SOLUTION MANUAL
Canadian Income Taxation 26th Edition
by William Buckwold, All Chapters 1 - 23
,TABLE OF CONTENTS
o o
Chapter1oTaxation-ItsoRoleoinoDecisionoMaking
Chapter2oFundamentalsoofoTaxoPlanning
Chaptero3oLiabilityoforoTax,oIncomeoDetermination,oandoAdministrationoofotheoIncomeoTaxoSystem
Chaptero4oIncomeofromoEmployment
Chaptero5oIncomeofromoBusiness
Chaptero6oTheoAcquisition,oUse,oandoDisposaloofoDepreciableoProperty
Chapter7oIncomeofromoProperty
Chapter8oGainsoandoLossesoonotheoDispositionoofoCapitaloProperty-CapitaloGains
Chaptero9oOtheroIncome,oOtheroDeductions,oandoSpecialoRulesoforoCompletingoNetoIncomeoforoTaxoPurposes
Chaptero10oIndividuals:oDeterminationoofoTaxableoIncomeoandoTaxesoPayable
Chaptero11oCorporations-AnoIntroduction
Chaptero12oOrganization,oCapitaloStructures,oandoIncomeoDistributionsoofoCorporations
Chaptero13oTheoCanadian-ControlledoPrivateoCorporation
Chaptero14oMultipleoCorporationsoandoTheiroReorganization
Chaptero15oPartnerships
Chaptero16oLimitedoPartnershipsoandoJointoVentures
Chaptero17oTrusts
Chaptero18oBusinessoAcquisitionsoandoDivestitures-AssetsoversusoShares
Chaptero19oBusinessoAcquisitionsoandoDivestitures-Tax-DeferredoSales
Chaptero20oDomesticoandoInternationaloBusinessoExpansion
Chaptero21oTaxoAspectsoofoCorporateoFinancing
Chaptero22oIntroductionotooGST/HST
Chaptero23oBusinessoValuations
, CHAPTER 1 o
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
o o o o o o
ReviewoQuestions
1. Ifoincomeotaxoisoimposedoafteroprofitsohaveobeenodetermined,owhyoisotaxationorelevantotoobusinessod
ecisionomaking?
2. Mostobusinessodecisionsoinvolveotheoevaluationoofoalternativeocoursesoofoaction.oForoexample,oaoma
rketingomanageromayobeoresponsibleoforochoosingoaostrategyoforoestablishingosalesoinonewogeograph
icaloterritories.oBrieflyoexplainohowotheotaxofactorocanobeoanointegralopartoofothisodecision.
3. Whatoareotheofundamentalovariablesoofotheoincomeotaxosystemothatodecision-
makersoshouldobeofamiliarowithosoothatotheyocanoapplyotaxoissuesotootheiroareasooforesponsibility?
4. Whatoisoano―after-tax‖oapproachotoodecisionomaking?
SolutionsotooReviewoQuestions
R1-
1oOnceoprofitoisodetermined,otheoIncomeoTaxoActodeterminesotheoamountoofoincomeotaxothatoresults.oH
owever,oatoallolevelsoofomanagement,oalternativeocoursesoofoactionoareoevaluated.oInomanyocases,otheoc
hoiceoofooneoalternativeooverotheootheromayoaffectobothotheoamountoandotheotimingoofofutureotaxesoono
incomeogeneratedofromothatoactivity.oTherefore,otheopersonomakingothoseodecisionsohasoaodirectoinput
ointoofutureoafter-
taxocasho flow.oObviously,odecisionsothatoreduceooropostponeotheopaymentoofotaxoaffectotheoultimateor
eturnoonoinvestmentoand,oinoturn,otheovalueoofotheoenterprise.oIncludingotheotaxovariableoasoaopartoofoth
eoformalodecisionoprocessowilloultimatelyoleadotooimprovedoafter-taxocashoflow.
R1-
2oExpansionocanobeoachievedoinonewogeographicoareasothroughodirectoselling,oorobyoestablishingoaofor
malopresenceoinotheonewoterritoryowithoaobranchoofficeooroaoseparateocorporation.oTheonewoterritorieso
mayoalsoocrossoprovincialoorointernationaloboundaries.oProvincialoincomeotaxoratesovaryoamongstotheo
provinces.oTheoamountoofoincomeothatoisosubjectotootaxoinotheonewoprovinceowillobeodifferentoforoeach
oofotheothreeoalternativesomentionedoabove.oForoexample,owithodirectoselling,ononeoofotheoincomeoisota
xedoinotheonewoprovince,obutowithoaoseparateocorporation,oalloofotheoincomeoisotaxedoinotheonewoprovi
nce.oBecauseotheotaxocostoisodifferentoinoeachocase,otaxationoisoaorelevantopartoofotheodecisionoandomus
tobeoincludedoinoanyocost-benefitoanalysisothatocomparesotheothreeoalternativeso[Reg.o400-402.1].
R1-
3oAobasicounderstandingoofotheofollowingovariablesowillosignificantlyostrengthenoaodecisionomaker'soa
bilityotooapplyotaxoissuesotootheiroareaooforesponsibility.
TypesoofoIncome - Employment,oBusiness,oProperty,oCapitalogains
TaxableoEntities - Individuals,oCorporations,oTrusts
AlternativeoBusiness - Corporation,oProprietorship,oPartnership,oLimited
, Structures partnership,oJointoarrangement,oIncomeotrust
TaxoJurisdictions - Federal,oProvincial,oForeign
R1-
4oAllocashoflowodecisions,owhetherorelatedotoorevenues,oexpenses,oassetoacquisitionsoorodivestitures,o
orodebtoandoequityorestructuring,owilloimpactotheoamountoandotimingoofotheotaxocost.o Therefore,o casho
flowo existso onlyo ono ano aftero taxo basis,o and,o theo taxo impactso whetherooronototheoultimateoresultoofotheo
decisionoisosuccessful.oAnoafter-taxoapproachotoodecision-makingorequiresoeachodecision-
makerotoothinko"after-
tax"oforoeveryodecisionoatotheotimeotheodecisionoisobeingomade,oand,otooconsideroalternativeocoursesoofo
actionotoominimizeotheotaxocost,oinotheosameowayothatodecisionsoareomadeoregardingootherotypesoofocos
ts.
Failureo too applyo ano after-
taxo approacho ato theo timeo thato decisionso areo madeo mayo provideoinaccurateoinformationoforoevaluation,oand,ores
ultoinoaopermanentlyoinefficientotaxostructure.
CHAPTER 2 o
FUNDAMENTALS OF TAX PLANNING o o o
ReviewoQuestions
1. ―Taxoplanningoandotaxoavoidanceomeanotheosameothing.‖oIsothisostatementotrue?oExplain.
2. Whatodistinguishesotaxoevasionofromotaxoavoidanceoandotaxoplanning?
3. DoesoCanadaoRevenueoAgencyodealowithoallotaxoavoidanceoactivitiesoinotheosameoway?oExplain.
4. Theopurposeoofotaxoplanningoisotooreduceoorodeferotheotaxocostsoassociatedowithofinancialotransaction
s.oWhatoareotheogeneralotypesoofotaxoplanningoactivities?oBrieflyoexplainohowoeachoofothemomayored
uceoorodeferotheotaxocost.
5. ―Itoisoalwaysobetterotoopayotaxolateroratherothanosooner.‖oIsothisostatementotrue?oExplain.
6. Whenocorporateotaxoratesoareo13%oandotaxoratesoforoindividualsoareo40%,oisoitoalwaysobetteroforotheoi
ndividualotootransferotheirobusinessotooaocorporation?
7. ―Asolongoasoalloofotheoincomeotaxorulesoareoknown,oaotaxoplanocanobeodevelopedowithocertainty.‖oIsot
hisostatementotrue?oExplain.
8. Whatobasicoskillsoareorequiredotoodevelopoaogoodotaxoplan?
9. Anoentrepreneuroisodevelopingoaonewobusinessoventureoandoisoplanningotooraiseoequityocapitalofromoi
ndividualoinvestors.oTheiroadviseroindicatesothatotheoventureocouldobeostructuredoasoaocorporationo(i.
e.,osharesoareoissuedotootheoinvestors)ooroasoaolimitedopartnershipo (i.e.,o partnershipo unitso areo sold).o
Botho structureso provideo limitedo liabilityo forotheoinvestors.oShouldotheoentrepreneuroconsiderotheota
xopositionsoofotheoindividualoinvestors?oExplain.oWithoutodealingowithospecificotaxorules,owhatogene
Canadian Income Taxation 26th Edition
by William Buckwold, All Chapters 1 - 23
,TABLE OF CONTENTS
o o
Chapter1oTaxation-ItsoRoleoinoDecisionoMaking
Chapter2oFundamentalsoofoTaxoPlanning
Chaptero3oLiabilityoforoTax,oIncomeoDetermination,oandoAdministrationoofotheoIncomeoTaxoSystem
Chaptero4oIncomeofromoEmployment
Chaptero5oIncomeofromoBusiness
Chaptero6oTheoAcquisition,oUse,oandoDisposaloofoDepreciableoProperty
Chapter7oIncomeofromoProperty
Chapter8oGainsoandoLossesoonotheoDispositionoofoCapitaloProperty-CapitaloGains
Chaptero9oOtheroIncome,oOtheroDeductions,oandoSpecialoRulesoforoCompletingoNetoIncomeoforoTaxoPurposes
Chaptero10oIndividuals:oDeterminationoofoTaxableoIncomeoandoTaxesoPayable
Chaptero11oCorporations-AnoIntroduction
Chaptero12oOrganization,oCapitaloStructures,oandoIncomeoDistributionsoofoCorporations
Chaptero13oTheoCanadian-ControlledoPrivateoCorporation
Chaptero14oMultipleoCorporationsoandoTheiroReorganization
Chaptero15oPartnerships
Chaptero16oLimitedoPartnershipsoandoJointoVentures
Chaptero17oTrusts
Chaptero18oBusinessoAcquisitionsoandoDivestitures-AssetsoversusoShares
Chaptero19oBusinessoAcquisitionsoandoDivestitures-Tax-DeferredoSales
Chaptero20oDomesticoandoInternationaloBusinessoExpansion
Chaptero21oTaxoAspectsoofoCorporateoFinancing
Chaptero22oIntroductionotooGST/HST
Chaptero23oBusinessoValuations
, CHAPTER 1 o
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
o o o o o o
ReviewoQuestions
1. Ifoincomeotaxoisoimposedoafteroprofitsohaveobeenodetermined,owhyoisotaxationorelevantotoobusinessod
ecisionomaking?
2. Mostobusinessodecisionsoinvolveotheoevaluationoofoalternativeocoursesoofoaction.oForoexample,oaoma
rketingomanageromayobeoresponsibleoforochoosingoaostrategyoforoestablishingosalesoinonewogeograph
icaloterritories.oBrieflyoexplainohowotheotaxofactorocanobeoanointegralopartoofothisodecision.
3. Whatoareotheofundamentalovariablesoofotheoincomeotaxosystemothatodecision-
makersoshouldobeofamiliarowithosoothatotheyocanoapplyotaxoissuesotootheiroareasooforesponsibility?
4. Whatoisoano―after-tax‖oapproachotoodecisionomaking?
SolutionsotooReviewoQuestions
R1-
1oOnceoprofitoisodetermined,otheoIncomeoTaxoActodeterminesotheoamountoofoincomeotaxothatoresults.oH
owever,oatoallolevelsoofomanagement,oalternativeocoursesoofoactionoareoevaluated.oInomanyocases,otheoc
hoiceoofooneoalternativeooverotheootheromayoaffectobothotheoamountoandotheotimingoofofutureotaxesoono
incomeogeneratedofromothatoactivity.oTherefore,otheopersonomakingothoseodecisionsohasoaodirectoinput
ointoofutureoafter-
taxocasho flow.oObviously,odecisionsothatoreduceooropostponeotheopaymentoofotaxoaffectotheoultimateor
eturnoonoinvestmentoand,oinoturn,otheovalueoofotheoenterprise.oIncludingotheotaxovariableoasoaopartoofoth
eoformalodecisionoprocessowilloultimatelyoleadotooimprovedoafter-taxocashoflow.
R1-
2oExpansionocanobeoachievedoinonewogeographicoareasothroughodirectoselling,oorobyoestablishingoaofor
malopresenceoinotheonewoterritoryowithoaobranchoofficeooroaoseparateocorporation.oTheonewoterritorieso
mayoalsoocrossoprovincialoorointernationaloboundaries.oProvincialoincomeotaxoratesovaryoamongstotheo
provinces.oTheoamountoofoincomeothatoisosubjectotootaxoinotheonewoprovinceowillobeodifferentoforoeach
oofotheothreeoalternativesomentionedoabove.oForoexample,owithodirectoselling,ononeoofotheoincomeoisota
xedoinotheonewoprovince,obutowithoaoseparateocorporation,oalloofotheoincomeoisotaxedoinotheonewoprovi
nce.oBecauseotheotaxocostoisodifferentoinoeachocase,otaxationoisoaorelevantopartoofotheodecisionoandomus
tobeoincludedoinoanyocost-benefitoanalysisothatocomparesotheothreeoalternativeso[Reg.o400-402.1].
R1-
3oAobasicounderstandingoofotheofollowingovariablesowillosignificantlyostrengthenoaodecisionomaker'soa
bilityotooapplyotaxoissuesotootheiroareaooforesponsibility.
TypesoofoIncome - Employment,oBusiness,oProperty,oCapitalogains
TaxableoEntities - Individuals,oCorporations,oTrusts
AlternativeoBusiness - Corporation,oProprietorship,oPartnership,oLimited
, Structures partnership,oJointoarrangement,oIncomeotrust
TaxoJurisdictions - Federal,oProvincial,oForeign
R1-
4oAllocashoflowodecisions,owhetherorelatedotoorevenues,oexpenses,oassetoacquisitionsoorodivestitures,o
orodebtoandoequityorestructuring,owilloimpactotheoamountoandotimingoofotheotaxocost.o Therefore,o casho
flowo existso onlyo ono ano aftero taxo basis,o and,o theo taxo impactso whetherooronototheoultimateoresultoofotheo
decisionoisosuccessful.oAnoafter-taxoapproachotoodecision-makingorequiresoeachodecision-
makerotoothinko"after-
tax"oforoeveryodecisionoatotheotimeotheodecisionoisobeingomade,oand,otooconsideroalternativeocoursesoofo
actionotoominimizeotheotaxocost,oinotheosameowayothatodecisionsoareomadeoregardingootherotypesoofocos
ts.
Failureo too applyo ano after-
taxo approacho ato theo timeo thato decisionso areo madeo mayo provideoinaccurateoinformationoforoevaluation,oand,ores
ultoinoaopermanentlyoinefficientotaxostructure.
CHAPTER 2 o
FUNDAMENTALS OF TAX PLANNING o o o
ReviewoQuestions
1. ―Taxoplanningoandotaxoavoidanceomeanotheosameothing.‖oIsothisostatementotrue?oExplain.
2. Whatodistinguishesotaxoevasionofromotaxoavoidanceoandotaxoplanning?
3. DoesoCanadaoRevenueoAgencyodealowithoallotaxoavoidanceoactivitiesoinotheosameoway?oExplain.
4. Theopurposeoofotaxoplanningoisotooreduceoorodeferotheotaxocostsoassociatedowithofinancialotransaction
s.oWhatoareotheogeneralotypesoofotaxoplanningoactivities?oBrieflyoexplainohowoeachoofothemomayored
uceoorodeferotheotaxocost.
5. ―Itoisoalwaysobetterotoopayotaxolateroratherothanosooner.‖oIsothisostatementotrue?oExplain.
6. Whenocorporateotaxoratesoareo13%oandotaxoratesoforoindividualsoareo40%,oisoitoalwaysobetteroforotheoi
ndividualotootransferotheirobusinessotooaocorporation?
7. ―Asolongoasoalloofotheoincomeotaxorulesoareoknown,oaotaxoplanocanobeodevelopedowithocertainty.‖oIsot
hisostatementotrue?oExplain.
8. Whatobasicoskillsoareorequiredotoodevelopoaogoodotaxoplan?
9. Anoentrepreneuroisodevelopingoaonewobusinessoventureoandoisoplanningotooraiseoequityocapitalofromoi
ndividualoinvestors.oTheiroadviseroindicatesothatotheoventureocouldobeostructuredoasoaocorporationo(i.
e.,osharesoareoissuedotootheoinvestors)ooroasoaolimitedopartnershipo (i.e.,o partnershipo unitso areo sold).o
Botho structureso provideo limitedo liabilityo forotheoinvestors.oShouldotheoentrepreneuroconsiderotheota
xopositionsoofotheoindividualoinvestors?oExplain.oWithoutodealingowithospecificotaxorules,owhatogene
