Deck 2: Byrd Chens Canadian Tax Principles 2

Question 1

Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holi- days operating a farm she purchased this year.She is confident that within two years her farm will be making a profit.In the current year, the farm had a loss of $18,000.
i.In the current year, she can deduct a maximum of $2,500 of the farm loss against other income.
ii.Any loss that is not deductible in the current year can be carried forward for a maxi- mum of seven years.
iii.Any loss that is not deductible in the current year can only be applied to the extent of farm income in the carry over year.

Answer 1

i.False.In the current year, she can deduct a maximum of $8,750 [$2,500 + (1/2)($12,500)] of the farm loss against other income.
ii.False.Any loss that is not deductible in the current year can be carried forward for a maximum of 20 years.
iii.True.A restricted farm loss can only be used to the extent of farm income in the carry over period.

Question 2

A corporation sold a long-term investment in common shares with an adjusted cost base of $25,000, for $10,000 during the current year.It also sold a parcel of land that is consid- ered capital property with an adjusted cost base of $8,000, for $12,000.Its net allowable capital loss for the year is $11,000.

Answer 2

False

Question 3

During the current year, an individual has taxable capital gains on the disposition of a qualified farm property and on the disposition of shares in a qualified small business cor- poration.The lifetime capital gains deduction can be used to eliminate up to $375,000 of the taxable capital gains on either disposition.

Answer 3

True

Question 4

The alternative minimum tax is an attempt to deal with a tax policy issue.What is this is- sue and, in general terms, how does the alternative minimum tax deal with this issue?
Tax Payable For Individuals Revisited - True Or False

Question 5

With respect to the deductibility of their losses, farmers fall into three categories.What are these three categories and how are losses treated in each category?

Question 6

The $750,000 lifetime capital gains deduction is available when the taxpayer has a gain on the disposition of shares in a "qualified small business corporation".What are the con- ditions that must be met for an enterprise to be a qualified small business corporation?

Question 7

Net capital losses can be carried forward or back, but can only be deducted to the extent of net taxable capital gains in the carry back or carry forward year.

Question 8

John Broley has a $50,000 non-capital loss carry forward and a $50,000 net capital loss carry forward.During the current year, his only income is a $50,000 taxable capital gain.He has asked your advice as to which of the two loss carry forwards he should deduct.What advice would you give him?

Question 9

If an individual has no loss carry overs from other years, the current year Net Income For
Tax Purposes will be equal to Taxable Income.

Question 10

What is a Small Business Corporation as defined in the Income Tax Act?

Question 11

An individual sells shares in a Canadian controlled private corporation that qualifies as a small business corporation to an arm's length party.The adjusted cost base of the shares is
$50,000 and they are sold for $30,000.The $20,000 loss is an Allowable Business Invest- ment Loss.

Question 12

An individual has a non-capital loss.It can be carried back three years and forward indefi- nitely.

Question 13

If an individual dies and has a net capital loss in that taxation year or unused net capital losses from previous years, these balances are subject to a different treatment than would be the case if the individual were still alive.Briefly describe how this treatment is differ- ent.

Question 14

Briefly describe the tax treatment of losses on listed personal property.

Question 15

When an enterprise has several types of loss carry forwards, why is it necessary to keep separate balances for each type?

Question 16

What is an Allowable Business Investment Loss? What special tax provisions are associ- ated with this type of loss?

Question 17

In situations where such a transfer would result in the creation of, or an increase in, the spousal tax credit for the taxpayer, dividends received by the spouse or common-law part- ner of the taxpayer can be transferred to him and included in his tax return.

Question 18

The carry forward periods for losses varies with the type of loss.Briefly describe the carry forward periods that the Income Tax Act provides for the types of losses that it identifies.

Question 19

ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination benefit.What tax policy objective is served by this provision?

Question 20

When an individual makes a gift of publicly traded securities to a registered charity, any capital gain that results from the disposition is deemed to be nil.

Question 21

Which one of the following would not affect the calculation of the alternative minimum tax?

A)Stock options not yet exercised.
B)The deduction of an Allowable Business Investment Loss.
C)A taxable capital gain resulting from the sale of a cottage.
D)Dividends received from a taxable Canadian corporation.
TIF PROBLEM ELEVEN - 4
Tax Payable For Individuals Revisited - Exam Exercises

Question 22

Charitable contributions that are not used during the current year can be carried forward for five years, without regard to whether the taxpayer is an individual or a corporation.

Question 23

Which of the following statements with respect to the tax on split income (the "kiddie tax") is not correct?

A)For purposes of this tax, a "specified individual" is anyone who has not reached the age of 17 years before the beginning of the year.
B)The tax is applied at a 29 percent rate to all of the income of a specified individual.
C)Split income includes taxable dividends received from private companies.
D)The only tax credits that can be applied against the Tax Payable on split income are dividend tax credits and foreign income tax credits.
Charitable Donations

Question 24

In the calculation of Adjusted Taxable Income in the alternative minimum tax calculation, which of the following are not considered tax preference items?

A)Losses arising through the deduction of CCA on Certified Canadian Films.
B)Dividend tax credits.
C)Employee stock option deductions.
D)Limited partnership losses.

Question 25

With respect to net capital loss balances, which of the following statements is not correct?

A)When such balances are deducted, the amount deducted will be based on the capital gains inclusion rate which applied in the year in which the loss was realized.
B)When such balances are carried back, they can be deducted only to the extent of tax- able capital gains arising in the carry back period.
C)Such balances can be carried back three years.
D)Such balances can be carried forward indefinitely.
Allowable Business Investment Losses

Question 26

A corporation can deduct all dividends received, without regard to the source of the divi- dends.

Question 27

Which of the following statements is correct with respect to the disposition of a valuable coin collection?

A)If a loss occurs, it cannot be deducted against any source of income.
B)If a loss occurs, one-half of this amount can be applied against one-half of any capital gain.
C)If a gain occurs, one-half of this amount can be offset by allowable capital losses on any disposition of capital property.
D)If a gain occurs it will not be taxed because this is personal use property.

Question 28

With respect to the lifetime capital gains deduction, which of the following statements is not correct?

A)The deduction is only available to individuals.
B)The Cumulative Gains Limit is reduced by any CNIL balance at the end of the year.
C)The Annual Gains Limit is reduced by Allowable Business Investment Losses realized
During the year.
D)The deduction is available on the disposition of shares of any small business corpora- tion.
Split Income

Question 29

Shelly is seeking your advice on how she can claim various deductions and credits.Which of the following items would reduce the amount of her Taxable Income? i.A net capital loss carried forward from a previous year.ii.A charitable donation.
Iii)Contributions to an RESP.
Iv)Childcare costs paid during the year.

A)i, ii, and iv
B)ii and iv
C)i and iv
D)i, iii, and iv

Question 30

With respect to an Allowable Business Investment Loss, which of the following statements is not correct?

A)An Allowable Business Investment loss can be deducted against any source of income.
B)If not used during the current year, an Allowable Business Investment Loss can only be
Applied against taxable capital gains in a carry forward or carry back period.
C)An Allowable Business Investment Loss results from the disposition of shares of a small business corporation.
D)An Allowable Business Investment Loss is the deductible portion of a Business Invest- ment Loss.
Lifetime Capital Gains Deduction

Question 31

Non-capital loss carry overs must be deducted in the order in which they were incurred, the oldest one first, followed by amounts arising in later years.

Question 32

Which of the following statements about Allowable Business Investment Losses is correct?

A)They are losses that result from the disposition of shares or debt in a Canadian con- trolled public corporation.
B)They can only be deducted against business income.
C)If they are not used during the current year, they are added to the net capital loss bal- ance.
D)If they are not used during the current year, they are added to the non-capital loss bal- ance.

Question 33

A net capital loss carry forward can only be deducted to the extent that there are net tax- able capital gains in the carry forward year.

Question 34

An individual has Net Income For Tax Purposes of $147,500.During the current year, the individual donates a depreciable capital asset with a fair market value of $300,000.The capital cost of this asset is $225,000 and it has a UCC $147,000.It is the only asset in its CCA class and no additions are made subsequent to the gift.If he elects to have the dona- tion valued at its fair market value, what is the maximum amount that this individual can claim as the basis for his charitable donations tax credit for the current year?

A)$300,000
B)$110,625
C)$139,500
D)$148,875
Foreign Tax Credits

Question 35

Which of the following would reduce an individual's Taxable Income?

A)A non-capital loss carried forward from a previous year.
B)A charitable donation carried forward from a previous year.
C)Adoption expenses.
D)Medical expenses.

Question 36

Which of the following transactions would result in the taxpayer being able to make a life- time capital gains deduction?

A)An individual sells 100 percent of the shares of a CCPC that uses 85 percent of its as- sets in the operation of an active business.
B)An individual sells 15 percent of the shares of a CCPC that uses 95 percent of its assets in the operation of an active business.
C)A CCPC sells 100 percent of the shares of another CCPC that uses 100 percent of its as- sets in the operation of an active business.
D)An individual sells 25 percent of the shares of a CCPC that uses 30 percent of its assets to produce property income.

Question 37

As a part time employee, Derek earns $20,000 per year.He recently started up his own business as a sole proprietorship.For the current year, his business revenues were $12,000 and his business expenses were $28,000.Derek has some investments that re- sulted in taxable dividend income of $1,400 and incurred interest expense of $2,000.Assuming this accounts for all of Derek's sources of income, what is his non-capital loss carry forward for the year?

A)Nil.
B)$600.
C)$3,400.
D)$16,000.

Question 38

Dividends received from taxable Canadian corporations are not included in the Net In- come For Tax Purposes of Canadian corporations.

Question 39

Martin is worried about how much tax he will have to pay this year and he is looking for anything that he might have missed that will decrease his Taxable Income.All of the fol- lowing could decrease his Taxable Income, with the exception of:

A)a deduction for contributions to an RPP.
B)application of a net capital loss carryforward.
C)application of a non-capital loss carryforward.
D)a credit for a charitable donation.

Question 40

Assume that any foreign income is taxed in the foreign jurisdiction.Which one of the fol- lowing types of foreign income generates foreign tax credits that may be applied to other taxation years?

A)Business income only.
B)Capital gains only.
C)Employment income only.
D)Investment income only.
Alternative Minimum Tax

Question 41

For integration to work properly for a CCPC whose income qualifies for the small business deduction, the combined federal/provincial tax rate on corporations must be equal to 20 percent, while the combined federal/provincial dividend tax credit must be equal to two-thirds of the gross up.

Question 42

A major goal of integration is to ensure that, if an individual has a given income source, he will retain the same after tax amount of cash from that source, without regard to whether he receives the income directly or, alternatively, the income is routed through a corpora- tion prior to his ultimate receipt of the after tax amount.

Question 43

During the current year, Loner Ltd.has a business loss of $250,000, net taxable capital gains of $45,000, an Allowable Business Investment Loss of $15,000, and receives divi- dends from taxable Canadian corporations in the amount of $35,000.What is the amount of the non-capital loss for the year?

A)$185,000.
B)$220,000.
C)$250,000.
D)$265,000.
Tax Payable

Question 44

Which of the following items cannot be deducted in the determination of Taxable Income for a corporation?

A)Dividends from taxable Canadian corporations.
B)Charitable contributions.
C)The lifetime capital gains deduction.
D)Net capital losses.

Question 45

With respect to the determination of Tax Payable for a corporation, which of the following statements is not correct?

A)The federal tax abatement percentage is reduced when less than 100 percent of the corporation's income is allocated to a province.
B)The basic tax rate applicable to corporations is 38 percent.
C)Provincial corporate taxes are based on a flat rate applied to a taxable income figure.
D)Full rate taxable income includes any income that is not eligible for the small business
Deduction.
Small Business Deduction

Question 46

With respect to foreign business tax credits for corporations, which of the following state- ments is not correct?

A)If the credit cannot be used during the current period, it can be carried back three years and forward ten years.
B)In the formula that limits this credit, the Tax Otherwise Payable is reduced by the fed- eral tax abatement.
C)In the formula that limits this credit, the Tax Otherwise Payable is reduced by the gen- eral rate reduction.
D)In the formula that limits this credit, the Adjusted Division B Income is reduced by div- idends that are deducted in the determination of Taxable Income.
TIF PROBLEM TWELVE - 4
Taxable Income And Tax Payable For Corporations - Exam Exercises

Question 47

Giganto Inc.is a CCPC that is not associated with any other company.As determined by ITR 5200, Giganto Inc.has M&P profits of $575,000, with all of this amount being Cana- dian source active business income.Its total Net Income For Tax Purposes is $625,000, with the additional $50,000 being foreign source business income.The foreign govern- ment withheld 10 percent of this amount which is equal to the foreign business income tax credit.In determining Taxable Income, Giganto deducted a non-capital loss carry for- ward of $75,000.What is Giganto's M&P deduction for the year?

A)$75,000
B)$ 8,625
C)$ 3,580
D)$31,132

Question 48

The federal tax abatement is always equal to 10 percent of a corporation's Taxable In- come.

Question 49

The 17 percent small business deduction is only available on:

A)Income earned in Canada by a resident corporation.
B)The first $500,000 in manufacturing and processing income earned by a Canadian controlled private corporation.
C)The active business income of a private corporation with no more than five full-time employees devoted to the production of property income.
D)All of the income earned in Canada by a Canadian controlled private corporation.
E) None of the above.

Question 50

For purposes of calculating the small business deduction, interest revenue can never be included in active business income.

Question 51

With respect to the determination of Tax Payable for a corporation, which of the following statements is correct?

A)Provincial tax is calculated as a percentage of federal Tax Payable.
B)The general rate reduction percentage is applied to full rate taxable income.
C)The basic federal tax rate is equal to 28 percent of Taxable Income.
D)The federal tax abatement is always equal to 10 percent of Taxable Income.

Question 52

With respect to charitable donations made by a corporation, which of the following state- ments is correct?

A)They create a credit against Tax Payable, based on the corporation's tax rate prior to the deduction of the federal abatement.
B)If they cannot be used during the current year, they can be carried back three years.
C)They are a deduction in the determination of corporate Taxable Income but not cor- porate Net Income.
D)The amount of contributions that can be deducted is only limited by the corporation's
Net Income For Tax Purposes for the year.

Question 53

The base used for calculating the M&P deduction is reduced by the amount of the small business deduction.

Question 54

For integration to work properly, the combined federal/provincial dividend tax credit must be equal to the gross up.For eligible dividends, this will occur in 2011 when the pro- vincial dividend tax credit rate is equal to 10/23 of the gross up.

Question 55

The Part I refundable tax procedures are designed to prevent deferral of taxes on income from investments that have been transferred to a corporation by an individual.

Question 56

With respect to foreign non-business tax credits for corporations, which of the following statements is correct?

A)If the credit cannot be used during the current period, it can be carried back three years and forward ten years.
B)The amount of the credit is limited to 15 percent of the foreign source non-business income.
C)The credit will be equal to the amount of foreign taxes withhold.
D)The full amount of foreign non-business income earned must be included in the cor- poration's Taxable Income.

Question 57

When dividends are paid by one taxable Canadian corporation to another taxable Cana- dian corporation, the recipient corporation will include the dividends in:

A)Both Taxable Income and Net Income For Tax Purposes, but with an offsetting credit against Tax Payable.
B)Both Taxable Income and Net Income For Tax Purposes, with no offsetting credit against Tax Payable.
C)Neither Taxable Income nor Net Income For Tax Purposes.
D)Net Income For Tax Purposes, but not Taxable Income.
E)Taxable Income, but not Net Income For Tax Purposes.

Question 58

A corporation's non-business foreign income tax credit is limited to 15 percent of foreign non-business income earned.

Question 59

Which of the following statements with respect to the general rate reduction for corpora- tions is not correct?

A)The general rate reduction is calculated by applying a specified percentage to full rate taxable income.
B)Full rate taxable income for a public company is reduced by the income eligible for the manufacturing and processing deduction.
C)The general rate reduction is not available to Canadian Controlled Private Corpora- tions (CCPCs).
D)While the basic tax rate for corporations remains at 38 percent, the general rate re- duction serves to reduce the effective tax rate for corporations that have full rate taxable income.
Foreign Tax Credits

Question 60

With respect to the manufacturing and processing deduction, which of the following statements is not correct?

A)The manufacturing and processing deduction is available to any corporation that has manufacturing and processing profits.
B)At the federal level, there is no tax advantage associated with the use of the manufac- turing and processing deduction.
C)The amount of manufacturing and processing profits is determined by a formula that is found in the Income Tax Regulations.
D)The base for the manufacturing and processing deduction cannot exceed manufactur- ing and processing profits, reduced by the amount eligible for the small business deduction.
General Rate Reduction

Question 61

The Refundable Dividend Tax On Hand (RDTOH) balance at the end of the year includes the refundable Part I tax for the current year, the refundable Part IV tax for the current year, the corporation's RDTOH balance at the end of the preceding year, with this total reduced by the corporation's dividend refund for the preceding year.

Question 62

Aggregate investment income as defined in ITA 129(4) includes interest, rents, dividends, and taxable capital gains.

Question 63

During the current year, Norton Tools Ltd.has net taxable capital gains of $45,000, re- ceives dividends from taxable Canadian corporations of $34,000, and earns interest income of $21,000.Taxable Income for the year equals $280,000, of which $210,000 is eligible for the small business deduction.The Company's additional refundable tax for the year is equal to:

A)$4,667.
B)$6,667.
C)$4,400.
D)$5,267.

Question 64

At the end of 2010, Gomez Inc., a CCPC, has a GRIP of $53,400.For 2011, the Company has Taxable Income of $143,000.This includes aggregate investment income of $19,000.In addition, the Company receives eligible dividends of $12,300.In calculating 2011 Tax Payable, the Company has a small business deduction of $14,450.During 2010, the com- pany paid dividends of $42,000 with $13,700 of the dividends designated as eligible.Dividends paid during 2011 total $51,000, with $18,400 of this amount being designated as eligible.What is the amount of the Company's GRIP at the end of the 2011 taxation year?

A)$79,300
B)$93,000
C)$67,000
D)$74,600

Question 65

When there has been an acquisition of control, the acquired corporation can choose to have a deemed disposition of any of its capital assets at any value that is elected for this purpose.

Question 66

With respect to integration, which of the following statements is correct for 2011?

A)For integration to be effective in situations where non-eligible dividends are paid, the combined federal/provincial tax rate on corporations must be equal to 29.08 percent.
B)For integration to be effective in situations where non-eligible dividends are paid, the provincial tax rate on individuals must be 14 percent.
C)For integration to be effective in situations where eligible dividends are paid, the pro- vincial dividend tax credit must be equal to one-third of the dividend gross up.
D)For integration to be effective in situations where non-eligible dividends are paid, the combined federal/provincial tax rate on corporations must be equal to 20 percent.
Refundable Part I Tax

Question 67

The Part IV refundable tax is assessed on portfolio dividends and on all dividends received from connected companies.

Question 68

When there is an acquisition of control, depreciable assets must be written down to their fair market value if this amount is less than their capital cost.

Question 69

With respect to the RDTOH account, which of the following statements is not correct?

A)The balance is increased by the amount of Part IV tax paid during the taxation year.
B)The balance is reduced by one-third of any dividends paid during the taxation year.
C)The balance is increased by the portion of Part I tax that is designated as refundable.
D)The balance is reduced by any dividend refund for its preceding taxation year.
GRIP And LRIP

Question 70

Which of the following statements with respect to Part IV tax is correct?

A)Only CCPCs are required to pay Part IV tax.
B)The refundable portion of Part IV tax is equal to 26-2/3 percent of aggregate invest- ment income.
C)The Part IV tax is assessed on all dividends received from connected companies.
D)The Part IV tax is assessed on all portfolio dividends.
RDTOH

Question 71

Aggregate investment income, as defined in ITA 129(4), includes the following:

A)Dividends from any source.
B)Net taxable capital gains for the year, less net capital loss carry overs deducted.
C)Interest and rents, but not foreign source property income.
D)Interest, rents, and dividends.

Question 72

A corporation's dividend refund for the year will be the lesser of the balance in the RDTOH account at the beginning of the year and one-third of the taxable dividends paid for the year.

Question 73

Morgan Ltd., a CCPC, had a $25,000 balance in its Refundable Dividend Tax On Hand (RDTOH) account on December 31, 2010, the end of its taxation year.Its refundable por- tion of Part I tax, before any refunds, for the 2011 year is $10,000.It did not receive any dividends in 2011.Morgan Ltd.paid dividends of $15,000 in each of 2010 and 2011.What is the balance in Morgan Ltd.'s RDTOH account at December 31, 2011?

A)$25,000.
B)$30,000.
C)$35,000.
D)$40,000.

Question 74

Premier Investments Inc.(Premier) is a private corporation.Premier received $20,000 of dividends from its investments in publicly traded Canadian shares during its taxation year ended June 30, 2011.Premier has loss carry forwards as follows: non-capital losses of $3,000, net capital losses of $5,000, and farm losses of $7,000.All of these losses are available for application in Premier's 2011 taxation year.The non-capital and farm losses will expire if not used during 2011.Assuming Premier has no other income, what is Pre- mier's minimum 2011 Part IV Tax Payable?

A)Nil.
B)$1,667.
C)$3,334.
D)$5,666.

Question 75

With respect GRIP and LRIP balances, which of the following statements is not correct?

A)A CCPC's GRIP balance is increased by 100 percent of eligible dividends received.
B)As long as a public company has an LRIP balance, all of its dividends will be non-eligi-
Ble)
C)A public company's LRIP balance will be increased by the amount of non-eligible divi- dends received.
D)A CCPC's GRIP balance will be reduced by 100 percent of the amount eligible for the small business deduction.

Question 76

Mr.Darby owns 75 percent of the shares of Darby Inc.and his spouse owns 80 percent of the shares of MS Darby Ltd.Darby Inc.and MS Darby Ltd.are associated.

Question 77

Which of the following statements with respect to eligible dividends paid in 2011 is not correct?

A)The recipient individual shareholder must gross them up by 41 percent.
B)They generate a federal tax credit equal to 13/23 of the gross up.
C)They can only be designated as eligible dividends by public companies.
D)They can be designated as eligible dividends by a CCPC with a positive GRIP balance.

Question 78

Any net capital losses that remain unused after an acquisition of control, cannot be used in years subsequent to the acquisition of control.

Question 79

Which of the following statements with respect to non-eligible dividends paid in 2011 is correct?

A)The combined federal/provincial dividend tax credit will be equal to the gross up.
B)The recipient individual shareholder must gross them up by 41 percent.
C)Dividends paid by CCPCs are always non-eligible.
D)To the extent that the company has an LRIP balance, dividends paid by public compa- nies will be non-eligible.

Question 80

With respect to Part I refundable taxes, which of the following statements is correct?

A)It is an additional tax which must be paid on aggregate investment income.
B)It is always refundable at the rate of $1 for each $3 of dividends paid.
C)It is designed to prevent the deferral of taxes on investment income that is retained by a public company.
D)It is designed to prevent the deferral of taxes on investment income that is retained by a CCPC.
Part IV Tax Payable