Canadian Income Taxation 2025/2026 26th Edition by William Buckwold, Joan Kitunen, Matthew Roman, Abraham Iqbal complete Solution Manual

Buckwold,Kitunen, RomanandIqbal,CanadianIncomeTaxation,2023-2024Ed.
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CHAPTER1 l’




TAXATION―ITSROLEINBUSINESSDECISIONMAKING l’ l’ l’ l’ l’ l’




ReviewQuestions l’




1. If income tax is imposed after profits have been determined, why is taxation relevant to
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businessdecisionmaking?
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2. Most business decisions involve the evaluation of alternative courses of action. For example,a
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marketing manager may be responsible for choosing a strategy for establishing
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salesinnewgeographicalterritories.Brieflyexplain howthetaxfactorcanbean integral part of
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thisdecision.
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3. What are the fundamental variables of the income taxsystem that decision-makers shouldbe
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familiarwithsothattheycanapplytaxissuestotheirareasofresponsibility?
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4. Whatisan―after-tax‖approachtodecisionmaking?
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SolutionstoReviewQuestions l’ l’ l’




R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that results.
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However,atalllevelsofmanagement,alternative coursesofaction areevaluated.In manycases,
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thechoiceofonealternativeovertheothermayaffectboththeamountandthe timingoffuturetaxes
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onincomegeneratedfromthatactivity.Therefore,thepersonmaking those decisions has a direct
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input into future after-tax cash flow. Obviously, decisions that reduceor postpone thepayment of
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taxaffectthe ultimatereturnoninvestment and,in turn, thevalueoftheenterprise.Includingthetax
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variableasapartoftheformaldecisionprocess willultimatelyleadtoimprovedafter-taxcashflow.
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R1-2Expansioncanbeachieved innewgeographicareasthroughdirectselling,orbyestablishingaformal
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presence in the new territory with a branch office or a separate corporation. The new territories may
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also cross provincial or international boundaries. Provincial income tax rates vary amongst the
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provinces.Theamountofincomethatissubjecttotaxinthenewprovince willbedifferentfor eachof
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the three alternatives mentioned above. For example, with direct selling, none of the income is
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taxed in the newprovince, but with a separate corporation, all of the income is taxed in the new
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province. Becausethetaxcostisdifferentineachcase,taxationis a relevant part of the decision and
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must be included in any cost-benefit analysis that compares the three alternatives [Reg. 400-
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402.1].

R1-3 A basic understanding of the following variables will significantly strengthen a decision maker's
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abilitytoapplytaxissuestotheirareaofresponsibility.
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TypesofIncome l’ l’ - Employment,Business,Property,Capital l’ l’ l’




gainsTaxableEntities
l’ l’ - Individuals,Corporations,Trusts l’ l’




AlternativeBusiness l’ - Corporation,Proprietorship, Partnership, l’ l’




LimitedStructures l’ partnership,Jointarrangement,Incometrust l’ l’ l’ l’




TaxJurisdictions l’ - Federal,Provincial,Foreign l’ l’




R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
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divestitures, or debt and equity restructuring, will impact the amount and timing of the tax cost.
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Therefore,cash flowexists onlyonanaftertaxbasis,and,thetaximpactswhetherornot the ultimate
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result of the decision is successful. An after-tax approach to decision-making requires each
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decision-maker to think "after-tax" for every decision at the time the decision is beingmade, and, to
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consider alternative courses of action to minimizethe tax cost, in the samewaythatdecisionsare
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maderegardingothertypesofcosts.
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Failure to apply an after-tax approach at the time that decisions are made may l’ l ’ l’ l ’ l’ l ’ l ’ l ’ l ’ l’ l ’ l’ l ’




provideinaccurateinformationforevaluation,and,resultinapermanentlyinefficienttax structure.
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CHAPTER2 l’




FUNDAMENTALSOFTAXPLANNING l’ l’ l’




ReviewQuestions l’




1. ―Taxplanningandtaxavoidancemeanthesamething.‖Isthisstatementtrue?Explain.
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2. Whatdistinguishestaxevasionfromtaxavoidanceandtaxplanning? l’ l’ l’ l’ l’ l’ l’ l’ l’




3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way? Explain.
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4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
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transactions. What are the general types of tax planning activities? Briefly explain how each of
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themmayreduceordeferthetaxcost.
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5. ―Itisalwaysbettertopaytaxlaterratherthansooner.‖Isthisstatementtrue?Explain.
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6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always betterfor the
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individualtotransfertheirbusinesstoacorporation?
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7. ―As long as all of the income tax rules are known, a tax plan can be developed with certainty.‖ Is
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this statement true? Explain.
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8. Whatbasicskillsarerequiredtodevelopagoodtaxplan? l’ l’ l’ l’ l’ l’ l’ l’ l’ l’




9. An entrepreneur is developing a new business venture and is planning to raise equity capital
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from individual investors. Their adviser indicates that the venture could be structured as a
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corporation (i.e., shares are issued to the investors) or as a limited partnership (i.e., partnership
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units are sold). Both structures provide limited liability for the investors. Should the
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entrepreneur consider the tax positions of the individual investors? Explain. Without dealing
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with specific tax rules, what general tax factors should an investorconsider before making an
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investment?
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10. Whatisataxavoidancetransaction? l’ l’ l’ l’ l’




11. ―If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
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primarily for bona fide business, investment, or family purposes, the general anti- avoidance
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rulewillapplyandeliminatethetaxbenefit.‖Isthisstatementtrue?Explain.
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R2-1 l ’ There is a distinction between tax planning and tax avoidance. Tax planning is the processof l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’




arranging financial transactions in a manner that reduces or defers the tax cost
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and that arrangement is provided for in the Income Tax Act or is not specifically prohibited. In
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otherwords,thearrangementischosenfromareasonablyclearsetofoptionswithintheAct.
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Incontrast,taxavoidanceinvolvesatransactionorseriesoftransactions,themainpurposeof which
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isto avoid or reducethe taxotherwise payable. Whileeachtransaction in the process maybelegal
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byitself,theseriesoftransactionscausearesultnotintendedbythe taxsystem.
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R2-2 Both tax planning and tax avoidance activities clearly present the full facts of each transaction,
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allowing them to be scrutinized by CRA. In comparison, tax evasion involves knowingly
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excluding or altering the facts with the intention to deceive. Failing to report an amount of
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revenueknowntoexistordeductingafalseexpenseareexamplesoftaxevasion.
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R2-3 CRA does not deal with all tax avoidance transactions in the same way. In general, CRA attempts to
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divide tax avoidance transactions between those that are an abuse of the tax system and those
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that are not. When an action is abusive, CRA will attempt to deny the resulting benefits by
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applyingoneoftheanti-avoidancerulesintheIncomeTaxAct.
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R2-4 Therearethreegeneraltypesoftaxplanningactivities: l’ l’ l’ l’ l’ l’ l’ l’




• Shiftingincomefromonetime-periodtoanother. l’ l’ l’ l’ l’ l’




• Transferringincometoanotherentity. l’ l’ l’ l’




• Convertingthenatureofincomefromonetypetoanother. l’ l’ l’ l’ l’ l’ l’ l’ l’




Shifting income to another time-period can be a benefit if it results in a lower rate of tax applyingto l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’




the income. Even if a lower rate of tax is not achieved, a benefit may be gainedfrom delaying the
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paymentof taxtoafuturetime-period.
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Shifting income to an alternate taxpayer (for example, from an individual to a corporation) may l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’




beneficiallyaltertheamountandtiming ofthetax.
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There are several types of income within the tax system such as employment income, businessl’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’ l’




income, capital gains and so on. Each type of income is governed by a different set of rules. For
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some types of income, the timing, the amount of income recognized, and the effectivetax rate is
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different from other types. By converting one type of income to another, a benefit may be gained if
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thetimingofincomerecognition,theamountrecognized,and/orthe effectivetax rate isfavorable.
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R2-5Thestatementisnottrue.Payingtaxlatermaybeanadvantagebecauseitdelaysthetaxcost andfrees
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up cash for other purposes. However, the delay may result in a higher rate of tax in the future year
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compared to the current year. In such circumstances, there is a trade-off between the timing of
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thetaxandtheamountoftaxpayable. l’ l’ l’ l’ l’ l’ l’ l’




R2-6 l ’ Thereisnotalwaysanadvantagetotransferincometoacorporationwhenthecorporatetax rate is
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l lower than that of the individual shareholder. While an immediate lower tax rate
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results, remember that the corporation may be required to distribute some or all of its after-tax
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income to the shareholder, which causes a second level of tax. Whether or not anadvantage is
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l achieved depends on the amount of that second level of tax and when it
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