Deck 1: Introduction to Federal Taxation in Canada

Question 1

List three factors that would be considered in the determination of whether or not an individual is a resident of Canada.

Answer 1

The main factors here would be:
• Does the individual have a dwelling in Canada?
• Does the individual's spouse or common-law partner live in Canada?
• Do the dependants of the individual live in Canada? Other factors that could be mentioned include:
• Owning personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles).
• Social ties with Canada (such as memberships in Canadian recreational and religious organizations).
• Economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts).
• Hospitalization and medical insurance coverage from a province or territory of Canada.
• A driver's license from a province or territory of Canada.
• A vehicle registered in a province or territory of Canada.
• A seasonal dwelling place in Canada or a leased dwelling place.
• Holding a Canadian passport.
• Membership in Canadian unions or professional organizations.

Question 2

What is the meaning of "person" when the term is used in the Income Tax Act?

Answer 2

In the Income Tax Act, the term "person" can refer to an individual, a corporation, or a trust.

Question 3

The major source of federal revenues is the personal income tax. Indicate three other types of taxes that contribute to federal revenues.

Answer 3

The other sources of federal revenues that are shown in Figure 1-1 of the text are:
• Corporate income taxes.
• Non-resident income taxes.
• GST.
• Customs and import duties.
• Other excise taxes.
• EI premiums.

Question 4

If an individual leaves Canada for a temporary absence, this raises the question of whether he was a Canadian resident during the period of absence, particularly if some residential ties have been retained. What are the major factors that are considered in determining whether an individual continues to be a Canadian resident during a temporary absence?

Question 5

What purposes are served by Canada's international tax treaties?

Question 6

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

Question 7

When an individual leaves Canada, the CRA may take the position that he has retained his residence status. What are the primary factors that the CRA will consider in determining whether such an individual has, in fact, ceased to be a Canadian resident?

Question 8

While the Sections of the Income Tax Act are numbered 1 through 260, there are actually more than 260 Sections. Explain why this is the case.

Question 9

What is the importance of residence in Canadian income taxation?

Question 10

Distinguish between horizontal equity and vertical equity as these terms are used in describing tax systems.

Question 11

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

Question 12

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.

Question 13

One of your friends is leaving Canada and would like to know when he will no longer be considered a Canadian resident. Briefly explain the rules related to terminating an individual's status as a Canadian resident.

Question 14

What are some of the factors that have led to the entrenched use of tax expenditures as opposed to program spending?

Question 15

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

Question 16

Provide an example of how taxation policy can be used to influence resource allocation.

Question 17

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

Question 18

The government pays a Canada Child 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 19

List four non-legislative sources of income tax information.

Question 20

Briefly describe the procedures used in calculating provincial income taxes for individuals in provinces other than Quebec.

Question 21

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

Question 22

What is the difference between tax avoidance and tax deferral?

Question 23

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 24

A partnership can be a taxable entity for GST purposes.

Question 25

Are enterprises that are incorporated in Canada always considered to be resident in Canada? Explain your conclusion.

Question 26

Your client, a government employee, would like to reduce his taxes. He is trying to decide whether he should contribute $5,000 to an RRSP this year. He has an RRSP as does his wife, a part time employee at a day care centre.
Briefly describe the basic goals of tax planning. What advice would you give your client regarding his RRSP contribution? Explain your conclusion.

Question 27

What are the components of Net Income For Tax Purposes?

Question 28

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 29

The federal government does not collect personal or corporate taxes for Ontario or Quebec.

Question 30

In general, provincial income taxes for individuals are based on a specified percentage of federal tax payable.

Question 31

It is possible that an individual could be considered resident in more than one country. In such situations, "tie-breaker" rules are used to avoid the individual being subject to taxation in both countries. List and describe three factors that would be considered in implementing the tie-breaker rules.

Question 32

What is income splitting? Under what circumstances will it provide tax benefits to an individual?

Question 33

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

Question 34

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 involved in this arrangement?

Question 35

Limon Inc. was incorporated in the U.S. five years ago. However, all of the directors of the corporation are Canadian residents, holding all of their meetings in Montreal. How would Limon Inc. be taxed?

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

For the current year, Jane Doe is deemed to a Canadian resident because she sojourned in Canada for 210 days. Also for the current year, Jack Fawn, a long-time resident of Manitoba, was considered a part year resident for the first 210 days, after which he permanently departed from Canada. Explain how these two individuals will be taxed in Canada.

Question 41

If an individual returns to Canada after an absence of less than two years, S5-F1-C1 indicates that, in general, he will be considered to have retained Canadian residency during his absence.

Question 42

If an individual moves to Canada and is here less than 183 days prior to the end of the year, that individual will be subject to Part I tax on their worldwide income for the entire year.

Question 43

Which of the following groups of entities are all subject to taxation on income?

A)Individuals, proprietorships and corporations
B)Proprietorships, corporations and trusts
C)Individuals, trusts and corporations
D)Individuals, partnerships and corporations

Question 44

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

Question 45

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 46

When an individual is absent from Canada for some period of time, the length of their absence is an important factor in determining whether they continued to be a Canadian resident during the period of their absence.

Question 47

A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year.

Question 48

A sojourner is any individual who has been present in Canada for 183 consecutive days in one year.

Question 49

The residency of a trust depends on the country in which the central management and control of the trust takes place, not where the beneficiaries reside.

Question 50

Which of the following types of taxes is not currently in use by the federal government of Canada?

A)Excise Taxes
B)Custom Duties
C)Head Tax
D)Transfer Tax

Question 51

Income tax is calculated for which of the following groups of jurisdictions?

A)Municipal, provincial, and federal
B)Provincial, federal, and international
C)Municipal, federal, and international
D)Municipal, provincial, and international

Question 52

Which of the following could be required to file a GST return?

A)Chan's Clothing Store (an unincorporated business)
B)The Chan Foundation (a registered charity)
C)Min Chan (an individual)
D)All of the above could be required to file a GST return.

Question 53

Canadian citizens are required to file a Canadian income tax return, without regard to where they currently live.

Question 54

Which of the following forms of taxation provides the largest component of federal government taxation revenues?

A)Personal income tax
B)Corporate income tax
C)Goods and services tax
D)Employment insurance premiums

Question 55

If an individual leaves Canada, the three most significant factors in determining whether he has ceased to be a resident are:
• Whether he continues to own a dwelling in Canada.
• Whether he is accompanied by his spouse or common-law partner.
• Whether he maintains social ties in Canada.

Question 56

Which of the following statements with respect to Canadian tax policy is NOT correct?

A)The economic burden of a particular tax may not fall on the same group that has the legal liability to pay the tax.
B)Extremely high rates of tax will always encourage individuals to work harder so that they will have more after tax income.
C)The inability to harmonize the GST in some provinces has increased the complexity of tax compliance.
D)A progressive tax system is unfair to individuals with incomes that fluctuate significantly from year to year.

Question 57

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 individuals.
D)Each province can establish rules for determining the Taxable Income of individuals.

Question 58

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 CPAs operating as a partnership.
D)The Martin family trust.

Question 59

Which of the following goals is NOT a current economic policy objective of the Canadian tax system?

A)Ensure the continued provision of public goods.
B)Redistribute income and wealth among taxpayers.
C)Ensure fairness in the allocation of resources to different levels of government.
D)Economic stabilization such as stimulating the economy or creating jobs.

Question 60

If there is a conflict between an international tax treaty and Canadian tax legislation, the Canadian tax legislation will prevail.

Question 61

Of the following statements related to liability for Canadian income tax, which statement is NOT correct?

A)As used in the Income Tax Act, the term person refers to individuals, trusts, and corporations.
B)Corporations must use the calendar year as their taxation year.
C)The Canadian Part I tax is assessed on residents of Canada.
D)The Canadian Part I tax is assessed Canadian employment income earned by a non-resident.

Question 62

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 63

Which of the following types of income earned by a non-resident is NOT subject to Canadian income tax under Part I of the Income Tax Act?

A)Employment income earned in Canada
B)Business income earned in Canada
C)Rental income earned in Canada
D)Income from the disposition of Canadian real estate

Question 64

Which of the following persons is NOT liable for Canadian income tax under Part I of the Income Tax Act?

A)Pheap Chom, an individual who has resided in Canada for the past 15 years.
B)Chom Incorporated, a Canadian resident corporation.
C)Phon Im, a resident of the United States who earns employment income in Canada.
D)Bunly Im, a resident of the United States who earns interest income in Canada.

Question 65

Which of the following is an essential factor in determining whether an individual has ceased to be a resident of Canada?

A)The individual has closed his Canadian savings account.
B)The individual has given up his membership in the Canuck Country Club.
C)The individual has become a resident of another country.
D)The individual has given up his Ontario driver's licence.

Question 66

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 Notice 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.

Question 67

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 Income Tax Folio.
D)A CRA Information Circular.

Question 68

Which of the following statements with respect to tax reference materials is correct?

A)Income Tax Folios are a legislative source of guidance.
B)Income Tax Regulations are gradually being replaced by Income Tax Folios.
C)Interpretation Bulletins are gradually being replaced by Information Circulars.
D)The Income Tax Act is the most important source of information for dealing with matters related to the federal income tax.

Question 69

"We should not have a tax system which encourages investment in particular assets or in specific 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 70

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 economic conditions.
C)A progressive system discourages tax evasion.
D)A progressive system encourages greater effort on the part of individuals.

Question 71

Ms. Floot has been out of Canada for several years. She is presumed to be a non-resident as long as certain tests are met. Indicate the condition that does NOT have to be met.

A)She did not leave a spouse or other dependants in Canada.
B)She does not return to Canada on a regular or frequent basis.
C)She did not leave personal property or social ties in Canada.
D)She did not leave taxable Canadian property in Canada.
E)She did establish permanent residence in another jurisdiction.

Question 72

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 73

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 Income Tax Act has Parts numbered I through XVII, reflecting the fact that there are 17 Parts 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 74

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

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

Question 75

Which of the following statements accurately describes a regressive tax?

A)A tax which results in higher effective tax rates for higher income taxpayers.
B)A tax which results in lower effective tax rates for higher income taxpayers.
C)A tax in which the same effective rate applies to all levels of income.
D)A tax that is shifted to consumers through price increases on the goods purchased.

Question 76

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 77

Which of the following statements with respect to using tax expenditures rather than program 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 78

An individual is liable for income tax in Canada if he:

A)is a resident in Canada.
B)is a citizen of Canada.
C)has lived in Canada at any time during the year.
D)All of the above are required.

Question 79

"Taxpayers who earn $100,000 in dividends should pay the same amount of tax as taxpayers 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.

Question 80

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

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