Taxation II Exam Materials
Course Introduction
Taxation II builds upon foundational concepts introduced in earlier taxation courses, delving deeper into the principles, laws, and regulations governing the taxation of individuals, corporations, partnerships, and other entities. This course covers advanced topics such as corporate income tax, partnership taxation, tax planning strategies, tax compliance, and the treatment of specialized transactions. Students will learn to interpret relevant sections of the Internal Revenue Code, analyze complex tax scenarios, and apply tax rules in practical situations through case studies and problem-solving exercises. By the end of the course, students will have a comprehensive understanding of the U.S. tax system and be well-prepared to address multifaceted taxation issues in both professional and academic settings.
Recommended Textbook
Canadian Income Taxation 2018 2019 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 is not considered to be a separate entity for tax purposes in Canada?
A)An individual
B)A proprietorship
C)A corporation
D)A trust
Answer: B
Q2) Two investor corporations may not enter jointly into which of the following?
A)Joint venture
B)Partnership
C)Separate corporation
D)Proprietorship
Answer: D
Q3) 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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Page 3
Chapter 2: Fundamentals of Tax Planning
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Q1) The controller 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 controller is engaging in A)tax avoidance.
B)tax evasion.
C)tax planning.
D)GAAR.
Answer: C
Q2) 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)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)Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to 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)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) 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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Chapter 4: Income From Employment
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Q1) Cindy works for Sky Manufacturers Ltd.,which is 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 on her 20x3 tax return?
A)$1,000 taxable benefit and no security option deduction
B)$1,000 taxable benefit and a 50% security option deduction
C)$3,000 taxable benefit and no security option deduction
D)$3,000 taxable benefit and a 50% security option deduction
Q2) 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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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:
The financial statements for Alice's dental practice reported a net income of $110,000. Amortization of $15,000 was reported in the expenses.
Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements.
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) List the six general limitations to business profit determination and give an example for three of the items
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Chapter
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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) Green Gardens Inc.purchased a piece of Class 8 machinery in 20x0.The cost of the machine was $5,000.In 20x2,the machine was sold for proceeds of $2,000 and there were no other purchases or disposals during the year.The UCC in the Class 8 pool was $5,500 at the beginning of 20x2.What is the UCC of this class at the end of 20x2?
A)$700
B)$2,800
C)$3,500
D)$4,800
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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) 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)$135,000
D)$216,000
Q2) 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.
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Chapter 9: Other Income, Other Deductions, and Special
Sample Questions
Q1) Which of the following examples of income received by adult family members from private corporations would not be excluded from tax on split income?
A)A capital gain from the sale of qualified small business corporation shares
B)Income received from a related business
C)Income received by the 68-year-old business owner's spouse
D)Income received by an uncle
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
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Q1) ABC.Ltd.had an unused allowable capital loss of $20,000 during the current fiscal year and an unused business loss of $10,000.ABC Ltd.has a December 31 year-end.Which of the following statements is TRUE?
A)All of the losses will be lost if not used in this fiscal year.
B)The unused allowable capital loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused business loss will become a non-capital loss and can be carried back three years and forward twenty years.
C)The unused business loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused allowable capital loss will become a non-capital loss and can be carried back three years and forward twenty years.
D)The unused business loss will become a non-capital loss and can be carried back three years and forward indefinitely.
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Chapter 11: Corporationsan Introduction
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Q1) Which of the following scenarios is not allowed?
A)The taxable income of ABC Co.is reduced by the amount of dividends received from other taxable Canadian corporations.
B)An individual's taxable income is reduced by the amount of dividends received from a taxable Canadian corporation.
C)A donation of $5,000 to a registered charity by XYZ Co.in 20x0 is used to reduce XYZ's 20x0 $100,000 net income for tax purposes to a taxable income of $95,000.
D)Little Corporation has an $8,000 non-capital loss from a loss that arose in 20x0 and $10,000 of taxable dividends received from a Canadian corporation in 20x1, both of which will be deducted from Little's 20x1 net income for tax purposes of $200,000.
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) There are significant differences in the tax treatment of shareholder debt and shareholder equity from the perspective of both the CCPC and the shareholders.
Required:
List one tax consequences for each of the following:
1)Return on investment - shareholder debt
2)Loss on investment - shareholder debt
3)Return of capital - shareholder debt
4)Return on investment - shareholder equity
5)Loss on investment - shareholder equity
6)Return of capital - shareholder equity
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) Private Co.received a $5,000 eligible 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 Part IV tax at rate of 38 1/3%.
D)Receipt of the dividend will result in an immediate dividend refund for Private Co.
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) Hold Co.is a Canadian controlled private corporation that acquired 100% of the shares of Small Co.in 20x5.Hold Co.paid $50,000 for the shares.Big Co.,an arm's length corporation,is now interested in purchasing Hold Co.'s investment in Small Co.Small Co.'s shares are currently worth $500,000 and the retained earnings of the company are $200,000.In order to reduce the fair market value of the shares,Small Co.will pay a dividend of $450,000 to Hold Co.,and then sell the shares for $50,000.Small Co.has a NIL RDTOH balance.
Required:
A)Applying the anti-avoidance rules of Subsection 55(2),what are the tax implications for Hold Co.resulting from this series of transactions?
B)What is the value of Small Co.'s 'safe income'?
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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Page 16
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) Small Corp.and Big Corp.are equal partners in Medium Enterprises.The partnership has a net worth of $210,000,split 50/50 between the two corporations.Size Corp.has been asked to join the partnership.When the transaction is complete,all three partners will have an equal interest.To accomplish this structural change,Size Corp.will contribute $105,000 to the partnership treasury.This transaction will
A)dilute the original partners' interests.
B)increase the original partners' interests.
C)result in a capital gain for the partners.
D)result in a capital loss for the partners.
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Chapter 16: Limited Partnerships and Joint Ventures
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Q1) 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) 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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18
Chapter 17: Trusts
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Q1) Which of the following statements is TRUE regarding trusts?
A)Losses that exceed income in a trust are allocated to the beneficiary at the end of the year.
B)From a tax perspective, there is little benefit to structuring a business as a royalty trust.
C)Income that is payable to a beneficiary cannot be deducted from the trust's income.
D)The residence of a trust is determined by the residence of the trustees.
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) 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.
Q2) 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.
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Chapter 19: Business Acquisitions and
Sales
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Q1) 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.
Q2) Anne owns 100% of the shares of ABC Co.and her husband,Zane,owns 100% of the shares of XYZ Co.The shares of ABC Co.are valued at $50,000 with an ACB and PUC of $1000.The couple is planning for XYZ Co.to pay Anne $50,000 in cash for her shares in ABC Co.Which of the following will result from this sale?
A)Anne will recognize a capital gain of $50,000.
B)Anne will recognize a capital gain of $49,000.
C)Anne will recognize a deemed dividend of $50,000 and a capital gain of $0.
D)Anne will recognize a deemed dividend of $49,000 and a capital gain of $0.
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Chapter 20: Domestic and International Business Expansion
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Q1) 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.
Q2) 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
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Chapter 21: Tax Aspects of Corporate Financing
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Q1) Which of the following statements regarding debt and equity financing is FALSE?
A)Interest payments on debt financing are deductible by the corporation for tax purposes.
B)Interest income from debt financing is taxable in the hands of the investor.
C)Dividend payments on equity financing are deductible by the corporation for tax purposes.
D)Dividends are paid from after-tax corporate income.
Q2) Mary is deciding where to invest $10,000.Based on her decision,she will either receive a 5% capital gain or a 7% non-eligible dividend as her return on investment.Mary's marginal tax rates are 45% on regular income,37% on non-eligible dividends,28% on eligible dividends,and 23% (rounded)on capital gains.Which of the following is TRUE?
A)Mary will receive a higher after-tax rate of return on the capital gain due to the higher tax rate for non-eligible dividends.
B)Mary will receive an after-tax rate of return of 5% on the capital gain and 7% on the non-eligible dividends.
C)Mary will receive an after-tax rate of return of 3.85% on the capital gain and 4.41% on the non-eligible dividends.
D)There is no difference in the after-tax rate of return on the two investments.
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Page 23
Chapter 22: Gsthst Overview
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Q1) The Little Company (TLC),located in British Columbia,provided a company car to its key employee,Ben,in 2018.The car was purchased for $38,000 + 5% GST at the beginning of the year,and was available to Ben for all twelve months of 2018.Ben drove the car 20,000 kms in 2018,9,000 of which were for employment purposes.TLC paid $5,200 for the operating costs of the car during the year.Ben did not receive an automobile allowance from TLC and he did not reimburse his employer for any of the operating costs.
Required:
A)Calculate the following for TLC:
(i)Input tax credit (ITC)for 2018
(ii)GST owing for 2018
B)Calculate Ben's total taxable benefit for 2018. (Round all amounts to zero decimal places.)
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