Solution Manual for Canadian Income Taxation
Q Q Q Q Q Q
26th Edition by William Buckwold
QQ Q Q Q Q Q
All chapters 1-23 Covered
Q Q Q
,TABLE OF CONTENT
Chapter 1 Taxation Its Role in Decision Making
Q Q Q Q Q Q Q
QChapter 2 Fundamentals of Tax Planning
Q Q Q Q Q
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Q Q Q Q Q Q Q Q Q Q Q Q Q
QChapter 4 Income from Employment
Q Q Q Q
Chapter 5 Income from Business
Q Q Q Q
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Q Q Q Q Q Q Q Q Q
QChapter 7 Income from Property
Q Q Q Q
Chapter 8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Q Q Q Q Q Q Q Q Q Q Q
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Q Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Q Q Q Q Q Q Q Q Q
Chapter 11 Corporations-An Introduction
Q Q Q
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Q Q Q Q Q Q Q Q Q
QChapter 13 The Canadian-Controlled Private Corporation
Q Q Q Q Q
Chapter 14 Multiple Corporations and Their Reorganization
Q Q Q Q Q Q
QChapter 15 Partnerships
Q Q
Chapter 16 Limited Partnerships and Joint Ventures
Q Q Q Q Q Q
QChapter 17 Trusts
Q Q
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Q Q Q Q Q Q Q
QChapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Q Q Q Q Q Q
QChapter 20 Domestic and International Business Expansion
Q Q Q Q Q Q
Chapter 21 Tax Aspects of Corporate Financing
Q Q Q Q Q Q
QChapter 22 Introduction to GST/HST
Q Q Q Q
Chapter 23 Business Valuations
Q Q Q
Chapter 1 Q
Taxation – It’s Role in Business Decision Making
Q Q Q Q Q Q Q
Review Questions Q
1. If income tax is imposed after profits have been determined, why is taxation
Q Q Q Q Q Q Q Q Q Q Q Q
Qrelevant to business decision making? Q Q Q Q
2. Most business decisions involve the evaluation of alternative courses of action. For
Q Q Q Q Q Q Q Q Q Q Q
example, a marketing manager may be responsible for choosing a strategy for
Q Q Q Q Q Q Q Q Q Q Q Q
establishing sales in new geographical territories. Briefly explain how the tax factor can
Q Q Q Q Q Q Q Q Q Q Q Q Q
be an integral part of this decision.
Q Q Q Q Q Q Q
3. What are the fundamental variables of the income tax system that decision-makers should
Q Q Q Q Q Q Q Q Q Q Q Q
be familiar with so that they can apply tax issues to their areas of responsibility?
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
4. What is an “after-tax” approach to decision making?
Q Q Q Q Q Q Q
,Solutions to Review Questions
Q Q Q
R1-1 Once profit is determined, the Income Tax Act determines the amount of income
Q Q Q Q Q Q Q Q Q Q Q Q Q
tax that results. However, at all levels of management, alternative courses of action
Q Q Q Q Q Q Q Q Q Q Q Q Q
are evaluated. In many cases, the choice of one alternative over the other may affect
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
both the amount and the timing of future taxes on income generated from that
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
activity. Therefore, the person making those decisions has a direct input into future
Q Q Q Q Q Q Q Q Q Q Q Q Q
after-tax cash flow. Obviously, decisions that reduce or postpone the payment of tax
Q Q Q Q Q Q Q Q Q Q Q Q Q
affect the ultimate return on investment and, in turn, the value of the enterprise.
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Including the tax variable as a part of the formal decision process will ultimately lead to
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
improved after-tax cash flow.
Q Q Q Q
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
Q Q Q Q Q Q Q Q Q Q Q Q Q
establishing a formal presence in the new territory with a branch office or a separate
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
corporation. The new territories may also cross provincial or international boundaries.
Q Q Q Q Q Q Q Q Q Q Q
Provincial income tax rates vary amongst the provinces. The amount of income that is
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
subject to tax in the new province will be different for each of the three alternatives
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
mentioned above. For example, with direct selling, none of the income is taxed in the
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
new province, but with a separate corporation, all of the income is taxed in the
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
new province. Because the tax cost is different in each case, taxation is a relevant
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
part of the decision and must be included in any cost-benefit analysis that compares
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
the three alternatives [Reg. 400-402.1].
Q Q Q Q Q
R1-3 A basic understanding of the following variables will significantly strengthen a decision
Q Q Q Q Q Q Q Q Q Q Q Q
maker's ability to apply tax issues to their area of responsibility.
Q Q Q Q Q Q Q Q Q Q Q
Types of Income Q Q - Employment, Business, Property, Capital Q Q Q
gains Taxable Entities -
Q Q Q Individuals, Corporations, Trusts Q Q
Alternative Business Q - Corporation, Proprietorship, Partnership, Limited Q Q Q
Structures Q partnership, Joint arrangement, Income trust Q Q Q Q
Tax Jurisdictions
Q - Federal, Provincial, Foreign Q Q
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
Q Q Q Q Q Q Q Q Q Q Q Q
divestitures, or debt and equity restructuring, will impact the amount and timing of
Q Q Q Q Q Q Q Q Q Q Q Q Q
the tax cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
whether or not the ultimate result of the decision is successful. An after-tax
Q Q Q Q Q Q Q Q Q Q Q Q Q
approach to decision- making requires each decision-maker to think "after-tax" for
Q Q Q Q Q Q Q Q Q Q Q Q
every decision at the time the decision is being made, and, to consider alternative
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
courses of action to minimize the tax cost, in the same way that decisions are made
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
regarding other types of costs.
Q Q Q Q Q
Failure to apply an after-tax approach at the time that decisions are made may
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qprovide inaccurate information for evaluation, and, result in a permanently inefficient
Q Q Q Q Q Q Q Q Q Q
tax structure.
Q Q
, CHAPTER 2 Q
FUNDAMENTALS OF TAX PLANNING Q Q Q
Review Questions
Q
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
Q Q Q Q Q Q Q Q Q Q Q Q Q
2. What distinguishes tax evasion from tax avoidance and tax planning?
Q Q Q Q Q Q Q Q Q
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
Q Q Q Q Q Q Q Q Q Q Q Q Q
QExplain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qfinancial transactions. What are the general types of tax planning activities? Briefly
Q Q Q Q Q Q Q Q Q Q Q
explain how each of them may reduce or defer the tax cost.
Q Q Q Q Q Q Q Q Q Q Q Q
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
for the individual to transfer their business to a corporation?
Q Q Q Q Q Q Q Q Q Q
7. “As long as all of the income tax rules are known, a tax plan can be
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ Q
Qdeveloped with QQ
certainty.” Is this statement true? Explain.
Q Q Q Q Q
8. What basic skills are required to develop a good tax plan?
Q Q Q Q Q Q Q Q Q Q
9. An entrepreneur is developing a new business venture and is planning to raise
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qequity capital from individual investors. Their adviser indicates that the venture
Q Q Q Q Q Q Q Q Q Q
Qcould be structured as a corporation (i.e., shares are issued to the investors) or as
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qa limited partnership (i.e., partnership units are sold). Both structures provide limited
Q Q Q Q Q Q Q Q Q Q Q
liability for the investors. Should the entrepreneur consider the tax positions of the
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qindividual investors? Explain. Without dealing with specific tax rules, what general tax
Q Q Q Q Q Q Q Q Q Q Q
factors should an investor consider before making an investment?
Q Q Q Q Q Q Q Q Q
10. What is a tax avoidance transaction?
Q Q Q Q Q
11. “If a transaction (or a series of transactions) that results in a tax benefit was not
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qundertaken primarily for bona fide business, investment, or family purposes, the
Q Q Q Q Q Q Q Q Q Q
Q general anti- avoidance rule will apply and eliminate the tax benefit.” Is this statement
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qtrue? Explain. Q
Q Q Q Q Q Q
26th Edition by William Buckwold
QQ Q Q Q Q Q
All chapters 1-23 Covered
Q Q Q
,TABLE OF CONTENT
Chapter 1 Taxation Its Role in Decision Making
Q Q Q Q Q Q Q
QChapter 2 Fundamentals of Tax Planning
Q Q Q Q Q
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Q Q Q Q Q Q Q Q Q Q Q Q Q
QChapter 4 Income from Employment
Q Q Q Q
Chapter 5 Income from Business
Q Q Q Q
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Q Q Q Q Q Q Q Q Q
QChapter 7 Income from Property
Q Q Q Q
Chapter 8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Q Q Q Q Q Q Q Q Q Q Q
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Q Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Q Q Q Q Q Q Q Q Q
Chapter 11 Corporations-An Introduction
Q Q Q
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Q Q Q Q Q Q Q Q Q
QChapter 13 The Canadian-Controlled Private Corporation
Q Q Q Q Q
Chapter 14 Multiple Corporations and Their Reorganization
Q Q Q Q Q Q
QChapter 15 Partnerships
Q Q
Chapter 16 Limited Partnerships and Joint Ventures
Q Q Q Q Q Q
QChapter 17 Trusts
Q Q
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Q Q Q Q Q Q Q
QChapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Q Q Q Q Q Q
QChapter 20 Domestic and International Business Expansion
Q Q Q Q Q Q
Chapter 21 Tax Aspects of Corporate Financing
Q Q Q Q Q Q
QChapter 22 Introduction to GST/HST
Q Q Q Q
Chapter 23 Business Valuations
Q Q Q
Chapter 1 Q
Taxation – It’s Role in Business Decision Making
Q Q Q Q Q Q Q
Review Questions Q
1. If income tax is imposed after profits have been determined, why is taxation
Q Q Q Q Q Q Q Q Q Q Q Q
Qrelevant to business decision making? Q Q Q Q
2. Most business decisions involve the evaluation of alternative courses of action. For
Q Q Q Q Q Q Q Q Q Q Q
example, a marketing manager may be responsible for choosing a strategy for
Q Q Q Q Q Q Q Q Q Q Q Q
establishing sales in new geographical territories. Briefly explain how the tax factor can
Q Q Q Q Q Q Q Q Q Q Q Q Q
be an integral part of this decision.
Q Q Q Q Q Q Q
3. What are the fundamental variables of the income tax system that decision-makers should
Q Q Q Q Q Q Q Q Q Q Q Q
be familiar with so that they can apply tax issues to their areas of responsibility?
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
4. What is an “after-tax” approach to decision making?
Q Q Q Q Q Q Q
,Solutions to Review Questions
Q Q Q
R1-1 Once profit is determined, the Income Tax Act determines the amount of income
Q Q Q Q Q Q Q Q Q Q Q Q Q
tax that results. However, at all levels of management, alternative courses of action
Q Q Q Q Q Q Q Q Q Q Q Q Q
are evaluated. In many cases, the choice of one alternative over the other may affect
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
both the amount and the timing of future taxes on income generated from that
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
activity. Therefore, the person making those decisions has a direct input into future
Q Q Q Q Q Q Q Q Q Q Q Q Q
after-tax cash flow. Obviously, decisions that reduce or postpone the payment of tax
Q Q Q Q Q Q Q Q Q Q Q Q Q
affect the ultimate return on investment and, in turn, the value of the enterprise.
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Including the tax variable as a part of the formal decision process will ultimately lead to
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
improved after-tax cash flow.
Q Q Q Q
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
Q Q Q Q Q Q Q Q Q Q Q Q Q
establishing a formal presence in the new territory with a branch office or a separate
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
corporation. The new territories may also cross provincial or international boundaries.
Q Q Q Q Q Q Q Q Q Q Q
Provincial income tax rates vary amongst the provinces. The amount of income that is
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
subject to tax in the new province will be different for each of the three alternatives
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
mentioned above. For example, with direct selling, none of the income is taxed in the
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
new province, but with a separate corporation, all of the income is taxed in the
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
new province. Because the tax cost is different in each case, taxation is a relevant
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
part of the decision and must be included in any cost-benefit analysis that compares
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
the three alternatives [Reg. 400-402.1].
Q Q Q Q Q
R1-3 A basic understanding of the following variables will significantly strengthen a decision
Q Q Q Q Q Q Q Q Q Q Q Q
maker's ability to apply tax issues to their area of responsibility.
Q Q Q Q Q Q Q Q Q Q Q
Types of Income Q Q - Employment, Business, Property, Capital Q Q Q
gains Taxable Entities -
Q Q Q Individuals, Corporations, Trusts Q Q
Alternative Business Q - Corporation, Proprietorship, Partnership, Limited Q Q Q
Structures Q partnership, Joint arrangement, Income trust Q Q Q Q
Tax Jurisdictions
Q - Federal, Provincial, Foreign Q Q
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
Q Q Q Q Q Q Q Q Q Q Q Q
divestitures, or debt and equity restructuring, will impact the amount and timing of
Q Q Q Q Q Q Q Q Q Q Q Q Q
the tax cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
whether or not the ultimate result of the decision is successful. An after-tax
Q Q Q Q Q Q Q Q Q Q Q Q Q
approach to decision- making requires each decision-maker to think "after-tax" for
Q Q Q Q Q Q Q Q Q Q Q Q
every decision at the time the decision is being made, and, to consider alternative
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
courses of action to minimize the tax cost, in the same way that decisions are made
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
regarding other types of costs.
Q Q Q Q Q
Failure to apply an after-tax approach at the time that decisions are made may
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qprovide inaccurate information for evaluation, and, result in a permanently inefficient
Q Q Q Q Q Q Q Q Q Q
tax structure.
Q Q
, CHAPTER 2 Q
FUNDAMENTALS OF TAX PLANNING Q Q Q
Review Questions
Q
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
Q Q Q Q Q Q Q Q Q Q Q Q Q
2. What distinguishes tax evasion from tax avoidance and tax planning?
Q Q Q Q Q Q Q Q Q
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
Q Q Q Q Q Q Q Q Q Q Q Q Q
QExplain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qfinancial transactions. What are the general types of tax planning activities? Briefly
Q Q Q Q Q Q Q Q Q Q Q
explain how each of them may reduce or defer the tax cost.
Q Q Q Q Q Q Q Q Q Q Q Q
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
for the individual to transfer their business to a corporation?
Q Q Q Q Q Q Q Q Q Q
7. “As long as all of the income tax rules are known, a tax plan can be
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ Q
Qdeveloped with QQ
certainty.” Is this statement true? Explain.
Q Q Q Q Q
8. What basic skills are required to develop a good tax plan?
Q Q Q Q Q Q Q Q Q Q
9. An entrepreneur is developing a new business venture and is planning to raise
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qequity capital from individual investors. Their adviser indicates that the venture
Q Q Q Q Q Q Q Q Q Q
Qcould be structured as a corporation (i.e., shares are issued to the investors) or as
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qa limited partnership (i.e., partnership units are sold). Both structures provide limited
Q Q Q Q Q Q Q Q Q Q Q
liability for the investors. Should the entrepreneur consider the tax positions of the
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qindividual investors? Explain. Without dealing with specific tax rules, what general tax
Q Q Q Q Q Q Q Q Q Q Q
factors should an investor consider before making an investment?
Q Q Q Q Q Q Q Q Q
10. What is a tax avoidance transaction?
Q Q Q Q Q
11. “If a transaction (or a series of transactions) that results in a tax benefit was not
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Qundertaken primarily for bona fide business, investment, or family purposes, the
Q Q Q Q Q Q Q Q Q Q
Q general anti- avoidance rule will apply and eliminate the tax benefit.” Is this statement
Q Q Q Q Q Q Q Q Q Q Q Q Q
Qtrue? Explain. Q
