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