TEST BANK for Canadian Income Taxation Planning and Decision Making, 25th Edition by William Buckwold, Joan Kitunen, Matthew Roman, Abraham Iqbal

TEST BANK for Canadian Income Taxation Planning and Decision Making, 25th Edition by William Buckwold, Joan Kitunen, Matthew Roman, Abraham Iqbal CHAPTER 1 1) Which of the following is not considered to be a separate entity for tax purposes in Canada? A) An individual B) A proprietorship C) A corporation D) A trust 2) Which of the following attitudes and actions is most likely to help decision-makers develop an efficient approach to taxation? A) Cash flows should be considered from a before-tax perspective when making decisions. B) Functional managers should not be held responsible for the tax effects of decisions within their divisions. C) Tax costs to a business should be regarded as controllable expenses, much like product costs and selling costs. D) All managers should own a copy of the Income Tax Act. 3) Which of the following statements is true? A) Dividends paid by a corporation are deductible by that corporation and are a form of property income for the recipient. B) Dividends paid by a corporation are deductible by that corporation and are a form of business income for the recipient. C) Dividends paid by a corporation are not deductible by that corporation and are a form of business income for the recipient. D) Dividends paid by a corporation are not deductible by that corporation and are a form of property income for the recipient. Version 1 1 4) When assessing the value of a corporation, the most relevant information that decisionmakers normally consider is A) the potential for before-tax profits. B) the potential for after-tax profits. C) the current corporate tax rate. D) cash flow before-tax. 5) Income tax is calculated for which of the following jurisdictional groups? A) Municipal, provincial, and federal B) Municipal, federal, and foreign C) Provincial, federal, and foreign D) Municipal, provincial, and foreign 6) Two investor corporations may not enter jointly into which of the following? A) Joint venture B) Partnership C) Separate corporation D) Proprietorship 7) Which of the following statements is true? Version 1 2 A) Cash flow should never be calculated on an after-tax basis. B) The tax cost to a business should be regarded as a cost of doing business. C) Income tax cannot be treated as a controllable cost. D) The value of an enterprise should be based on pre-tax cash flow. 8) Logan holds a 7% interest-bearing debt instrument in Glow Co. Glow Co.'s tax rate is 27%, and Logan is in a 45% tax bracket. Which of the following statements is correct? A) The after-tax cost of the debt instrument is 5.11% to Glow Co., and the after-tax value to Logan is 3.85%. B) The after-tax cost of the debt instrument is 5.11% to Glow Co., and the after-tax value to Logan is 3.15%. C) The after-tax cost of the debt instrument is 1.89% to Glow Co., and the after-tax value to Logan is 3.15%. D) The after-tax cost of the debt instrument is 7% to Glow Co., and the after-tax value to Logan is 7%. 9) Which of the following lists accurately names the five general income categories for tax purposes? A) Business, Interest, Employment, Capital Gains, Other B) Business, Property, Employment, Capital Gains, Foreign C) Business, Property, Employment, Capital Gains, Other D) Business, Property, Employment, Investments, Other 10) Proprietorships, corporations, partnerships, limited partnerships, joint ventures, and income trusts are all Version 1 3 CONTACT US ON A) categories of income for tax purposes. B) tax jurisdictions. C) examples of financial instruments. D) forms of business. 11) Which of the following statements regarding taxation within jurisdictions in Canada is true? A) Federal and provincial or territorial tax brackets are always identical to one another. B) Only federal taxes apply to individuals while both federal and provincial or territorial taxes apply to corporations. C) Both federal and provincial or territorial taxes apply to Canadian taxpayers. D) Only federal taxes apply to corporations while both federal and provincial taxes apply to individuals. 12) Jamie is an employee at ABC Ltd. and is in a 45% tax bracket. ABC Ltd. has a tax rate of 27%. The company has offered Jamie a 10% pay raise. Jamie's current salary is $50,000. What is after-tax cost of the raise to ABC Ltd.? A) $1,350 B) $2,750 C) $2,858 D) $3,650 13) Simone is an employee at XYZ Ltd. and is in a 45% tax bracket. XYZ Ltd. has a tax rate of 27%. The company has offered Simone a 10% pay raise. Simone's current salary is $50,000. What is after-tax value of the raise to Simone? Version 1 4 A) $1,350 B) $2,250 C) $2,750 D) $5,000 14) All cash flow must be considered on an after-tax basis because A) companies want a positive cash flow. B) the value to a business must be considered. C) the investor's tax rate is irrelevant. D) decisions that appear favourable on a pre-tax basis may be unfavorable or marginally favourable on an after- tax basis. 15) Which of the following is not a separate entity for tax purposes? A) Corporation B) Trust C) Partnership D) Individual 16) The Canadian income tax system for individuals is considered A) progressive. B) regressive. C) flat. D) unfair. Version 1 5 17) What is the most significant form of taxation that affects return on investment? A) Property Taxes B) Excise Taxes C) Income Taxes D) All taxes 18) QWERTY Co. decides to give a 6% raise to its employee Jean, who is currently in the 40% tax bracket. The company is in the 27% tax bracket. What is the after-tax implication for each of the parties in this transaction? 3.6%. A) The company has a net after-tax cost of 4.38% and Jean has an after-tax income of B) Both Jean and the company have a 3% after-tax cost/benefit. C) We should only consider the pre-tax amount of 6% to each party. D) Both the company and Jean have an after-tax cost of 4.38%. 19) Explain what is meant by the statement that "tax should be treated as a ‘controllable cost'." 20) Blake holds a 5% interest-bearing debt instrument in Day Co. Day Co.'s tax rate is 27%, and Blake is in a 50% tax bracket. Required: A) Calculate the after-tax cost (as a percentage) of the debt-instrument to Day Co. B) Calculate the after-tax value (as a percentage) of Blake's interest income. Version 1 6 21) Tanner holds a 7% interest-bearing debt instrument in Eve Co. Eve Co.'s tax rate is 13%, and Tanner is in a 45% tax bracket. Required: A) Calculate the after-tax cost (as a percentage) of the debt-instrument to Eve Co. B) Calculate the after-tax value (as a percentage) of Tanner's interest income. Version 1 7 Answer Key Test name: Chap 01_25e 1) B 2) C 3) D 4) B 5) C 6) D 7) B 8) A 9) C 10) D 11) C 12) D 13) C 14) D 15) C 16) A 17) C 18) A Version 1 8 CHAPTER 2 1) The CEO at Big Co. has decided to sell a piece of capital equipment after the company's year-end to avoid paying capital gains tax this year. Which tax planning method will the CEO be using? A) Transferring income to another entity B) Shifting income from one time period to another C) Converting the nature of income from one type to another D) This is a form of tax evasion and is not allowed 2) Which of the following scenarios illustrates unacceptable tax planning? A) Property transferred between Stan and Reed (arm's-length parties) is valued at fair market value. B) Mr. A transfers his shares to his spouse, and the dividends from the shares are included in Mr. A's income. C) Faizan owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies. D) Ben transfers property to his child at a value less than fair market value. 3) The controller of Little Company Ltd. has decided to sell a piece of capital equipment after the company's year-end to avoid paying tax on capital gains this year. The controller is engaging in A) tax planning. B) tax avoidance. C) tax evasion. D) GAAR. Version 1 1 4) If Cindy invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, what is Cindy's tax rate? A) 4.8% B) 8% C) 40% D) 60% 5) Which of the following statements regarding the General Anti-Avoidance Rule (GAAR) is true? A) The purpose of GAAR is to catch tax evaders. B) When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances. C) A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes. D) Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR. 6) The three key factors of cash flow are A) the amount of money coming in, the amount of money going out, and timing. B) the amount of money coming in, the amount of money going out, and interest rates. C) the amount of money coming in, the amount of money saved, and timing. D) the amount of money coming in, the amount of money saved, and interest rates. 7) One important skill required for tax planning purposes, referred to as the 'eighth wonder of the world,' is Version 1 2 A) having a global perspective. B) respecting the time value of money. C) having perspective. D) the ability to speculate. 8) Rory has run a successful proprietorship for the past four years and has now decided to incorporate the business. Which category of tax planning has Rory applied? A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another 9) The sole shareholder of ABC Co. purchased the shares of the company in 2016 for $25,000 and has recently valued the shares at $150,000. In preparation to sell the company to an arm's-length party, the shareholder decided not to issue the usual annual dividend of $20,000. What type of tax planning is the shareholder engaging in? A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another 10) XYZ Inc. has chosen to delay the recognition of a discretionary reserve until the following year. What type of tax planning is the shareholder engaging in? Version 1 3 A) Transferring income from one entity to another B) Converting income from one type of income to another C) Shifting income from one time period to another D) Converting income from one jurisdiction to another 11) What is tax planning? A) The legal arranging of transactions to minimize the impact of taxes on cash flow B) Making sure the least amount of tax is paid C) Filing taxes in an orderly fashion D) Avoid the payment of unnecessary taxes at all costs 12) Lee decides to incorporate their business to take advantage of the reduced tax rates for small business corporations. What type of tax planning has Lee engaged in? A) Shifting income to another type B) Shifting income to another entity C) Shifting income to another time period D) This is tax avoidance because there is no business reason to incorporate 13) Tax planning requires skills to minimize taxes payable in a legal fashion. Why is this so important? A) The ability to maximize cash flow and reinvest the amounts is extremely desirable. B) Tax planning is a desirable employable skill. C) Tax planning is something that managers see as a by-product of good business. D) Tax planning requires the avoidance of taxes. Version 1 4 14) What is the general anti-avoidance rule (GAAR)? A) Avoid paying taxes at all costs. B) Non-arm's length transactions are prohibited. C) All of taxpayer's transaction amounts must be reasonable. D) Taxpayers cannot enter into transactions where the sole purpose is to reduce taxes, without any business purpose. 15) Fred decides that it is better if his corporation pays him a dividend rather than a salary. What type of tax planning is Fred using? A) Shifting income to another entity B) Shifting income to another type C) Shifting income to another time period D) Hiding income to avoid paying taxes 16) Quinn's proprietorship earned $160,000 in pre-tax profits this year. Quinn does not require personal funds from the business. Personal tax rates (federal plus provincial) in Quinn's province are: On the first $50,000 20% On the next $50,000 30% On the next $56,000 40% On the next $66,000 45% On income over $222,000 50% Version 1 5 (All rates are assumed for this question.) The combined federal and provincial rate of tax for Canadian-controlled private corporations in Quinn's province is 13% on the first $500,000 of income. Quinn has been considering incorporating the business. Required: A. Calculate the after-tax profits for the business as i) a proprietorship, and ii) a corporation. Show all calculations. B. Name the type of tax planning that Quinn would be engaging in if the company were incorporated. 17) List the three key factors of cash flow. 18) Ahmad has $10,000 to invest and wants to put the funds in a one-year investment earning an annual interest rate of 12%. Ahmad is in a 42% tax bracket. Required: a) Calculate the total value of Ahmad 's investment, after-tax, at the end of the year. b) Calculate the tax liability of the investment. Version 1 6 19) Match each of the following terms with the most accurate example. Use each example only once. TERMS: Tax evasion Tax planning Tax avoidance EXAMPLES: A. An individual is seeking a beneficial outcome, and therefore, legally arranges transactions to minimize the impact on cash flow from taxes owing. B. A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned during the year. C. Two unrelated companies take steps to become related solely for the purpose of loss utilization. Version 1 7 Answer Key Test name: Chap 01_2022-23 1) B 2) D 3) A 4) C 5) C 6) A 7) B 8) A 9) B 10) C 11) A 12) B 13) A 14) D 15) B Version 1 8 CHAPTER 3 1) Fran is a Canadian citizen. In March of this year, Fran's employer transferred Fran to the United States. Fran's spouse and child moved with Fran at that time. Fran chose not to sell the family's home, and instead, now lends it to extended family from overseas during the winter months. Fran has five weeks of vacation each summer, at which time the family returns to Canada and stay in their house. Fran did not cancel a long-standing country club membership, nor did they close the family's Canadian bank accounts. Which of the following statements is true? A) Fran is a Canadian citizen, and will therefore, automatically be considered a Canadian resident for tax purposes. B) Fran no longer resides in Canada, and will therefore, automatically be considered a non-resident of Canada. C) Fran is considered a part-time resident of Canada for the five weeks that Fran and family vacation in the country. D) If Fran is considered to have a continuing state of relationship with Canada, Fran might be a resident for tax purposes. 2) Of the following individuals, which would be considered a part-year resident of Canada for the 2022 taxation year? A) John lived in Canada all of his life prior to moving to Germany in 2022, where he was assigned to a seven-month assignment to set up the international operations for his Canadian employer. He did not sell his home on Vancouver Island, as his spouse and children remained in Canada for work and schooling reasons. B) Marie is a Swiss citizen who lived in Canada from February to October of 2022. While in Canada, Marie joined the local fitness club, gained part-time employment, and opened an account in a Canadian bank. C) Prasham is a citizen of India, where he lived his entire life prior to moving to Canada on April 30th, 2022. Upon arriving in Canada to begin his new career, he began full-time work and purchased a home. D) June moved to Canada three years ago from the United States, maintaining American citizenship. Version 1 1 3) Section 3(a) of the Income Tax Act includes which of the following? A) Income from: employment, property, and capital transactions B) Income from: employment, property, business, and capital transactions C) Income from: business, other items, and capital transactions D) Income from: employment, property, business, and other items 4) Which of the following may be exempt from Canadian withholding tax when paid to a non-resident? A) Dividends B) Interest paid to an arm's-length party C) Pension benefits D) Registered retirement income fund payments 5) Regarding taxation years, which of the following statements is TRUE? A) All corporate taxpayers must use the calendar year as their taxation year. B) The taxation year for an individual taxpayer typically ends on April 30th . C) Individual taxpayers may choose any twelve-month period as their taxation year. D) A corporation may have a taxation year less than twelve months during a year the corporation is formed, dissolved, or is granted a change in its year-end. 6) With regards to the taxation year, which of the following situations is correct? Version 1 2 A) An individual taxpayer's taxation year ends on April 30th . B) A corporation's taxation year is its fiscal period not exceeding 52 weeks. C) Corporations must use December 31s t as the taxation year end. D) Taxation year ends must be considered for tax planning purposes within business structures. 7) The category of ‘Other Income' includes A) employment income. B) capital gains and losses. C) lottery winnings. D) pension benefits. 8) During the year Mackenzie had employment income of $40,000, property income of $3,000, a business loss of $22,000, an allowable business investment loss of $5,000, income from an RRSP withdrawal of $2,000, and a capital loss of $40,000 on the sale of shares in a public corporation. How much is Mackenzie's net income for tax purposes in accordance with Section 3 of the Income Tax Act? A) $0 B) $18,000 C) $20,500 D) $23,000 9) During the year Marija had employment income of $50,000, property income of $5,000, a business loss of $12,000, income from an RRSP withdrawal of $3,000, and a capital loss of $30,000 on the sale of shares in a small business corporation. How much is Marija's net income for tax purposes in accordance with Section 3 of the Income Tax Act? Version 1 3 A) $0 B) $16,000 C) $31,000 D) $46,000 10) During the year Jungkook had employment income of $30,000, property income of $1,000, a business loss of $2,000, income from an RRSP withdrawal of $2,000, and a capital gain of $30,000 on the sale of shares in a small business corporation. How much is Jungkook's net income for tax purposes in accordance with Section 3 of the Income Tax Act? A) $1,000 B) $31,000 C) $46,000 D) $61,000 11) Sami moved to Europe on August 15th, 2022, to open and incorporate a café in a small European village. Prior to moving, Sami’s only income for 2022 was a salary of $55,000. Sami did not own any assets prior to moving. Sami severed all other ties to Canada prior to moving. What is the residency status for Sami in 2022 for Canadian tax purposes? A) Sami is a full-time resident for all of 2022. B) Sami is a sojourner in 2022. C) Sami is a non-resident for all of 2022. D) Sami is a part-year resident in 2022. 12) With respect to residency of corporations, which of the following is correct? Version 1 4 A) The determination of residency for corporations is usually more complex than determining residency for individuals. B) Corporations that are incorporated in Canada are considered residents of Canada regardless of where the controlling shareholders reside. C) Corporations that are incorporated in Canada are considered residents of Canada only if the controlling shareholders reside in Canada. D) Corporations that are incorporated in Canada will be classified as non-resident if the controlling shareholders reside in a foreign jurisdiction. 13) When there is a conflict between the Income Tax Act and international tax treaties, what must be attended to first? A) The Income Tax Act B) International tax treaties C) Whichever appears to be fairer to the taxpayer D) Provincial/territorial income tax law 14) A taxpayer operates a business as a member of a partnership. How will income earned in the partnership be taxed? A) The partnership will be taxed on the income and each partner will be taxed on any salary taken. B) Each partner will be taxed on the share of net income according to the partnership agreement. C) The partnership will be taxed on net profit only. D) Each partner will be taxed on withdrawals taken during the year. Version 1 5 15) Aaliyah, along with her spouse and children, have lived in Canada all their lives. In April of the current year, Aaliyah receives a job offer which requires her to move to the US. She decides to move on April 10th but her spouse and children remain in Canada until June 27th. They move to the US on June 27th and it takes until July 15 to find a suitable home for them in the U.S. When does Aaliyah's residency in Canada end? A) April 10, the day Aaliyah moves out of Canada B) June 27th , when the family joins Aaliyah C) July 15th when the family finds a new home in the U.S. D) They are all deemed residents for the entire year. 16) ABC Co. was incorporated in Canada in 2015, however, it never did business in Canada. It had a permanent establishment in the US only. How will ABC be taxed? paid A) Taxed in Canada on its Canadian income only B) Taxed in the US only since that is where the permanent establishment is C) Taxed in both Canada and the US based on share of income D) Taxed in Canada on its world income and given a foreign tax credit for any US taxes 17) A taxpayer has an allowable capital loss of $5,000. How will it be used? A) It may be deducted against all types of income. B) The loss may be carried back 3 years or forward indefinitely and used against taxable capital gains. C) The loss may be carried back 3 years or forward 10 years against any income. D) The loss may be carried back 3 years or forward 20 years against any taxable capital gains Version 1 6 18) Fouad Jacobs moved to Canada on April 30th, 2022. Fouad was born and raised in Beirut and moved to Canada to start a career in architecture. Fouad earned $45,000 from May to December in 2022 from the architecture firm. Fouad earned $10,000 of employment income from January to March in 2022 while still living in Beirut, and also received $1,000 in dividends in March 2022 and $1,000 in dividends in September 2022 from stocks in a European corporation. Fouad's parents e-transferred $2,000 as a gift for Fouad's 25th birthday in August 2022. Required: a) Determine Fouad's residency status for Canadian tax purposes for 2022. b) How much income is Fouad required to report for the 2022 tax year? c) Explain why any items have been excluded from your calculations. 19) Answer the following questions which pertain to the administration of the Canadian Income Tax system. 1. Individuals (who do not carry on a business) must file an income tax return for the most recent calendar year by which date? 2. Individuals who carry on an unincorporated business must file an income tax return for the most recent calendar year by which date? 3. Who is responsible for the filing of a deceased taxpayer's tax return? 4. What is the taxation year for an inter-vivos trust? 5. What type of trust is permitted to choose a non-calendar year for tax purposes? 6. A trust must file an income tax return within how many days of its taxation year? 7. What is the taxation year for a corporation (other than a professional corporation)? 8. A corporation is required to file an income tax return within how many months of its taxation year-end? Version 1 7 20) The following list contains Division C deductions: a. Charitable donations b. Employee stock option deductions c. Unused losses of other years d. Dividends from Canadian corporations e. Capital gain deduction on certain property f. Dividends from foreign affiliates Required: Sort the deductions into the appropriate columns below. (Answers may be used more than once if applicable.) Individual Corporation Net Income for Tax Purposes Net Income for Tax Purposes Less: Less: = Taxable Income = Taxable Income Version 1 8 Answer Key Test name: Chap 03_2022-23 1) D 2) C 3) D 4) B 5) D 6) D 7) D 8) B 9) C 10) C 11) D 12) B 13) B 14) B 15) B 16) D 17) B Version 1 9 CHAPTER 4 1) Ali was provided with a company car to drive from March 1st to December 31st of 2022. The car cost the company $22,000, plus GST (5%) and PST (6%). Ali drove the car a total of 15,000 kilometers during the year. 11,000 kilometers were for business purposes and the other 4,000 kilometers were for personal use. Ali's employer paid for all of the vehicle's operating costs which totaled $1,100. What is the minimum amount that Ali will report in total taxable benefits as a result of the above information? (Round your answer to the nearest dollar and apply tax rules for 2022.) A) $1,758 B) $2,332 C) $6,044 D) $7,021 2) Which of the following is one of the tests used by the courts to determine a taxpayer's status as an employee or a self-employed contractor? A) Chance of lawsuit test B) Employer test C) Ownership of tools test D) Contractor test 3) Piper works for Moon Co., which is a public corporation. Piper was granted a stock option in three years ago to purchase shares at $15 per share from the company when the fair market value was $17 per share. Piper exercised the option this year and purchased 500 shares. The fair market value at that time was $21 per share. What is Piper's tax treatment of this option? A) $1,000 taxable benefit and no security option deduction B) $1,000 taxable benefit and a 50% security option deduction C) $3,000 taxable benefit and no security option deduction D) $3,000 taxable benefit and a 50% security option deduction Version 1 1 4) Which of the following, when provided by an employer, is a tax-deferred or tax-free benefit for the employee? A) Premiums for private health care plans providing extended health coverage beyond a public plan B) Financial counselling services not connected to re-employment or retirement C) Group term life insurance policy D) A $200 cash gift for the employee's wedding 5) Keegan received $25,000 by way of an employee loan at a rate of 1% interest when the CRA's prescribed rate of interest was 3%. Keegan is in a 40% income tax bracket. What is the actual cost (rate) of Keegan's loan? (Assume there are no fluctuations in the prescribed rate of interest.) A) 1% B) 1.2% C) 1.8% D) 2% 6) The following pertains to the 2022 tax year. Minju is employed as a salesperson and earned a salary of $50,000 and commission income totaling $5,500. Minju is required to pay for numerous employment expenses each year which are identified on the annual T2200. Minju paid $6,200 for advertising and promotion during the year. Minju uses a personal vehicle for work purposes. The undepreciated capital cost of the vehicle was $25,000 at the beginning of the year and $320 of interest was paid per month on a loan for the car. Minju drove the car a total of 20,000 kilometres during the year. 8,000 of these were for work purposes. How much is Minju's total salesperson deduction for the year? Version 1 2 A) $9,960 B) $10,057 C) $16,600 D) $17,540 7) Alex works exclusively from home as an employed salesperson for SET Co. During the year, Alex earned $21,000 from SET Co. Alex's office occupies 8% of the home's square footage. The following costs were incurred for the entire home during the year: property taxes $3,000, insurance $1,500, utilities $2,400, and mortgage interest $6,000. How much can Alex deduct for the year? A) $552 B) $1,032 C) $6,900 D) $12,900 8) An individual has the option to receive a $1,000 annual bonus and invest the after-tax amount for 25 years or receive $1,000 per annum in a registered pension plan for the next 25 years. Assuming a constant rate of return of 8% and a tax rate of 40%, what will be the total after-tax difference between the two plans? (Calculate for either as ordinary annuity) (Round intermediate calculations to nearest whole dollar.) A) The RPP will yield $16,005 more than the annual bonus. B) The annual bonus will yield $16,005 more than the RPP. C) The RPP will yield $29,242 more than the annual bonus. D) The annual bonus will yield $29,242 more than the RPP. Version 1 3 9) Sven is choosing between an annual $1,000 bonus from his employer to be invested at 8% over 20 years or an annual $1,000 RPP from his employer also to be invested at 8% over 20 years. Which of the following statements is accurate? (Sven's tax rate will remain constant at 45% and all funds will be treated as ordinary annuities.) (Round intermediate calculations to nearest whole dollar.) A) Sven's accumulated funds will be greater if he selects the bonus. B) Sven's accumulated funds will be the same regardless of which option he chooses. C) Sven's accumulated funds will be greater if he selects the RPP. D) If Sven chooses the RPP, the funds will compound at a rate of 4.4%. 10) The following pertains to the 2022 tax year. Cleo is employed by ABC Inc., a public corporation. You are provided with the following information: Cleo's salary for the year was $90,000, a cash bonus of $8,000 was announced on December 3rd to be paid to Cleo on January 10th, 2023, RPP contributions of $2,000 were made by both Cleo and ABC, Cleo exercised a stock option during the year when the FMV was $5 per share (granted at $4 per share when the FMV was $3), and a $20 meal allowance was provided once a month due to the three hours of overtime that was required once a month immediately following eight hours of regular work. Which of the following is correct? A) Cleo will have a $4,000 RPP deduction from employment income. B) Cleo's meal allowance is a non-taxable benefit. C) The cash bonus is taxable in 2022. D) The stock option was granted at a price greater than the fair market value and is therefore not taxable until sold. 11) An employee received the following from their employer during a taxation year: 1) a $55,000 salary, 2) a watch valued at $200 as a birthday gift, and 3) a $15,000 low-interest loan with a 1% interest rate when the CRA's prescribed rate during the year was 3%. What is the employee's net income for tax purposes? Version 1 4 A) $55,000 B) $55,300 C) $55,500 D) $55,750 12) Z Co. declares a bonus to be paid to employee Marcia during the fiscal year ended December 31, 2022. The bonus will be paid on June 30, 2023. When will Marcia claim the income? A) Marcia will claim the income in 2022 when it is earned. B) Marcia will claim the income in 2023 when it is received. C) Marcia will claim the income in 2024, the year after it is received. D) Marcia does not have to claim the income. 13) Chris does work for several clients. Chris pays for the tools used to perform assigned tasks and is responsible for scheduling the work and ensuring tasks are done on time. If Chris is late, the client invoices are reduced by 15%. How would Chris report this income? A) This is employment income, and the clients must issue T4 slips. B) Chris is an independent contractor, and this is business income. C) Chris should choose the method which will benefit him the most - employee or independent contractor. D) The clients should choose the method which will benefit them the most - employee or independent contractor. 14) During the year, Amr received the following noncash gifts from his employer: A painting worth $400 and a watch worth $250. How will these gifts be taxed? Version 1 5 A) These gifts will not be taxed at all. B) The entire $650 will be reported on Amr's return. C) As noncash gifts, there is a $500 exemption and the remaining $150 will be taxed. D) The painting will not be taxed but the watch will. 15) ABC Co. provides a generous employee benefits package that includes a life insurance policy and a health and dental policy covered by a private health service plan. How will an employee be taxed if they use the benefits? A) The employee will be taxed on life insurance and health and dental benefits. B) The benefits package is not taxable since the employee would not receive funds. C) The employee will be taxed on the value of benefits used. D) The employee will be taxed on the life insurance premium but not the health benefits. 16) A taxpayer works in Windsor and travels throughout the city during their 8-hour day. They keep their receipts and deduct the value of meals because they heard that 50% of meal expense is allowed. When CRA audits this taxpayer, will the deduction be denied? A) No, since the taxpayer has receipts and was working for an employer. B) Yes, since the taxpayer was not away from the municipality for more than 12 hours. C) No, since the taxpayer deducted 50% of the costs incurred. D) No, as long as the taxpayer has other travel expenses. Version 1 6 17) Kelly is a high school history teacher and a national expert in ancient ruins. In July of 2023, Kelly was hired by the local university to teach an elective course in ancient Mayan history. Kelly then conducted a field trip of the ruins in Guatemala with some of the local students from July 30th to August 10th. Kelly recruited another local expert to teach the last class that fell during the dates of the trip. Kelly earned $55,000 from the teaching job and negotiated a contract price of $5,000 to teach the university elective and $7,000 to conduct the tour. The university provided Kelly with office space during the month of July. Kelly's personal laptop and collection of books were used to prepare the lectures and the tour material. Kelly was paid on July 31st and August 31st and was not provided any additional benefits or insurance by the university. Required: Determine the tax treatment of Kelly's income and expenses for 2023. Apply the four tests within the guidelines used by the courts to determine whether a taxpayer is an employee or an independent contractor. 18) Alistair was employed by ABC Ltd. (a Canadian-controlled private corporation) from January to December of 2023. Alistair earned a gross salary of $72,000. The following deductions were made during the year: Income tax $20,000 CPP & EI $4,453 Registered Pension Plan contribution $3,000 The following amounts were paid by ABC Ltd. in 2023 on Alistair's behalf: CPP & EI $4,834 Registered Pension Plan $3,000 Group life insurance $1,200 Version 1 7 Additional information: On January 15, 2021, Alistair was given an option to purchase 500 shares of ABC for $5.00 per share when the market value was $5.50. Alistair exercised the option on June 1, 2022, when the shares were valued at $7.00 and sold the shares on March 17, 2023 when the market value was $8.00 per share. Alistair pays $50 a month for a personal cell phone. Alistair purchased $300 worth of merchandise (at cost) from ABC Ltd. during the year. The retail value of the merchandise was $500. Required: A) Calculate Alistair's minimum net income for tax purposes from employment for 2023, in accordance with Section 3 of the Income Tax Act. B) Calculate Alistair's capital gain from the sale of the stock option. C) Identify items that have been omitted in your calculations in A and B. (Alistair minimizes the tax liability whenever possible.) D) Will Alistair be able to deduct the stock option deduction to arrive at taxable income? Why or why not? 19) Wyatt Harris worked for RET Co. from March 1st to December 31st during the year. Wyatt earned a monthly base salary of $4,000, plus a 1% commission on sales. During the year, Wyatt's sales totaled $800,000. RET required Wyatt to pay for some employment expenses. Wyatt travelled out of the city most days to sell to customers in surrounding towns and received a monthly allowance of $500 to cover travel costs (which has been accurately recognized as ‘unreasonable'). Wyatt and RET each contributed $2,000 to Wyatt's registered pension plan during the year. Wyatt provided you with the following receipts for the year: Gasoline receipts related only to employment $5,200 Meals with clients 3,200 Purchase of a laptop 1,000 Advertising costs 800 Version 1 8 Phone call charges for business 1,200 Consumable supplies for work 500 Membership to a local golf club 8,000 Wyatt purchased a new vehicle during the year to use for employment at RET. 12,000 of the 25,000 km driven during the year were for business purposes. The vehicle cost Wyatt $39,000 plus an HST of 11%. Work-related interest payments on the car loan totaled $200 per month. Required: Calculate Wyatt's minimum employment net income for tax purposes for the year in accordance with Section 3 of the Income Tax Act. (Round intermediate and final answers to nearest whole dollar.) 20) The following case pertains to the 2022 tax year. Angelo is employed fulltime as the Head of Human Resources at State Fund Corporation ("State Fund"), a large public corporation with its head office located in Toronto. The following information is provided regarding the taxation year: 1) Salary $275,000 Payroll deductions (paid by Angelo): Employment Insurance premiums $953 Canada Pension Plan contributions 3,500 Registered pension plan contributions 9,000 Income tax 50,400 2) Version 1 9 State Fund paid for the following amounts on Angelo’s behalf in 2021: a. Canada Pension Plan contributions $3,500 b. Employment Insurance premiums 1,334 c. Registered pension plan contributions 9,000 d. Gym membership 500 e. Group term life insurance premium 700 f. Extended health and dental premium 600 Group sickness and accident insurance 400 3) Angelo is provided with a company car and State Fund pays the $1,000 per month lease cost. The company also pays for the annual operating costs of $3,500. Angelo drove the car for 20,000km during the year, and the travel log shows that about 30% of the total km related to performing employment duties. 4) Angelo also participates in State Fund's employee stock option plan, and three years ago was granted the option to acquire shares for $45 per share. At the time, the shares were trading for $39 per share. Angelo exercised the option in January of this year and acquired 1,000 shares (the shares were trading for $50 per share at that time). In December of this year, Angelo sold 800 shares for $52 per share. 5) State Fund allows employees to work from home two days a week. Angelo maintains a home office and allocates 10% of the housing costs (property tax, internet, utilities, and home insurance) to this office. In 2021, 10% of the total costs were $2,400. Angelo also purchased a new computer this year for $3,000 to be used exclusively for working from home. The nature of Angelo's work (HR) does not require meeting with clients of State Fund. Required: Calculate Angelo's income from employment for this year. You must provide a brief explanation for anything you have intentionally omitted from the calculation. No marks will be given for unexplained omissions. Version 1 10 21) The following case pertains to the 2022 tax year. Izumi Tanaka is employed by TSK Inc., a Canadian-controlled private corporation. The following information has been provided to you: 1) Izumi earned $90,000 from TSK. 2) A cash bonus of $8,000 was announced on December 3rd, to be paid to Izumi on January 10th of the following year. 3) Izumi was provided with a company car for the entire year. The cost of the car (including taxes) was $40,000. All operating costs were paid by TSK. Izumi drove the car 21,000 kilometers during the year. 10,000 kilometers were for personal use. 4) Izumi and TSK each contributed $2,000 towards Izumi's registered pension plan. 5) Izumi was presented with a watch from TSK, valued at $200, as a birthday gift. 6) In January, Izumi was granted a stock option to purchase 2000 shares in TSK at a cost of $8.00 per share. At that time, the fair market value per share was $9.00. Izumi exercised the option in February when the market value had risen to $9.50 per share. 7) TSK provided Izumi with a $20 meal allowance once a month due to the two hours of overtime that was required to be worked once a month immediately following eight hours of regular work. 8) An annual union due of $850 was deducted from Izumi's pay during the year. Required: A) Calculate Izumi's minimum employment income for tax purposes in accordance with Section 3 of the Income Tax Act. B) Identify any items that have been omitted in your calculations, and briefly explain why. (Round intermediate calculations to nearest whole dollar.) Version 1 11 Answer Key Test name: Chap 04_2022-23 1) A 2) C 3) C 4) A 5) C 6) A 7) A 8) A 9) C 10) B 11) B 12) B 13) B 14) C 15) D 16) B Version 1 12 CHAPTER 5 1) Blue Co. was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its annual tax return. Which of the following general limitations to business profit determination best describes the reason for the CRA's decision? A) Exempt-income test B) Personal-expense test C) Insurance proceeds exemption D) Reserve test 2) Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act? A) Maintenance fees on a yacht at Yellow Yacht Leasing Inc. B) Legal and accounting fees incurred during the construction of a building C) Advertising costs in a non-Canadian newspaper directed at an American market D) Workspace in a home used as a taxpayer's principal place of business 3) Sari ran a proprietorship that generated $75,000 in profits during the year. Included in these profits were: a) $10,000 - amortization expense; b) $5,000 - reasonable bad debt expense; c) $55,000 - cost of goods sold (closing inventory at market value); and $8,000 - meals and entertainment with clients. The business' capital cost allowance has been accurately calculated at $8,500 for the year. How much is Sari's business net income for tax purposes? A) $73,500 B) $75,000 C) $80,500 D) $89,000 Version 1 1 4) Hansa invested in a piece of land seven years ago when real estate prices were rising in his area and land values were expected to double within five years. The land remained vacant and was only used in 2018 when Hansa was approached to rent the land for two weeks for a local carnival for a fee of $1,000. Hansa has just been offered a significant sum of money for the land in response to an advertisement in a local newspaper. Based on Hansa's primary intention for the land, the gain on the sale would be classified as A) business income. B) property income. C) a capital gain. D) exempt income. 5) A taxpayer recognized a $40,000 loss during the year from a small farm (which was a secondary activity to a full-time job as a dentist). What is the maximum deduction that would be allowed from the farm loss for the year? A) $0 B) $17,500 C) $21,250 D) $40,000 6) Employers can deduct unpaid remuneration for tax purposes in a taxation year A) if paid within 180 days of the taxation year. B) if paid within 250 days of the taxation year. C) if paid within 365 days of the taxation year. D) if paid within two years of the taxation year. 7) Which of the following is one example of a qualified expenditure for scientific research and experimental development? Version 1 2 A) Engineering and design work B) Market research and sales promotion C) Quality control or routine testing D) Humanities related research 8) ABC Co. is a retail outlet. Recently ABC Co. sold its shares in Public Corp. for $10,000. The shares originally cost ABC Co. $7,000. For tax purposes, this is an example of A) capital income. B) business income. C) other income. D) property income. 9) A contractor constructed a house for resale which was sold immediately. For tax purposes, this is an example of A) capital income. B) business income. C) other income. D) property income. 10) LM Truck Dealer Ltd. sold a fleet of new trucks to XYZ Mining Inc. For tax purposes, this is an example of A) capital income. B) business income. C) other income. D) property income. Version 1 3 11) Emory Co. recognized business profits of $100,000 during the year prior to deducting a reserve for doubtful accounts of $45,000. Emory deducted a reserve for its uncollectible debts of $35,000 in the previous year. Emory is forecasting profits of $200,000 and uncollectible debts of $50,000 next year. If Emory claims a reserve this year, what is the company's net income for tax purposes? A) $20,000 B) $90,000 C) $100,000 D) $110,000 12) A new small business is preparing its first tax statement and is uncertain as to how to report the closing inventory for this year and the beginning inventory for the following year. Which of the following would be a correct treatment of the inventory values? A) The closing inventory is valued at lower of cost or market and the beginning inventory is valued at market value. B) The closing inventory is valued at market value and the beginning inventory is valued at the lower of cost or market value. C) The closing inventory is valued at lower of cost or market, or all items at market value, and the beginning inventory is valued in the same manner chosen for the closing inventory. D) The closing inventory is calculated on a LIFO basis. 13) ABC Corporation has accounts receivable of $145,000 in 2022. It has also determined that the allowance for doubtful accounts is $4,000 for the year (a reasonable amount). During 2023, it records the following in the books: Write-off of accounts receivable $2,500 and reinstatement of accounts previously written off $3,000. For the year ended 2023, it determines that the allowance for doubtful accounts should be $5,000 (a reasonable amount). What is the deduction of the reserve for doubtful debts in 2023 for tax purposes? Version 1 4 A) $4,500 B) $500 C) $2,500 D) Not allowed 14) Smith and company completed landscaping on its grounds in 2023. The invoice total was $11,000 of which $7,500 was paid during the year. What is the deduction for tax purposes? A) $11,000 B) None, this is part of the cost of land. C) $7,500 D) The company would deduct CCA as part of the building. 15) Jones Company has declared and accrued management bonuses for the year ended December 31, 2022. The bonus amounts of $50,000 are scheduled to be paid on June 30, 2023. How are these bonuses to be deducted for tax purposes? A) Deduct the amounts in 2023. B) Deduct the amounts in 2024. C) Deduct the amounts in 2022. D) Bonuses cannot be deducted. 16) Kind Corporation pays its employees for using their own vehicles while conducting company business. It paid an employee $.59 per km and they drove 10,000 km in 2022. The allowance is tax-free to the employee. How much is actually deductible by the company in that year? Version 1 5 A) $5,900 B) $6,100 C) $3,050 D) $5,800 17) Pardeep uses his own vehicle for his sole proprietorship. He borrowed money to purchase the vehicle in 2021. The interest he paid on the amount owing for 2023 was $5,700. He drove the vehicle a total of 10,000 km of which 7,200 km were related to employment. How much can he deduct in 2023? A) $3,600 B) $4,400 C) $4,104 D) $2,592 18) List the six general limitations to business profit determination and give an example for three of the items. 19) Jaylen Abbas runs a small proprietorship. You have been provided with the following financial information pertaining to his business: Sales $150,000 Cost of goods sold* 80,000 Advertising in a local paper 1,000 Advertising in a U.S. newspaper directed at Canadians living in the U.S. 2,000 Meals and entertainment 10,000 Property taxes on a vacant piece of land (which earns no income) adjacent to the business 2,500 Version 1 6 Golf course fees for Jaylen 1,500 Cost of one convention held on a cruise ship in the Mediterranean Sea sponsored by a Canadian association. 2,000 (*All closing inventory is valued at market value.) Required: A) Calculate the net income for tax purposes for Jaylen's proprietorship. B) Explain why any items have been omitted. C) Briefly discuss how your answer in A) would change if Jaylen had valued the inventory at cost. 20) The following scenario pertains to the 2022 tax year. Karok Sanders has provided you with the following information: • The financial statements for Karok's dental practice reported a net income of $120,000. • Amortization of $15,000 is reported in the expenses. • Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements. Karok conducted scientific research and experimental development (SR&ED) during the year. $40,000 of the expenditures are qualified SR&ED activities. These costs are currently reported as capital items on the balance sheet. • Karok has a small hobby farm in the country, which recognized a loss of $9,000 during the year. Required: Calculate Karok's minimum net income for tax purposes. Version 1 7 21) Waves Ltd. is a Canadian-controlled private corporation, operating a small gift store in Kelowna. The company has a December 31st year-end. Waves' financial statements reported net income before taxes of $220,000 in Year 1. Financial information relating to Year 1 is as follows: Land adjacent to the gift shop was purchased with a $75,000 bank loan during the year and is used as an outdoor sales area. Interest expense on the loan for the year was $9,600, and the fee to obtain the loan was $1,000. Both the interest and the loan fees were expensed by Waves in Year 1. The company hired a contractor to landscape the land. The $5,000 bill for the landscaping was paid in full during the year and capitalized on Waves' Balance Sheet. During the year, a new display case worth $2,000 was purchased and expensed on the books. Amortization expense of $21,000 was deducted during the year. Total CCA (following any adjustments) for the year was $16,000 and is not reflected in the financial statements. The following were also expensed during the year: Meals with clients $1,400.00 Lawn mowing service $1,000.00 Golf dues for employees $5,000.00 A reasonable reserve for bad debt $2,000.00 On December 30th, Waves' president announced a bonus to be paid to the company's key employee in the amount of $5,000, which was expensed on the books that day. The employee will receive the bonus in Year 2 in equal payments of $2,500, to be issued on January 30th and July 30th. Required: Determine Waves Ltd.'s net income for tax purposes for Year 1. Version 1 8 Version 1 9 Answer Key Test name: Chap 05_2022-23 1) A 2) B 3) C 4) A 5) B 6) A 7) A 8) A 9) B 10) B 11) B 12) C 13) B 14) C 15) A 16) D 17) D Version 1 10 CHAPTER 6 1) X Co. purchased a piece of Class 8 machinery in June 2020 for $5,000. In 2022 the machine was sold for proceeds of $2,000 and there were no other purchases or disposals during the year. The undepreciated capital cost (UCC) in the Class 8 pool was $5,500 at the beginning of 2022. What is the UCC of this class at the end of 2022? A) $700 B) $2,800 C) $3,500 D) $4,800 2) Which of the following statements regarding recapture is true? A) Recapture only occurs when there is a positive balance in a class pool and that pool of assets is empty. B) Recapture may be deducted from business income. C) Recapture occurs when there is a positive balance in a class pool, even if there are assets remaining in that class pool. D) Recapture occurs when there is a negative balance in a class pool, even if there are assets remaining in that class pool. 3) R Co. was incorporated in 2022. Incorporation costs were $3,500. How much CCA is allowed in 2022 and how much operating expense is allowed in the year? (Round final answers to the nearest whole dollar.) A) $38, $3,000 B) $25, $3,000 C) $175, $0 D) $225, $500 Version 1 1 4) Which of the following cases is disqualified for capital cost allowance in the current year? A) A Canadian-controlled private corporation purchased and installed a new engine in a semi-trailer that is used to haul produce to Mexico. B) An employee owns and uses an automobile in the course of their employment duties during the month of December. Their pay for December is not received until January of the following year. C) A piece of equipment was purchased by a public company during the year on a 5-year financing term. D) A building under construction is scheduled for completion in eighteen months. The building will be used as a production facility. 5) A piece of equipment that belonged to a construction company was sold in June 2021. The proceeds from the sale generated recapture. A new piece of equipment was purchased in January of 2022. The company's fiscal year-end is December 31st. The CEO has heard about deferred recapture. Which of the following is correct? A) The recapture on the disposition may be deferred as the new equipment was acquired within 12 months. B) The recapture on the disposition may be deferred as the disposition was voluntary and the property qualifies. C) The recapture on the disposition may not be deferred as the disposition was voluntary and the property does not qualify. D) Recapture on dispositions can never be deferred. 6) In 2021, a storage facility was destroyed in a fire. The undepreciated capital cost (UCC) of the building at the end of 2020 was $47,000, and the original cost was $55,000. Insurance proceeds of $50,000 were received for the market value in 2021. Pursuant to S.13(4), the taxpayer elected to defer the recapture. A new building was built in 2022 at a cost of $60,000. How much is the amended recapture for 2021 following the replacement in 2022? Version 1 2 A) $0 B) $3,000 C) $5,000 D) $13,000 7) Z Ltd. was incorporated on January 1, 2022. The incorporation costs were $4,500. Z then purchased W Co. The assets of W Co. included $80,000 of equipment, goodwill of $50,000, and a customer list valued at $30,000. Z's year-end is December 31. The company maximizes its allowable deductions. How much is Z's Class 14.1 undepreciated capital cost (UCC) at the end of 2022? (rounded) A) $75,387 B) $78,163 C) $77,425 D) $79,463 8) A Co. (a public corporation) leased an office and paid $20,000 for leasehold improvements in January of this year. This cost includes drywall, new carpets, and all the new lighting fixtures. The term of the lease is 2 years, plus an option to renew for 2 more years. What is the maximum CCA that A Co. will be allowed to deduct this year? A) $4,000 B) $5,000 C) $6,000 D) $7,500 9) X Co. (a public corporation) purchased a Class 8 photocopier in 2020 for $2,500. The copier needed replacing in 2022, and a new Class 8 machine costing $2,800 was purchased. The old copier was sold for $300 in parts. What is the most beneficial impact on income from this 2022 transaction? (X Co. has always claimed the maximum CCA allowed.) Version 1 3 A) $780 B) $1,030 C) $1,940 D) $2,140 10) Globe Inc. (a public corporation) had a Class 10 undepreciated capital cost (UCC) balance of $12,000 at the end of 2021. The only asset in the pool (a small pickup truck) was sold on December 20th of 2022 for $5,000. On the same day, Globe purchased a new truck for $8,000. How much CCA can Globe claim in 2022? (The maximum CCA is always claimed by Globe Inc.) A) $1,350 B) $3,600 C) $4,500 D) $4,950 11) MN Co. (a public corporation) had a Class 8 UCC balance of $3,500 at the end of Year 1. The company sold its only Class 8 asset on December 31st, Year 2, for $3,000 and purchased a new Class 8 asset the same day for $1,000. MN Co. has a December 31st year-end. Which of the following is correct? A) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, caused an increase in MN's Year 2 NITP. B) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, caused a decrease in MN's Year 2 NITP. C) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, had no impact on MN's Year 2 NITP. D) Purchasing the $1,000 asset in Year 2, rather than waiting until Year 3, resulted in recapture. Version 1 4 12) T Ltd. (a public corporation) purchased a Class 53 asset for $50,000 in 2022. The undepreciated capital cost (UCC) of the class was $20,000 at the end of 2021. T Ltd. will apply accelerated CCA. How much is the UCC at the end of 2022? A) $0 B) $10,000 C) $35,000 D) $60,000 13) On what assets may a company claim capital cost allowance (CCA)? A) Any depreciable assets used to earn business income B) All assets including land and building C) All long-term assets except land and building D) Only corporations may claim CCA 14) Z Co. (a public corporation) claims the maximum capital cost allowance (CCA) allowed each year. It purchased a new passenger vehicle in 2022 at a cost of $48,000. What is the maximum CCA Z Co. can claim? (Ignore GST/HST implications.) A) $14,400 B) $21,600 C) $10,200 D) $15,300 15) During the year, X Co. sold depreciable property (the last asset in the Class) for $7,000 and experienced a loss of $3,000 for accounting purposes. Before the sale, the undepreciated capital cost (UCC) of the Class was $10,000. How will that loss be reported for tax purposes? Version 1 5 A) Allowable capital loss of $1,500 B) Terminal loss of $1,500, claimed against business income C) Terminal loss of $3,000 claimed against business income D) Capital loss of $3,000 claimed against taxable capital gains 16) What classes are the exception to declining balance method of calculating capital cost allowance (CCA)? A) No exceptions B) Class 13 only C) Class 14 only D) Class 13 and 14 17) Y Co. sold a building and some equipment during the year and will experience recapture on all assets sold. To what extent will it be able to defer the recapture to a future year? A) It cannot defer recapture. B) It can defer recapture by replacing the assets with assets used for a similar purpose within 24 months of the end of the taxation year of the disposition. C) It can defer recapture by replacing the assets within 12 months of the end of the taxation year of the disposition. D) It can defer the recapture on the building only by purchasing a replacement building within 12 months of the end of the taxation year of the disposition. 18) R Co. (a public corporation) began business on October 1, Year 1. The company’s yearend is December 31st. R Co. purchased a Class 1 (4%) asset on November 1, Year 1 for $100,000. How much is the maximum CCA that R Co. can claim in Year 1? (Rounded) Version 1 6 A) $1,003 B) $1,512 C) $4,000 D) $6,000 19) J Co. (a Canadian-controlled private corporation) had a Class 8 UCC balance of $10,000 at the end of 2021. In 2022, J Co. purchased a Class 8 asset for $50,000 to be used by the business immediately. What is J Co.’s maximum CCA for 2022? A) $12,000 B) $17,000 C) $52,000 D) $60,000 20) The assets and UCC balances for K Ltd. (a public corporation) are listed below: Asset UCC Balance, End of 2021 Class 1 (4%) building purchased in 2010 $100,000 Class 10 Delivery van 15,000 Class 8 Furniture and office equipment 30,000 Separate Class 8 Photocopier purchased in 2020 2,000 Class 44 Patent (purchased in 2019) 10,000 Version 1 7 The following transactions took place in 2022: a. K Ltd. purchased $2,000 worth of small tools (each costing under $500). b. The delivery van was sold for $12,000. The original cost was $20,000. A second-hand van was purchased in the year for $16,000. c. $15,000 was paid for an air conditioning system in the building, which was added to the cost of the standard Class 1 pool. d. K Ltd. sold the photocopier for $1,500 in the year and will replace it in January 2023 with a second-hand model valued at $1,700. e. The business acquired a Class 14 franchise on March 1st of 2022 for $55,000. The franchise has a limited legal life of 20 years. (Ignore leap year effects.) Required: A) Calculate the following: 1) The total CCA that K Ltd. will be able to claim in 2022. 2) Any recapture and/or terminal loss that occurred during the year. B) What would the tax effect have been for the original photocopier if K Ltd. had purchased the new photocopier during 2022? 21) WKL Ltd. is a public corporation operating a land-development business in Kelowna, BC. In June 2022, the company acquired a license to manufacture prefabricated homes and began operations immediately. Financial information for the 2022 taxation year is outlined below: WKL's profit before income taxes for the year ended November 30, 2021, was $245,000, as follows: Income from land development and prefabricated home manufacturing $248,000 Loss of sale of properties (3,000) Version 1 8 $245,000 The loss on sale of property resulted from two transactions. On October 1, 2022, WKL sold all of its shares of Q Ltd., a 100% subsidiary, for $100,000. (The shares were acquired seven years ago for $80,000.) Also, during the year, WKL sold some of its vehicles for $25,000. The vehicles originally cost $50,000 and had a book value of $48,000 at the time of sale. New vehicles were obtained under a lease arrangement. The 2021 corporate tax return shows the following ending UCC balances: Class Undepreciated capital cost Class 8 $30,000 Class 10 120,000 Class 13 45,000 Class 14.1 2,100 WKL occupies leased premises under a seven-year lease agreement that began three years ago. At the time, WKL spent $60,000 to improve the premises. The lease agreement gives WKL the option to renew the lease for two three-year periods. WKL began manufacturing prefabricated homes on June 1, 2022. At that time, it acquired the following: License: right to manufacture for 10 years $90,000 Manufacturing equipment (Class 53) 105,000 Trucks (Class 10) 60,000 Accounting amortization in 2022 amounted to $60,000. WKL normally acquires raw land, which it then develops into building lots for resale to individuals or housing contractors. In 2022, it sold part of its undeveloped land inventory to another developer for $400,000. The sale realized a profit of $80,000, which is included in the land-development income above. The proceeds consisted of $40,000 in cash, with the balance payable in five annual instalments beginning in 2023. Travel and entertainment expense includes the following: Professional hockey tickets for suppliers and staff $7,000 Hotel and airfare 9,000 Charitable donations 4,000 Version 1 9 Legal and accounting expense includes the following: Revising the corporation's articles of association to conduct business in all provinces $2,000 Collection of bad debts 1,500 Reviewing the terms of a collateral agreement on a long-term bank loan 3,000 Annual audit 8,000 Golf dues 2,000 Required: Calculate WKL's net income for tax purposes for the 2022 taxation year. Version 1 10 22) EB Co. (a public corporation) began operations in 2021 in Edmonton, Alberta. All income in the company classifies as 'business income'. The following information was provided: 1) EB Co. signed an 8-year lease for a building when the business began. The building is estimated to be worth $500,000. EB Co. has an option to renew the lease for an additional 2 years. EB Co. spent $100,000 in 2021 on improvements to the leased building at the beginning of the year. 2) EB Co. purchased land and a building adjacent to the business for $120,000 in 2021. The Class 1 (4%) building was valued at $50,000 and is used as a storage facility. 3) EB Co. purchased several small tools in 2021 that are used to maintain the rental tools. The total cost of these tools was $8,000, and each tool cost under $500. 4) A delivery van costing a total of $50,000 was purchased in 2021, to be used solely in the business. 5) EB Co. furnished the business at a cost of $30,000 with Class 8 assets. 6) A computer was purchased for $1,000 to track sales and inventory. 7) Incorporation costs for the business in 2021 were $5,000. 8) EB Co. purchased a $42,000 passenger vehicle to be used for the business. In 2021 the vehicle was driven 20,000 km. 15,000 km were for business.