SOLUTION MANUAL
Canadian Income Taxation 26th Edition
by William Buckwold, All Chapters 1 - 23
,TABLE OF CONTENTS
Chapter1 Taxation-Its Role in Decision Making
Chapter2 Fundamentals of Tax Planning
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Chapter 4 Income from Employment
Chapter 5 Income from Business
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Chapter7 Income from Property
Chapter8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Chapter 11 Corporations-An Introduction
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Chapter 13 The Canadian-Controlled Private Corporation
Chapter 14 Multiple Corporations and Their Reorganization
Chapter 15 Partnerships
Chapter 16 Limited Partnerships and Joint Ventures
Chapter 17 Trusts
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Chapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Chapter 20 Domestic and International Business Expansion
Chapter 21 Tax Aspects of Corporate Financing
Chapter 22 Introduction to GST/HST
Chapter 23 Business Valuations
, CHAPTER 1
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
Review Questions
1. If income tax is imposed after profits have been determined, why is taxation relevant to business
decision making?
2. Most business decisions involve the evaluation of alternative courses of action. For example, a
marketing manager may be responsible for choosing a strategy for establishing sales in new
geographical territories. Briefly explain how the tax factor can be an integral part of this decision.
3. What are the fundamental variables of the income tax system that decision-makers should be
familiar with so that they can apply tax issues to their areas of responsibility?
4. What is an ―after-tax‖ approach to decision making?
Solutions to Review Questions
R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that results.
However, at all levels of management, alternative courses of action are evaluated. In many cases,
the choice of one alternative over the other may affect both the amount and the timing of future
taxes on income generated from that activity. Therefore, the person making those decisions has a
direct input into future after-tax cash flow. Obviously, decisions that reduce or postpone the
payment of tax affect the ultimate return on investment and, in turn, the value of the enterprise.
Including the tax variable as a part of the formal decision process will ultimately lead to improved
after-tax cash flow.
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by establishing a
formal presence in the new territory with a branch office or a separate corporation. The new
territories may also cross provincial or international boundaries. Provincial income tax rates vary
amongst the provinces. The amount of income that is subject to tax in the new province will be
different for each of the three alternatives mentioned above. For example, with direct selling, none
of the income is taxed in the new province, but with a separate corporation, all of the income is
taxed in the new province. Because the tax cost is different in each case, taxation is a relevant part
of the decision and must be included in any cost-benefit analysis that compares the three
alternatives [Reg. 400-402.1].
R1-3 A basic understanding of the following variables will significantly strengthen a decision maker's
ability to apply tax issues to their area of responsibility.
Types of Income - Employment, Business, Property, Capital gains
Taxable Entities - Individuals, Corporations, Trusts
Alternative Business - Corporation, Proprietorship, Partnership, Limited
Structures partnership, Joint arrangement, Income trust
, TaxPJurisdictions - Federal,PProvincial,PForeign
R1-
4PAllPcashPflowPdecisions,PwhetherPrelatedPtoPrevenues,Pexpenses,PassetPacquisitionsPorPdivestitures,P
orPdebtPandPequityPrestructuring,PwillPimpactPthePamountPandPtimingPofPthePtaxPcost.P Therefore,P cash
P flowP existsP onlyP onP anP afterP taxP basis,P and,P theP taxP impactsP whetherP
orPnotPthePultimatePresultPofPth
ePdecisionPisPsuccessful.PAnPafter-taxPapproachPtoPdecision-makingPrequiresPeachPdecision-
makerPtoPthinkP"after-
tax"PforPeveryPdecisionPatPthePtimePthePdecisionPisPbeingPmade,Pand,PtoPconsiderPalternativePcoursesPo
fPactionPtoPminimizePthePtaxPcost,PinPthePsamePwayPthatPdecisionsParePmadePregardingPotherPtypesPofP
costs.
FailureP toP applyP anP after-
taxP approachP atP theP timeP thatP decisionsP areP madeP mayP providePinaccuratePinformationPforPevaluation,Pand,Pre
sultPinPaPpermanentlyPinefficientPtaxPstructure.
CHAPTER 2 P
FUNDAMENTALS OF TAX PLANNING P P P
ReviewPQuestions
1. ―TaxPplanningPandPtaxPavoidancePmeanPthePsamePthing.‖PIsPthisPstatementPtrue?PExplain.
2. WhatPdistinguishesPtaxPevasionPfromPtaxPavoidancePandPtaxPplanning?
3. DoesPCanadaPRevenuePAgencyPdealPwithPallPtaxPavoidancePactivitiesPinPthePsamePway?PExplain.
4. ThePpurposePofPtaxPplanningPisPtoPreducePorPdeferPthePtaxPcostsPassociatedPwithPfinancialPtransactio
ns.PWhatParePthePgeneralPtypesPofPtaxPplanningPactivities?PBrieflyPexplainPhowPeachPofPthemPmayPr
educePorPdeferPthePtaxPcost.
5. ―ItPisPalwaysPbetterPtoPpayPtaxPlaterPratherPthanPsooner.‖PIsPthisPstatementPtrue?PExplain.
6. WhenPcorporatePtaxPratesPareP13%PandPtaxPratesPforPindividualsPareP40%,PisPitPalwaysPbetterPforPtheP
individualPtoPtransferPtheirPbusinessPtoPaPcorporation?
7. ―AsPlongPasPallPofPthePincomePtaxPrulesParePknown,PaPtaxPplanPcanPbePdevelopedPwithPcertainty.‖PIs
PthisPstatementPtrue?PExplain.
8. WhatPbasicPskillsParePrequiredPtoPdevelopPaPgoodPtaxPplan?
9. AnPentrepreneurPisPdevelopingPaPnewPbusinessPventurePandPisPplanningPtoPraisePequityPcapitalPfrom
PindividualPinvestors.PTheirPadviserPindicatesPthatPthePventurePcouldPbePstructuredPasPaPcorporationP
(i.e.,PsharesParePissuedPtoPthePinvestors)PorPasPaPlimitedPpartnershipP (i.e.,P partnershipP unitsP areP sold
).P BothP structuresP provideP limitedP liabilityP forPthePinvestors.PShouldPthePentrepreneurPconsiderPthe
PtaxPpositionsPofPthePindividualPinvestors?PExplain.PWithoutPdealingPwithPspecificPtaxPrules,PwhatPg
eneralPtaxPfactorsPshouldPanPinvestorPconsiderPbeforePmakingPanPinvestment?
Canadian Income Taxation 26th Edition
by William Buckwold, All Chapters 1 - 23
,TABLE OF CONTENTS
Chapter1 Taxation-Its Role in Decision Making
Chapter2 Fundamentals of Tax Planning
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Chapter 4 Income from Employment
Chapter 5 Income from Business
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Chapter7 Income from Property
Chapter8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Chapter 11 Corporations-An Introduction
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Chapter 13 The Canadian-Controlled Private Corporation
Chapter 14 Multiple Corporations and Their Reorganization
Chapter 15 Partnerships
Chapter 16 Limited Partnerships and Joint Ventures
Chapter 17 Trusts
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Chapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Chapter 20 Domestic and International Business Expansion
Chapter 21 Tax Aspects of Corporate Financing
Chapter 22 Introduction to GST/HST
Chapter 23 Business Valuations
, CHAPTER 1
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
Review Questions
1. If income tax is imposed after profits have been determined, why is taxation relevant to business
decision making?
2. Most business decisions involve the evaluation of alternative courses of action. For example, a
marketing manager may be responsible for choosing a strategy for establishing sales in new
geographical territories. Briefly explain how the tax factor can be an integral part of this decision.
3. What are the fundamental variables of the income tax system that decision-makers should be
familiar with so that they can apply tax issues to their areas of responsibility?
4. What is an ―after-tax‖ approach to decision making?
Solutions to Review Questions
R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that results.
However, at all levels of management, alternative courses of action are evaluated. In many cases,
the choice of one alternative over the other may affect both the amount and the timing of future
taxes on income generated from that activity. Therefore, the person making those decisions has a
direct input into future after-tax cash flow. Obviously, decisions that reduce or postpone the
payment of tax affect the ultimate return on investment and, in turn, the value of the enterprise.
Including the tax variable as a part of the formal decision process will ultimately lead to improved
after-tax cash flow.
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by establishing a
formal presence in the new territory with a branch office or a separate corporation. The new
territories may also cross provincial or international boundaries. Provincial income tax rates vary
amongst the provinces. The amount of income that is subject to tax in the new province will be
different for each of the three alternatives mentioned above. For example, with direct selling, none
of the income is taxed in the new province, but with a separate corporation, all of the income is
taxed in the new province. Because the tax cost is different in each case, taxation is a relevant part
of the decision and must be included in any cost-benefit analysis that compares the three
alternatives [Reg. 400-402.1].
R1-3 A basic understanding of the following variables will significantly strengthen a decision maker's
ability to apply tax issues to their area of responsibility.
Types of Income - Employment, Business, Property, Capital gains
Taxable Entities - Individuals, Corporations, Trusts
Alternative Business - Corporation, Proprietorship, Partnership, Limited
Structures partnership, Joint arrangement, Income trust
, TaxPJurisdictions - Federal,PProvincial,PForeign
R1-
4PAllPcashPflowPdecisions,PwhetherPrelatedPtoPrevenues,Pexpenses,PassetPacquisitionsPorPdivestitures,P
orPdebtPandPequityPrestructuring,PwillPimpactPthePamountPandPtimingPofPthePtaxPcost.P Therefore,P cash
P flowP existsP onlyP onP anP afterP taxP basis,P and,P theP taxP impactsP whetherP
orPnotPthePultimatePresultPofPth
ePdecisionPisPsuccessful.PAnPafter-taxPapproachPtoPdecision-makingPrequiresPeachPdecision-
makerPtoPthinkP"after-
tax"PforPeveryPdecisionPatPthePtimePthePdecisionPisPbeingPmade,Pand,PtoPconsiderPalternativePcoursesPo
fPactionPtoPminimizePthePtaxPcost,PinPthePsamePwayPthatPdecisionsParePmadePregardingPotherPtypesPofP
costs.
FailureP toP applyP anP after-
taxP approachP atP theP timeP thatP decisionsP areP madeP mayP providePinaccuratePinformationPforPevaluation,Pand,Pre
sultPinPaPpermanentlyPinefficientPtaxPstructure.
CHAPTER 2 P
FUNDAMENTALS OF TAX PLANNING P P P
ReviewPQuestions
1. ―TaxPplanningPandPtaxPavoidancePmeanPthePsamePthing.‖PIsPthisPstatementPtrue?PExplain.
2. WhatPdistinguishesPtaxPevasionPfromPtaxPavoidancePandPtaxPplanning?
3. DoesPCanadaPRevenuePAgencyPdealPwithPallPtaxPavoidancePactivitiesPinPthePsamePway?PExplain.
4. ThePpurposePofPtaxPplanningPisPtoPreducePorPdeferPthePtaxPcostsPassociatedPwithPfinancialPtransactio
ns.PWhatParePthePgeneralPtypesPofPtaxPplanningPactivities?PBrieflyPexplainPhowPeachPofPthemPmayPr
educePorPdeferPthePtaxPcost.
5. ―ItPisPalwaysPbetterPtoPpayPtaxPlaterPratherPthanPsooner.‖PIsPthisPstatementPtrue?PExplain.
6. WhenPcorporatePtaxPratesPareP13%PandPtaxPratesPforPindividualsPareP40%,PisPitPalwaysPbetterPforPtheP
individualPtoPtransferPtheirPbusinessPtoPaPcorporation?
7. ―AsPlongPasPallPofPthePincomePtaxPrulesParePknown,PaPtaxPplanPcanPbePdevelopedPwithPcertainty.‖PIs
PthisPstatementPtrue?PExplain.
8. WhatPbasicPskillsParePrequiredPtoPdevelopPaPgoodPtaxPplan?
9. AnPentrepreneurPisPdevelopingPaPnewPbusinessPventurePandPisPplanningPtoPraisePequityPcapitalPfrom
PindividualPinvestors.PTheirPadviserPindicatesPthatPthePventurePcouldPbePstructuredPasPaPcorporationP
(i.e.,PsharesParePissuedPtoPthePinvestors)PorPasPaPlimitedPpartnershipP (i.e.,P partnershipP unitsP areP sold
).P BothP structuresP provideP limitedP liabilityP forPthePinvestors.PShouldPthePentrepreneurPconsiderPthe
PtaxPpositionsPofPthePindividualPinvestors?PExplain.PWithoutPdealingPwithPspecificPtaxPrules,PwhatPg
eneralPtaxPfactorsPshouldPanPinvestorPconsiderPbeforePmakingPanPinvestment?
