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