Taxation of Individuals and Corporations Final Exam Questions
Course Introduction
This course provides a comprehensive overview of the federal income tax system as it applies to both individuals and corporations. Students will examine key principles of taxation, including gross income determination, allowable deductions, tax credits, and the calculation of taxable income. The course also explores tax planning opportunities, the differences between individual and corporate tax rules, and the implications of recent tax law changes. Through real-world problems and case studies, students will develop practical skills in tax compliance, reporting, and ethical tax practice. This foundation enables students to analyze tax consequences and make informed decisions for individuals and businesses.
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 statements is false?
A) Cash flow should be calculated on an after-tax basis.
B) The tax cost to a business should not be regarded as a cost of doing business.
C) Income tax should be considered a controllable cost.
D) The value of an enterprise should not be based on pre-tax cash flow.
Answer: B
Q2) Which of the following statements is true?
A) Payment of the return on equity is deductible by the corporation and is a form of property income for the individual.
B) Payment of the return on equity is deductible by the corporation and is a form of business income for the individual.
C) Payment of the return on equity is not deductible by the corporation and is a form of business income for the individual.
D) Payment of the return on equity is not deductible by the corporation and is a form of property income for the individual.
Answer: D
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Chapter 2: Fundamentals of Tax Planning
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Q1) The manager of Little Company Ltd.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying tax on capital gains this year.The manager is engaging in
A) tax avoidance.
B) tax evasion.
C) tax planning.
D) GAAR.
Answer: C
Q2) 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
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4
Chapter 3: Liability for Tax, Income Determination, and Administration
of the Income Tax System
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Q1) Regarding taxation years,which of the following statements is TRUE?
A) Corporate taxpayers must use the calendar year as their taxation year.
B) The taxation year for an individual taxpayer ends on April 30<sup>th</sup>.
C) An individual taxpayer can choose any twelve month period as their taxation year.
D) A corporation may have a taxation year less than twelve months during a year the corporation is formed, dissolved, or is granted a change in its year end.
Answer: D
Q2) 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
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Page 5
Chapter 4: Income From Employment
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Q1) 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
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.
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.
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6
Chapter 5: Income From Business
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Q1) Which of the following expenses would be denied as a deduction in the 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.
Q2) 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.
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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) 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.
Q2) A public corporation earns $500,000 in pre-tax profits and pays out all of its after-tax earnings in dividends.The corporate tax rate is 27.5% and the shareholders are all in a 45% tax bracket.The dividend gross-up rate is 1.38 and the total dividend tax credit (federal and provincial)is 27.5%.
Required:
A)Calculate:
1)the total amount of federal tax paid by the corporation,and
2)the total net federal tax paid by the shareholders on the dividends.
B)Briefly explain how this tax structure illustrates the theory of integration.
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Page 9
Chapter 8: Gains and Losses on the Disposition of Capital
Property-Capital 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 totalled $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) Anne Smith acquired her house in 20X0 for $150,000 and her cottage in 20X4 for $100,000.Due to a rise in real estate prices,she decided to sell both properties and backpack around the world for two years.Both properties were sold in October of 20X8.Anne received $375,000 in proceeds for the house,and $250,000 for the cottage. Required:
Calculate the minimum taxable capital gain that the Anne can report for her house and for her cottage on her 20X8 tax return.
Q3) Greta Snow sold the following items prior to moving to Europe:
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Chapter
Sample Questions
Q1) Steve gifted shares in a public corporation which cost $10,000 to his fifteen year old son,Simon.During the year,Simon received $500 in dividends.Simon then sold the shares for $12,000.Which of the following tax situations is true for Steve and Simon?
A) Simon will have to claim the dividends and capital gain on his tax return.
B) Steve will have to claim the dividends on his tax return and Simon will have to recognize the capital gain on his tax return.
C) Steve will have to claim the dividends and a capital gain on his tax return.
D) Simon will have to claim the dividends on his tax return and Steve will have to recognize the capital gain on his tax return.
Q2) Upon the death of a taxpayer,which of the following statements is true?
A) Capital property that is left to a spouse is deemed to be sold at cost, and all other capital property is deemed to be sold at market value.
B) Capital property that is left to a spouse is deemed to be sold at market value, and all other capital property is deemed to be sold at cost.
C) All property left to a spouse and to others is deemed to be sold at cost.
D) All property left to a spouse and to others is deemed to be sold at market value.
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Chapter 10: Individuals: Determination of Taxable Income and
Taxes Payable
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Q1) Which of the following is a requirement for a business to qualify as a 'qualified small business corporation'?
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 shares must not have been owned by another non-related individual in the past 24 months.
D) The shares must not have been owned by another related individual in the past 24 months.
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
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Page 12
Chapter 11: Corporations-An Introduction
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Q1) In 20X0,Coffee Co.recognized $37,000 in business income and $1,000 in taxable capital gains.In 20X1,the company incurred a business loss of $25,000,a taxable capital gain of $2,000,and an allowable capital loss of $5,000.Business income for 20X2 was $50,000,taxable capital gains were $4,000,and the company received $10,000 in dividends from a taxable Canadian corporation.Assuming Coffee Co.utilizes any unused losses in the earliest years possible,which of the following taxable incomes are correct,after all carry-over adjustments have been made?
A) 20X0: $12,000; 20X1: $0; 20X2: $52,000
B) 20X0: $38,000; 20X1: ($28,000); 20X2: $64,000
C) 20X0: $13,000; 20X1: ($2,000); 20X2: $62,000
D) 20X0: $37,000; 20X1: $0; 20X2: $27,000
Q2) Johnson Co.is a CCPC with active business income of $350,000 in 20X2.The company engages in retail and wholesale activities.Capital gains in 20X0 were $84,000. Johnson Co.will utilize a net capital loss carry-over of $28,000 on its 20X2
Q3) Using general terms,explain how a change in control of a corporation can affect the net-capital losses and the non-capital losses.
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Page 13
Chapter 12: Organization, Capital Structures, and Income
Distributions of Corporations
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Q1) Compare shareholder equity to shareholder debt,addressing 1)return on investment,2)loss on investment,and 3)return of capital.
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.
Q3) 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,who had originally purchased the shares from the corporate treasury for $10,000.Which of the following tax consequences will Tony recognize?
A)He will have a deemed dividend of $10,000 and no capital gain or loss.
B)He will have a deemed dividend of $15,000 and a capital loss of $5,000.
C)He will have a deemed dividend of $15,000 and a capital gain of $10,000.
D)He will have 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 does not describe two associated corporations (in a de jure context)?
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
Q2) Which of the following types of corporate income are subject to the special refundable tax of 62/3%,and a tax reduction of 262/3% upon distribution of the income?
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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15
Chapter 14: Multiple Corporations and Their Reorganization
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Q1) The shareholders of Parent Co.and Sub Co.wish to combine the business activities of the two companies through a business combination.Both companies have assets that have appreciated in value above their capital cost.Parent Co.owns 85% of the shares of Sub Co.
Required:
Suggest a business combination (amalgamation or wind-up)that would defer the tax consequences associated with the increased value of the assets,and explain why you did not choose the other option.
Q2) 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) At least 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 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) Small Corp.and Big Corp.are equal partners in Medium Enterprises.The total partnership has a net worth of $210,000,split 50/50 between the two corporations.Size Co.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 Co.will contribute $105,000 to the partnership treasury.This transaction which
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) An outside passive investor has $50,000 to invest in a limited 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 five years,and there is a chance that it may not succeed at all due to its nature.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 issue for the investor.
C) The investor is not in a hurry to recover his/her investment.
D) None of the above. An investor would never choose to invest in such a business.
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) A trust account holds two buildings as its assets.Building 1 originally cost $150,000 and Building 2 originally cost $210,000.It is now the 21<sup>st</sup> anniversary of the trust,and the assets have not been transferred to the beneficiary.The undepreciated capital cost of Building 1 is $85,000 and its market value is $200,000.The undepreciated capital cost of Building 2 is $145,000 and its market value is $190,000.Which costs will be the deemed acquisition values of the buildings for the trust?
A) B1 = $150,000; B2 = $210,000
B) B1 = $85,000; B2 = $145,000
C) B1 = $200,000; B2 = $190,000
D) B1 = $200,000; B2 = $210,000
Q2) A trust that is created upon the death of an individual,and which is taxed applying the full range of tax rates within the individual's progressive scale is a(n):
A) Unit investment trust
B) Inter vivos trust
C) Investment trust
D) Testamentary trust
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19
Chapter 18: Business Acquisitions and Divestitures-Assets
Versus Shares
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Q1) A purchaser has agreed to purchase all of the shares of Tee Co.,a CCPC.Tee Co.owns fifteen significant capital assets,some of which have appreciated in value.Which of the following is TRUE?
A) The purchaser will obtain a cost base of the assets equal to fair market value.
B) The capital cost allowance on the assets will be higher for the purchaser than it was for the vendor.
C) The sale will result in business income for the vendor.
D) The purchaser will be responsible for the liabilities of Tee Co.
Q2) Sam Sherwood wishes to purchase Kitchen Cabinets,Inc.(KCI),from its sole shareholder,Steve Oaks.Which of the following is TRUE if Sam purchases the assets rather than the shares of the corporation?
A) Payment of the purchase price will flow directly to Steve Oaks.
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) Sam will have to acquire all of the assets of KCI.
Q3) Identify the tax effects for 1)the vendor and 2)the purchaser when a business divestiture and acquisition involves a)the sale of assets,and b)the sale of shares.
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Page 20
Chapter 19: Business Acquisitions and
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Q1) Which of the following is not typically used to defer taxes in business reorganizations?
A) Transfer of depreciable assets at their undepreciated capital costs, from one corporation to another.
B) Transfer of shares at their adjusted cost base, from one corporation to another.
C) Transfer of non-depreciable assets at their fair market values, from one corporation to another.
D) An amalgamation
Q2) Which of the following is not a common feature often associated with closely held corporations?
A) The corporation has only one, or relatively few, shareholders.
B) The corporation is often sold due to the owner's wish to retire.
C) The corporation may be sold to family members or employees who do not have enough cash to buy the business.
D) The corporation pays regular dividends to its public shareholders.
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21
Chapter 20: Domestic and International Business Expansion
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Q1) In the Canada-U.S.tax treaty,the definition of a 'permanent establishment' does not include:
A) a place of management
B) a factory
C) a storage facility
D) an office
Q2) 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.
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22
Chapter 21: Tax Aspects of Corporate Financing
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Q1) During the year,The Light Corporation paid $550,000 in preferred share dividends to ABC Inc.Both companies are Canadian corporations.Which of the following is true?
A) ABC Inc. will have to pay Part VI.1 tax on the dividend, regardless of whether or not it has taxable income.
B) The Light Corporation will have to pay Part VI.1 tax on the dividend, regardless of whether or not it has taxable income.
C) ABC Inc. will have to pay Part VI.1 tax on the dividend, only if it has taxable income.
D) The Light Corporation will have to pay Part VI.1 tax on the dividend, only if it has taxable income.
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