5.Perspective
6.Global approach
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Chapter 3: Liability for Tax, Income Determination, and Administration
of the Income Tax System
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Sample Questions
Q1) ABC Corporation purchased inventory from Galaxy Wholesalers.The cost on the invoice was $25,000.The inventory was marked up by 35% and sold to a retailer.The retailer subsequently marked the goods up 45% and sold the products to its consumers.(Pre-GST costs were used to calculate marked up prices.)
Required:
Calculate how much GST was collected and remitted by both the wholesaler and the retailer.
Answer: 11ea6d24_5f92_1247_b3c7_71489d909ce7_TB1840_00
Q2) Segment A of the aggregate formula includes which of the following?
A) Income from employment, income from property, and income from capital transactions.
B) Income from employment, income from property, income from business, and income from capital transactions.
C) Income from business, 'other' income, and income from capital transactions.
D) Income from employment, income from property, income from business, and 'other' income.
Answer: D
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Page 5
Chapter 4: Income From Employment
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Sample Questions
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) Susan was provided with a company car to drive during March to December of the current year.The car cost the company $22,000 plus GST and PST totalling 11%.Susan drove the car a total of 15,000 kilometres during the year.11,000 kilometres were for business purposes and the other 4,000 kilometres were for personal use.Susan's employer pays for all of the vehicle's operating costs which totaled $1,100.What is the minimum amount that Susan can report as her total taxable benefit for the use of the car during the year? (Round your answer.)
A) $1,172
B) $1,758
C) $2,252
D) $5,964
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Page 6
Chapter 5: Income From Business
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Q1) 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.
Q2) Ken Gray runs a small proprietorship (Ken's Fish)that specializes in fishing gear.He has provided you with the following information:
Q3) 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.
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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) 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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Page 8
Chapter 7: Income From Property
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Q1) 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.
Q2) Joanne owns a rental property,which she purchased for $100,000 in 20X0.In the same year,her rental income before CCA was $8,000.Her rental income before CCA was $3000 in 20X1.Joanne always minimizes her tax liability whenever possible.Which of the following statements is true? (The rental property is a Class 1 asset,depreciable at a rate of 4%.)
A) Joanne has a rental loss of $840 in 20X1.
B) Joanne has a rental loss of $920 in 20X1.
C) Joanne's rental income is $0 in 20X1.
D) Joanne's rental income in 20X0 was $4,000.
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Page 9
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 9: Other Income, Other Deductions, and Special
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Sample Questions
Q1) Which of the following deductions are allowed as 'other' deductions for tax purposes?
A) Contributions to an individual's Canada Savings Bonds, 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, 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 moving expenses against income at the new location.
Q2) In 20X4,Tom Depuis moved 2874 kilometers from Anytown,Province1 to Newtown,Province2 to assume the position of manager for his company at the Newtown head office,beginning October 1<sup>st</sup>.Tom received a salary of $5,100 per month at his new job.He incurred the following moving costs:
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11
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) On February 16<sup>th</sup>,20X4,Samantha received an eligible dividend in the amount of $2,000.She is in a 40% tax bracket.How much is Samantha's dividend tax credit for 20X4? (Assume a DTC of 15%.)
A) $300
B) $414
C) $2,000
D) $2,760
Q3) 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) 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
Q2) Bride and Groom Co.is a Canadian controlled private corporation with active business income of $750,000.The company is in the business of producing and selling bridal wear.Dividends were received from a taxable Canadian corporation in the amount of $80,000.
Additional information is as follows:
Net capital loss carry-over balance is $200,000. Non capital loss carry-over balance is $70,000. Required:
Calculate the minimum federal Part I tax payable by Bride and Groom Co.
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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Q1) Anthony is the sole shareholder of Glass Co.He would like to lend $500,000 to his company by way of a shareholder loan.He is not sure whether to issue an interest free loan or a loan with an interest rate of 10%.Anthony does not pay himself a salary,but rather issues all after-tax profits to himself in the form of a dividend.
Required:
A)Calculate the total combined tax liability for Anthony and Glass Co.under both alternatives.(Assume that the CRA's prescribed rate of interest is 2%; Anthony's personal tax rate is 45%; his marginal tax rate on dividends is 35%; and Glass Co.has income of $200,000,and is subject to a 15% tax rate.)
B)Briefly explain the reason for the tax differential in your results.
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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Chapter 13: The Canadian-Controlled Private Corporation
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Q1) There are several benefits to incorporating a business.Some of those benefits are:
A) Lower tax rates are often recognized; the shareholder may receive compensation; and 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; and active business income under $500,000 is eligible for a lower tax rate.
C) There is greater flexibility to bring family members on board as owners; non-taxable benefits may be provided to the shareholder; and 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; and 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) Tom and Bob are equal shareholders of a profitable operating company.The company is growing and dividend payouts are increasing.The two men have heard that 'holding corporations' might suit their needs.Which of the following would apply?
A) Dividends received by the holding companies from the operating company must be invested in the same ventures.
B) The holding companies would receive the dividends from the operating company, free of tax, to be invested in ventures of Tom and Bob's separate choices.
C) The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal expenditures without paying a second level of tax.
D) Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.
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Chapter 15: Partnerships
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Q1) 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 partner's affairs.
Q2) Sharon is a forty percent partner in Green Nursery.She also works full-time as an engineer,earning a gross salary of $100,000,annually.Green Nursery's net income for tax purposes is $210,000.During the year,Green Nursery received $10,000 in non-eligible dividends from a CCPC.The company sold a capital asset and recognized a gain of $16,000.(The dividend income and capital gains income have been included in the net income.)Sharon withdrew $20,000 from the partnership.The ACB of Sharon's partnership interest was $75,000 at the end of the previous year.
Required:
A)Calculate the partnership's business income for 2013.
B)Calculate Sharon's net income for tax purposes for 2013.
C)Calculate the ACB of Sharon's partnership interest for the year for 2013.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) Teresa White is one of 5 equal limited partners in House Designs Enterprises (HDE).She contributed $100,000 five years ago when the enterprise began.During the year,HDE generated pre-tax profits of $500,000.The sole general partner,Betty Carmel,receives 55% of the company's profits.Both Teresa and Betty are subject to a 45% marginal personal tax rate.
Required:
Calculate Teresa's after-tax rate of return on her investment.
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.
Q3) 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.
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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) 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 shares of Rock Co. (a small business corporation), which have a fair market value of $20,000.
B) Stick Co. also owns shares in Leaf Co., (a public corporation), 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) 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) The Sweater Corp.is a Canadian corporation which plans to expand internationally.The company has decided to establish a foreign subsidiary corporation in another country.Which of the following is false?
A) The subsidiary will be subject to taxes in the foreign country.
B) The subsidiary's profits will be included in the Canadian corporation's worldwide income.
C) Dividends received by the Canadian corporation from the foreign subsidiary are not included in Canadian corporate taxable income.
D) Dividends received by the Canadian corporation from the foreign subsidiary may be subject to a withholding tax in the foreign jurisdiction.
Q2) Crispy Chips Inc.is considering an expansion into the United States.Jeff Arthur,the CEO,is not sure how to structure this new venture and would like some general information before he meets with his accountant and lawyer. Required:
Write a memo to Jeff,informing him of the two fundamental approaches he can take to conduct his foreign operations (branch and subsidiary corporation); listing two advantages and two disadvantages of both approaches.
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Page 22
Chapter 21: Tax Aspects of Corporate Financing
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Q1) 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.
Q2) Joe Genius of ABC Corporation is considering whether to lease or purchase a large capital asset.If he purchases the asset,he will use debt financing.Which of the following is a true statement describing a similarity in the tax treatment of leasing and purchasing with debt?
A) Both allow for a tax deduction.
B) Principal payments are deductible for both alternatives.
C) Cash payments and tax savings will usually occur simultaneously for both alternatives.
D) Capital cost allowance is always calculated for both alternatives.
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