Deck 1: Byrd Chens Canadian Tax Principles

Question 1

Contributions to a Registered Retirement Savings Plan can be deducted to reduce the taxes of an individual in the year that they are made.However, these contributions will be subject to tax when they are withdrawn from the plan.What type of tax planning is in- volved in this arrangement?

Answer 1

The basic type of tax planning that is involved in Registered Retirement Savings Plans is tax deferral-a tax savings results from making contributions that will have to be paid back at a later point in time.There may also be an element of avoidance in that, after retirement, an individual may be in a lower tax bracket than he was during his working years.If this is the case, there will be an absolute reduction in taxes.(This assumes that the basic rate structure is unchanged.)

Question 2

What is the difference between tax avoidance and tax deferral?

Answer 2

Tax avoidance is a form of tax planning in which the taxpayer, through means that are within the boundaries of tax legislation, arranges his affairs in a manner that allows him to receive benefits without the payment of taxes.Tax planning to achieve tax deferral involves either the delayed recognition of income, or the accelerated recognition of deductions.The payment of tax is delayed, as opposed to permanently avoided.

Question 3

A regressive tax is one that taxes high income individuals at lower effective rates.Explain why a sales tax levied at a flat rate of 8 percent can be regressive.

Answer 3

While the sales tax rate is the same for all individuals without regard to their income level, lower income individuals normally spend a higher percentage of their total income.Since the sales tax is levied on the amounts spent, this means that the sales tax paid by lower income individuals represents a larger percentage of their income.As a consequence, they are generally considered to be regressive in nature.

Question 4

A value added tax is a tax levied on the increase in value of a commodity or service that has been created by the taxpayer's stage of the production or distribution cycle.

Question 5

What is income splitting? Under what circumstances will it provide tax benefits to an indi- vidual?

Question 6

ITA 3(b) states that a taxpayer should "determine the amount, if any", by which taxable capital gains exceeds allowable capital losses.In this context, what is the meaning of the phrase "the amount, if any"?

Question 7

In general, provincial income taxes are based on a specified percentage of federal tax pay- able.

Question 8

What is the meaning of "taxation year" as the phrase is used in the Income Tax Act.

Question 9

The government pays a "child tax benefit" to the parents of children who are under 18 years of age.The payments are reduced by a percentage of income in excess of a specified level.What objectives are achieved by this benefit system?

Question 10

A partnership can be a taxable entity for GST purposes.

Question 11

Indicate three disadvantages of a tax system that uses progressive rates.

Question 12

What are the components of Net Income For Tax Purposes?

Question 13

A partnership can be a taxable entity for income tax purposes.

Question 14

The federal government does not collect personal or corporate taxes for Ontario or Que- bec.

Question 15

A major advantage of progressive tax rates is that their use encourages economic growth.

Question 16

The Canadian income tax system is often used to achieve various economic objectives.
Give three examples that illustrate this point.

Question 17

Tax expenditures are less costly to administer than direct funding programs.

Question 18

Under what circumstances will a person who is not resident in Canada be required to pay
Canadian income taxes?

Question 19

Distinguish between horizontal equity and vertical equity as these terms are used in de- scribing tax systems.

Question 20

A sales tax is a regressive tax even when it is applied at a single rate on all transactions.

Question 21

With respect to provincial income taxes, other than those assessed in Quebec, which of the following statements is not correct?

A)Each province can apply different rates to as many brackets for individuals as it wishes.
B)The federal government collects the provincial income tax for individuals for every province except Quebec.
C)Each province can establish its own tax credits to apply against Tax Payable for indi- viduals.
D)Each province can establish rules for determining the Taxable Income of individuals.
Tax Policy Concepts

Question 22

Of the following publications, indicate the one that is not a legislative source.

A)Income Tax Act.
B)Interpretation Bulletins.
C)Income Tax Application Rules.
D)International Tax Treaties.
E) Income Tax Regulations.

Question 23

Part I of the Income Tax Act is the largest and most important part.

Question 24

There are a number of common areas of litigation involving the CRA.Indicate which type of transaction is least likely to be in dispute.

A)Arm's length versus non-arm's length transactions.
B)Capital versus income transactions.
C)Unreported revenues from business transactions.
D)Establishment of fair market value.
E) The deductibility of farm losses against other sources of income.

Question 25

Which of the following is not a taxable entity for Canadian income tax purposes?

A)Darklyn Ltd., a Canadian resident corporation.
B)Ms.Sarah Bright, a Canadian resident.
C)Walters and Walters, a group of CMAs operating as a partnership.
D)The Martin family trust.

Question 26

Which of the following would not be considered a desirable characteristic of a tax system?

A)Balance between sectors.
B)Inelasticity.
C)Neutrality.
D)Flexibility.

Question 27

Where would an individual find the formula for determining the prescribed rate?

A)The Income Tax Act.
B)The Income Tax Regulations.
C)A CRA Interpretation Bulletin.
D)A CRA Information Circular.

Question 28

Of the following publications, indicate the one that is not published by the CRA.

A)Interpretation Bulletins.
B)Information Circulars.
C)Dominion Tax Cases.
D)Income Tax Technical News.

Question 29

Which of the following statements with respect to using tax expenditures rather than pro- gram spending is not correct?

A)It is more costly to administer tax expenditures as opposed to program spending.
B)Tax expenditures reduce the visibility of government actions.
C)Tax expenditures leave fewer decisions in the hands of the private sector, thereby providing for more efficient allocation of resources.
D)Tax expenditures reduce the impact of progressive rates on higher income taxpayers.

Question 30

Taxpayers who earn $100,000 in dividends should pay the same amount of tax as taxpay- ers who earn $100,000 in capital gains.This statement reflects which of the following qualitative characteristics of an effective tax system?

A)Vertical equity.
B)Neutrality.
C)Elasticity.
D)Horizontal equity.
Income Tax Reference Materials

Question 31

With respect to the calculation of Net Income For Tax Purposes, which of the following statements is not correct?

A)Subdivision e deductions are subtracted from the total of all positive sources of in- come.
B)Allowable capital losses for the year can only be deducted to the extent of taxable cap- ital gains for the year.
C)Business losses can be netted against employment income in determining the positive amounts to be included under ITA 3(a) and 3(b).
D)Property losses can only be deducted after the subtraction of Subdivision e deduc- tions.
Tax Planning

Question 32

Which of the following can be considered an advantage of an income tax system based on progressive rates?

A)A progressive rate system is simpler to administer.
B)A progressive rate system provides greater stability in the context of changing eco- nomic conditions.
C)A progressive system discourages tax evasion.
D)A progressive system encourages greater effort on the part of individuals.

Question 33

Any taxpayer can choose the calendar year as their taxation year.

Question 34

We should not have a tax system which encourages investment in particular assets or in particular areas of the country.This statement reflects which of the following qualitative characteristics of an effective tax system?

A)Neutrality.
B)Horizontal equity.
C)Simplicity.
D)Elasticity.

Question 35

Which of the following would be considered a desirable characteristic of an effective tax system?

A)Inelasticity.
B)Lack of international competitiveness.
C)Simplicity.
D)Ambiguity.

Question 36

An income tax is payable for each taxation year on the Taxable Income of every person resident in Canada at any time in the year.

Question 37

Which of the following statements is not correct?

A)Most major income tax changes are introduced in the annual Federal Budget.
B)A federal election can prevent passage of draft legislation.
C)Proposed changes in tax law are usually introduced to parliament in the form of a No- tice of Ways and Means Motion.
D)When there is a conflict between the Canadian Income Tax Act and an international agreement, the terms of the Canadian Income Tax Act prevail.
Liability For Tax

Question 38

The citation ITA 61(4)(b)(ii) would be read Paragraph 61, Subparagraph 4, Section b, Sub- section ii.

Question 39

With respect to the structure of the Income Tax Act, which of the following statements is correct?

A)The major components of the Income Tax Act are called Divisions.
B)The current Income Tax Act has Sections numbers 1 through 260, reflecting the fact that there are 260 Sections in the Act.
C)All Parts of the Income Tax Act have Divisions.
D)All Parts of the Income Tax Act contain at least one Section.

Question 40

Providing employees with private health care benefits involves what type of tax planning?

A)Tax evasion.
B)Tax deferral.
C)Income splitting.
D)Tax avoidance.

Question 41

If an individual is required to make income tax instalment payments, one acceptable pat- tern of payments is to base each payment on one-quarter of the estimated Tax Payable for the current taxation year.

Question 42

With respect to the filing of an individual income tax return, which of the following state- ments is correct?

A)An individual is required to file an income tax return if their only source of income is business income, even if no tax is payable.
B)An individual is required to file an income tax return if they have reached the age of 18 by the end of the year.
C)If an individual has disposed of a capital property during the year, they are required to file an income tax return, even if no tax is payable.
D)An individual is not required to file an income tax return if no tax is payable for the year.

Question 43

Because the taxation year of an individual must be based on the calendar year, all individ- uals will have the same filing due date.

Question 44

Exam Exercise One - 4 (Regressive Taxes)
Samantha Taylor has Taxable Income for the current year of $625,000, of which $216,000 is spent on goods and services that are subject to Harmonized Sales Tax (HST) at a rate of 13 percent.Her sister, Martha Taylor, is a part-time student living in the same province and has Taxable Income of $12,000.During the current year, as a result of using some of her savings, she spends $21,400 on goods and services that are all subject to HST.
Determine the effective sales tax rate as a percentage of the income of the two sisters.

Question 45

All corporations must file their tax returns no later than six months after the end of their fis- cal year, and pay any balance of tax owing no later than three months after the end of their fiscal year.

Question 46

If an individual believes that the amount of income taxes withheld by his employer is greater than the amount that he will have to pay in a particular year, he can make a request to the CRA to have his source deductions reduced.

Question 47

Without regard to whether an individual's filing due date is April 30 or June 15, any bal- ance of tax owing must be paid by April 30.

Question 48

Exam Exercise One - 2 (Taxable Entities For GST Purposes)
Which of the following entities could be required to file a GST return?
• Sally Forbes (an individual)
• Forbes Boutique (an unincorporated business)
• Forbes and Delaney (a partnership)
• The Forbes family trust (a trust)
• Forbes Enterprises Ltd.(a corporation)
• The Forbes Foundation (an unincorporated charity)

Question 49

Exam Exercise One - 5 (Non-Resident Liability For Tax)
Ms.Michelle Walker, a U.S.citizen, has Canadian employment income of $42,000 and U.S.employment income of $40,000 Canadian.She lives in Seattle, Washington and is a resident of the United States for the entire year.Ms.Walker does not believe that she is subject to taxa- tion in Canada.Is she correct?
Explain your conclusion.
Introduction - Exam Exercises

Question 50

The interest rate applicable on refunds to individuals is 4 percentage points less than the interest rate applicable on amounts owing to the CRA.

Question 51

Making contributions to an RRSP always involves what type of tax planning?

A)Tax avoidance and tax deferral.
B)Tax deferral.
C)Tax avoidance.
D)Income splitting.

Question 52

The penalty for an individual making insufficient instalment payments is 5 percent of the total unpaid tax at the filing date, plus 1 percent per month.

Question 53

Exam Exercise One - 3 (Federal And Provincial Taxes Payable)
Joan Smith has Taxable Income of $37,500.For the current year her federal tax rate is 15 percent, while the corresponding provincial rate is 8.2 percent.Determine Ms.Smith's combined federal and provincial tax payable, before consideration of any available credits against Tax Payable.

Question 54

If quarterly instalments must be paid by an individual, they can be calculated as one-quar- ter of the net tax owing for the preceding year.

Question 55

Tax avoidance involves deliberately ignoring a specific provision in the Income Tax Act.
Procedures And Administration - True Or False

Question 56

Exam Exercise One - 1 (Taxable Entities For Income Tax Purposes)
Which of the following entities could be required to file an income tax return?
• Sally Forbes (an individual)
• Forbes Boutique (an unincorporated business)
• Forbes and Delaney (a partnership)
• The Forbes family trust (a trust)
• Forbes Enterprises Ltd.(a corporation)
• The Forbes Foundation (an unincorporated charity)

Question 57

Interest and penalties may be waived or reduced in extraordinary circumstances, such as those involving natural disasters or serious illness.

Question 58

The notice of objection for a corporation must be filed within 90 days from the date of mailing of the notice of assessment.

Question 59

If an individual dies after October in a particular taxation year, his legal representatives must file his tax return by the later of his normal filing due date and six months after the date of his death.

Question 60

The GAAR provisions are not applicable to gifts to adult children.

Question 61

Ms.Deveco's 2011 income tax return is due on April 30, 2012 While she is too busy to file her tax return on that date, she remits a check to the government for $10,000, her esti- mated amount of net tax owing on that date.She has never filed a late return before.She prepares and files her tax return on May 31, 2012.At this time, the return shows that her actual net tax owing was $9,800.Assuming that the interest rate applicable to late pay- ment of taxes is one-half percent per month without daily compounding, how much will she owe in penalties and interest on the late filing?

A)$ 49.
B)$490.
C)$588.
D)$637.
E) Nil.
Individual Instalments

Question 62

Under what circumstances is an individual entitled to a home relocation loan deduction?
How is the amount of the deduction calculated?

Question 63

For corporations, the filing deadline for tax returns is:

A)April 30.
B)the fiscal year end.
C)three months after the fiscal year end.
D)three months after the fiscal year end if the small business deduction is claimed, oth- erwise two months after the fiscal year end.
E)six months after the fiscal year end.

Question 64

Ms.Loren dies on February 1, 2012.All of her income is from employment activities and she does not have a spouse or common-law partner.What is the latest date for filing her 2011 income tax return?

A)April 30, 2012.
B)June 15, 2012.
C)August 1, 2012.
D)June 30, 2012.

Question 65

Briefly explain the difference between a tax deduction and a tax credit.

Question 66

John Barron is self-employed and plans to file his 2011 tax return on June 15, 2012.His balance-due day is:

A)April 30, 2011.
B)April 30, 2012.
C)June 15, 2012.
D)June 15, 2011.

Question 67

For a public corporation, which of the following statements is true with respect to filing a notice of objection?

A)It must be filed no later than 180 days from the date the notice of assessment was mailed.
B)It must be filed the later of 90 days after the date the notice of assessment was filed and one year from the filing date for the return under assessment.
C)It must be filed the later of 180 days after the date the notice of assessment was filed and one year from the filing date for the return under assessment.
D)It must be filed no later than 90 days after the notice of assessment was mailed.
Procedures And Administration - Exam Exercises

Question 68

For its 2011 taxation year, its first year of operation, PS Swim Inc.filed its return three months late.The unpaid tax at the due date for the return was $2,500.This amount was not paid until the return was filed.What would its penalty be?

A)Nil.
B)$75.
C)$125.
D)$200.
E) $500.
Corporate Instalments

Question 69

A Canadian public corporation had federal taxes payable in 2009 and 2010 exceeding $3,000.One correct option it has with respect to its 2011 instalments is to pay:

A)equal instalments, on a quarterly basis, based on its 2010 federal taxes payable.
B)on a monthly basis, instalments equal to 1/12th of its estimated 2011 federal taxes payable.
C)one lump-sum payment, within three months of its 2011 year end.
D)on a monthly basis, instalments equal to 1/12th of its 2009 federal taxes payable.

Question 70

Explain briefly the rules for determining which province will assess an individual for in- come taxes.From the point of view of tax planning, is the province in which an individual is taxed an important issue?

Question 71

Tom Arnold filed his 2011 tax return on March 1, 2012.The CRA mailed a notice of as- sessment to Tom dated May 15, 2012, and Tom received it on May 30, 2012.If Tom disagrees with the notice of assessment, he has until which one of the following dates to file a notice of objection?

A)90 days from March 1, 2012.
B)90 days from April 30, 2012.
C)90 days from May 15, 2012.
D)90 days from May 30, 2012.
E) None of the above.

Question 72

Mr.Finlay, a retired individual whose only source of income was pension receipts, dies on August 15, 2011.By what date must Mr.Finlay's final tax return be filed?

A)April 30, 2012.
B)February 28, 2012.
C)February 15, 2012.
D)December 31, 2011.
E) None of the above.

Question 73

Jason Marks has to pay his tax by instalments as a result of his significant investment in- come.His net tax owing in 2009 was $13,600.In 2010, it was $15,000.His estimate for 2011 is $17,000.If he decides to pay his 2011 tax instalments according to the prior year option, how much should he pay on September 15, 2011?

A)$3,400.
B)$3,750.
C)$4,250.
D)$6,500.

Question 74

For the 2011 taxation year, John Bookman had a taxable capital gain of $45,000 and a net business loss of $45,000, resulting in a Taxable Income of nil.Which of the following statements is correct?

A)John is not required to file a tax return for 2011.
B)John must file a tax return on or before June 15, 2012.
C)John must file a tax return on or before December 31, 2012.
D)John must file a tax return on or before April 30, 2012.

Question 75

Larry Short has self-employment income of $62,000 in 2011.Prior to this year, he was employed full-time and his employer's withholdings more than covered his tax liability for the year.Larry estimates that, based on his self-employment income, his net tax owing for 2011 will be $8,000.Which of the following statements is true?

A)Larry must file his return for 2011 by April 30, 2012.
B)Larry should pay instalments in 2011.
C)Larry must pay his income tax for 2011 by June 15, 2012.
D)If Larry has as much income in 2012 as he had in 2011, he will have to pay instalments during 2012.
Corporate Filing Requirements

Question 76

PS Swim Inc.has a year end of November 30.For its 2011 taxation year, its income tax re- turn is due on:

A)January 31, 2012.
B)February 29, 2012.
C)April 30, 2012.
D)May 31, 2012.
E) None of the above.

Question 77

PP Ltd., a client of your firm, has a November 30th year end and has requested you to ad- vise them on what its monthly instalments for the 2011 tax year will be.Its taxes payable for its November 30, 2009 and November 30, 2010 years were $13,800 and $13,200, re- spectively.Its estimated taxes payable for the November 30, 2011 year are $14,400.PP Ltd.wants to pay the lowest amount possible, without incurring interest penalties.What would its instalments be?

A)Twelve payments at $1,200 per month.
B)Twelve payments at $1,100 per month.
C)Twelve payments at $1,150 per month.
D)Two monthly payments at $1,200 each, followed by ten monthly payments at $1,140 each.
E) None of the above.

Question 78

All of the following people will have to pay tax by instalments this year, except:

A)Jane White, who received a one-time bonus of $60,000 last year and, because her employer had not deducted enough tax, found herself with net tax owing of $8,200.
B)Karen Phillips, who has started to earn investment income, which resulted in net tax owing of $3,100 last year.Her investment income is expected to be even greater this year.
C)Blake Fortin, who established a sole proprietorship two years ago.Blake had a very successful first year and, as result, he had net tax owing that year of $85,000.Business dropped in his second year, resulting in net tax owing of only $1,500.This year, busi- ness has picked up again and he expects to have net tax owing of $53,000.
D)Terri Jones, who has had net taxable capital gains on real estate in excess of $40,000 in each of the last two years, and who expects to have similar gains this year.

Question 79

Minnie Belanger is retired.She mailed her 2011 tax return on March 5, 2012.She re- ceived a portion of the tax refund claimed and an assessment notice, dated April 19, 2012, which set out the difference between the amount claimed and the amount of the re- fund.As Minnie disagrees with the notice of assessment, she wishes to file a notice of objection.By which of the following dates must she file her notice of objection?

A)March 5, 2013.
B)April 19, 2013.
C)April 30, 2013.
D)July 18, 2012.
E) June 15, 2013.

Question 80

Ms.Marston has net tax owing for 2009 of $4,500, net tax owing for 2010 of $8,000, and net tax owing for 2011 of $7,500.If she wishes to pay the minimum total amount of instal- ments for the 2011 taxation year, her first payment on March 15 will be for what amount?

A)Nil.
B)$1,125.
C)$1,875.
D)$2,000.