SOLUTION MANUAL
r
Canadian Income Taxation 26th Edition
r r r r
by William Buckwold, All Chapters 1 - 23
r r r r r r r
,TABLE rOF rCONTENTS
Chapter1 rTaxation-Its rRole rin rDecision rMaking
Chapter2 rFundamentals rof rTax rPlanning
Chapter r3 rLiability rfor rTax, rIncome rDetermination, rand rAdministration rof rthe rIncome rTax rSystem
Chapter r4 rIncome rfrom rEmployment
Chapter r5 rIncome rfrom rBusiness
Chapter r6 rThe rAcquisition, rUse, rand rDisposal rof rDepreciable rProperty
Chapter7 rIncome rfrom rProperty
Chapter8 rGains rand rLosses ron rthe rDisposition rof rCapital rProperty-Capital rGains
Chapter r9 rOther rIncome, rOther rDeductions, rand rSpecial rRules rfor rCompleting rNet rIncome rfor rTax rPurposes
Chapter r10 rIndividuals: rDetermination rof rTaxable rIncome rand rTaxes rPayable
Chapter r11 rCorporations-An rIntroduction
Chapter r12 rOrganization, rCapital rStructures, rand rIncome rDistributions rof rCorporations
Chapter r13 rThe rCanadian-Controlled rPrivate rCorporation
Chapter r14 rMultiple rCorporations rand rTheir rReorganization
Chapter r15 rPartnerships
Chapter r16 rLimited rPartnerships rand rJoint rVentures
Chapter r17 rTrusts
Chapter r18 rBusiness rAcquisitions rand rDivestitures-Assets rversus rShares
Chapter r19 rBusiness rAcquisitions rand rDivestitures-Tax-Deferred rSales
Chapter r20 rDomestic rand rInternational rBusiness rExpansion
Chapter r21 rTax rAspects rof rCorporate rFinancing
Chapter r22 rIntroduction rto rGST/HST
Chapter r23 rBusiness rValuations
CHAPTER r1
TAXATION― rITS rROLE rIN rBUSINESS rDECISION rMAKING
, Review rQuestions
1. If rincome rtax ris rimposed rafter rprofits rhave rbeen rdetermined, rwhy ris rtaxation rrelevant rto
rbusiness rdecision rmaking?
2. Most rbusiness rdecisions rinvolve rthe revaluation rof ralternative rcourses rof raction. rFor rexample, ra
rmarketing rmanager rmay rbe rresponsible rfor rchoosing ra rstrategy rfor restablishing rsales rin rnew
rgeographical rterritories. rBriefly rexplain rhow rthe rtax rfactor rcan rbe ran rintegral rpart rof r this
rdecision.
3. What rare rthe rfundamental rvariables rof rthe rincome rtax rsystem rthat rdecision-makers rshould rbe
rfamiliar rwith rso rthat rthey rcan rapply rtax rissues rto rtheir rareas rof rresponsibility?
4. What ris ran r―after-tax‖ rapproach rto rdecision rmaking?
Solutions rto rReview rQuestions
R1-1 rOnce rprofit ris rdetermined, rthe rIncome rTax rAct rdetermines rthe ramount rof rincome rtax rthat rresults.
rHowever, rat rall rlevels rof rmanagement, ralternative rcourses rof raction rare revaluated.rIn rmany rcases,
rthe rchoice rof rone ralternative rover rthe rother rmay raffect rboth rthe ramount rand rthe rtiming rof rfuture
rtaxes ron rincome rgenerated rfrom rthat ractivity. rTherefore, rthe rperson rmaking rthose rdecisions rhas
ra rdirect rinput rinto rfuture rafter-tax rcash r flow. rObviously, rdecisions rthat rreduce ror rpostpone rthe
rpayment rof rtax raffect rthe rultimate rreturn ron rinvestment rand, rin rturn, rthe rvalue rof rthe renterprise.
rIncluding rthe rtax rvariable ras ra rpart rof rthe rformal rdecision rprocess rwill rultimately rlead rto
rimproved rafter-tax rcash rflow.
R1-2 rExpansion rcan rbe rachieved rin rnew rgeographic rareas rthrough rdirect rselling, ror rby restablishing ra
rformal rpresence rin rthe rnew rterritory rwith ra rbranch roffice ror ra rseparate rcorporation. rThe rnew
rterritories rmay ralso rcross rprovincial ror rinternational rboundaries. rProvincial rincome rtax rrates rvary
ramongst rthe rprovinces. rThe ramount rof rincome rthat ris rsubject rto rtax rin rthe rnew rprovince rwill rbe
rdifferent rfor reach rof rthe rthree ralternatives rmentioned rabove. rFor rexample, rwith rdirect rselling,
rnone rof rthe rincome ris rtaxed rin rthe rnew rprovince, rbut rwith ra rseparate rcorporation, rall rof rthe
rincome ris rtaxed rin rthe rnew rprovince. rBecause rthe rtax rcost ris rdifferent rin reach rcase, rtaxation ris ra
rrelevant rpart rof rthe rdecision rand rmust rbe rincluded rin rany rcost-benefit ranalysis rthat rcompares rthe
rthree ralternatives r[Reg. r400-402.1].
R1-3 rA rbasic runderstanding rof rthe rfollowing rvariables rwill rsignificantly rstrengthen ra rdecision rmaker's
rability rto rapply rtax rissues rto rtheir rarea rof rresponsibility.
Types rof rIncome - Employment, rBusiness, rProperty, rCapital rgains
Taxable rEntities - Individuals, rCorporations, rTrusts
Alternative rBusiness - Corporation, rProprietorship, rPartnership, rLimited
Structures partnership, rJoint rarrangement, rIncome rtrust
Tax rJurisdictions - Federal, rProvincial, rForeign
R1-4 rAll rcash rflow rdecisions, rwhether rrelated rto rrevenues, rexpenses, rasset racquisitions ror rdivestitures,
ror rdebt rand requity rrestructuring, rwill rimpact rthe ramount rand rtiming rof rthe rtax rcost. r Therefore,
r cash r flow r exists r only r on r an r after r tax r basis, r and, r the r tax r impacts r whether ror rnot rthe rultimate
rresult rof rthe rdecision ris rsuccessful. rAn rafter-tax rapproach rto rdecision-making rrequires reach
rdecision-maker rto rthink r"after-tax" rfor revery rdecision rat rthertime rthe rdecision ris rbeing rmade, rand,
rto rconsider ralternative rcourses rof raction rto rminimize rthe rtax rcost, rin rthe rsame rway rthat rdecisions
, r are rmade rregarding rother rtypes rof rcosts.
Failure r to r apply r an r after-tax r approach r at r the r time r that r decisions r are r made r may r providerinaccurate
rinformation rfor r evaluation, r and, rresult rin ra r permanently rinefficient rtax rstructure.
CHAPTER r2
FUNDAMENTALS rOF rTAX rPLANNING
Review rQuestions
1. ―Tax rplanning rand rtax ravoidance rmean rthe rsame rthing.‖ rIs rthis rstatement rtrue? rExplain.
2. What rdistinguishes rtax revasion rfrom rtax ravoidance rand rtax rplanning?
3. Does rCanada rRevenue rAgency rdeal rwith rall rtax ravoidance ractivities rin rthe rsame rway? rExplain.
4. The rpurpose rof rtax rplanning ris rto rreduce ror rdefer rthe rtax rcosts rassociated rwith rfinancial
rtransactions. rWhat rare rthe rgeneral rtypes rof rtax rplanning ractivities? rBriefly rexplain rhow reach rof
r them rmay rreduce ror rdefer rthe rtax rcost.
5. ―It ris ralways rbetter rto rpay rtax rlater rrather rthan rsooner.‖ rIs rthis rstatement rtrue? rExplain.
6. When rcorporate rtax rrates rare r13% rand rtax rrates rfor rindividuals rare r40%, ris rit ralways rbetter rfor
rthe rindividual rto rtransfer rtheir rbusiness rto ra rcorporation?
7. ―As rlong ras rall rof rthe rincome rtax rrules rare rknown, ra rtax rplan rcan rbe rdeveloped rwith
rcertainty.‖ rIs rthis rstatement rtrue? rExplain.
8. What rbasic rskills rare rrequired rto rdevelop ra rgood rtax rplan?
9. An rentrepreneur ris rdeveloping ra rnew rbusiness rventure rand ris rplanning rto rraise requity rcapital
rfrom rindividual rinvestors. rTheir radviser rindicates rthat rthe rventure rcould rbe rstructured ras ra
rcorporation r(i.e., rshares rare rissued rto rthe rinvestors) ror ras ra rlimited rpartnership r (i.e.,
r partnership r units r are r sold). r Both r structures r provide r limited r liability r for rthe rinvestors.
rShould rthe rentrepreneur rconsider rthe rtax rpositions rof rthe rindividual rinvestors? rExplain.
rWithout rdealing rwith rspecific rtax rrules, rwhat rgeneral rtax rfactors rshould ran rinvestor rconsider
rbefore rmaking ran rinvestment?
10. What ris ra rtax ravoidance rtransaction?
11. ―If ra rtransaction r(or ra rseries rof rtransactions) rthat rresults rin ra rtax rbenefit rwas rnot rundertaken
rprimarily rfor rbona rfide rbusiness, rinvestment, ror rfamily rpurposes, rthe rgeneral ranti-avoidance
rrule rwill rapply rand reliminate rthe rtax rbenefit.‖ rIs rthis rstatement rtrue? rExplain.
r
Canadian Income Taxation 26th Edition
r r r r
by William Buckwold, All Chapters 1 - 23
r r r r r r r
,TABLE rOF rCONTENTS
Chapter1 rTaxation-Its rRole rin rDecision rMaking
Chapter2 rFundamentals rof rTax rPlanning
Chapter r3 rLiability rfor rTax, rIncome rDetermination, rand rAdministration rof rthe rIncome rTax rSystem
Chapter r4 rIncome rfrom rEmployment
Chapter r5 rIncome rfrom rBusiness
Chapter r6 rThe rAcquisition, rUse, rand rDisposal rof rDepreciable rProperty
Chapter7 rIncome rfrom rProperty
Chapter8 rGains rand rLosses ron rthe rDisposition rof rCapital rProperty-Capital rGains
Chapter r9 rOther rIncome, rOther rDeductions, rand rSpecial rRules rfor rCompleting rNet rIncome rfor rTax rPurposes
Chapter r10 rIndividuals: rDetermination rof rTaxable rIncome rand rTaxes rPayable
Chapter r11 rCorporations-An rIntroduction
Chapter r12 rOrganization, rCapital rStructures, rand rIncome rDistributions rof rCorporations
Chapter r13 rThe rCanadian-Controlled rPrivate rCorporation
Chapter r14 rMultiple rCorporations rand rTheir rReorganization
Chapter r15 rPartnerships
Chapter r16 rLimited rPartnerships rand rJoint rVentures
Chapter r17 rTrusts
Chapter r18 rBusiness rAcquisitions rand rDivestitures-Assets rversus rShares
Chapter r19 rBusiness rAcquisitions rand rDivestitures-Tax-Deferred rSales
Chapter r20 rDomestic rand rInternational rBusiness rExpansion
Chapter r21 rTax rAspects rof rCorporate rFinancing
Chapter r22 rIntroduction rto rGST/HST
Chapter r23 rBusiness rValuations
CHAPTER r1
TAXATION― rITS rROLE rIN rBUSINESS rDECISION rMAKING
, Review rQuestions
1. If rincome rtax ris rimposed rafter rprofits rhave rbeen rdetermined, rwhy ris rtaxation rrelevant rto
rbusiness rdecision rmaking?
2. Most rbusiness rdecisions rinvolve rthe revaluation rof ralternative rcourses rof raction. rFor rexample, ra
rmarketing rmanager rmay rbe rresponsible rfor rchoosing ra rstrategy rfor restablishing rsales rin rnew
rgeographical rterritories. rBriefly rexplain rhow rthe rtax rfactor rcan rbe ran rintegral rpart rof r this
rdecision.
3. What rare rthe rfundamental rvariables rof rthe rincome rtax rsystem rthat rdecision-makers rshould rbe
rfamiliar rwith rso rthat rthey rcan rapply rtax rissues rto rtheir rareas rof rresponsibility?
4. What ris ran r―after-tax‖ rapproach rto rdecision rmaking?
Solutions rto rReview rQuestions
R1-1 rOnce rprofit ris rdetermined, rthe rIncome rTax rAct rdetermines rthe ramount rof rincome rtax rthat rresults.
rHowever, rat rall rlevels rof rmanagement, ralternative rcourses rof raction rare revaluated.rIn rmany rcases,
rthe rchoice rof rone ralternative rover rthe rother rmay raffect rboth rthe ramount rand rthe rtiming rof rfuture
rtaxes ron rincome rgenerated rfrom rthat ractivity. rTherefore, rthe rperson rmaking rthose rdecisions rhas
ra rdirect rinput rinto rfuture rafter-tax rcash r flow. rObviously, rdecisions rthat rreduce ror rpostpone rthe
rpayment rof rtax raffect rthe rultimate rreturn ron rinvestment rand, rin rturn, rthe rvalue rof rthe renterprise.
rIncluding rthe rtax rvariable ras ra rpart rof rthe rformal rdecision rprocess rwill rultimately rlead rto
rimproved rafter-tax rcash rflow.
R1-2 rExpansion rcan rbe rachieved rin rnew rgeographic rareas rthrough rdirect rselling, ror rby restablishing ra
rformal rpresence rin rthe rnew rterritory rwith ra rbranch roffice ror ra rseparate rcorporation. rThe rnew
rterritories rmay ralso rcross rprovincial ror rinternational rboundaries. rProvincial rincome rtax rrates rvary
ramongst rthe rprovinces. rThe ramount rof rincome rthat ris rsubject rto rtax rin rthe rnew rprovince rwill rbe
rdifferent rfor reach rof rthe rthree ralternatives rmentioned rabove. rFor rexample, rwith rdirect rselling,
rnone rof rthe rincome ris rtaxed rin rthe rnew rprovince, rbut rwith ra rseparate rcorporation, rall rof rthe
rincome ris rtaxed rin rthe rnew rprovince. rBecause rthe rtax rcost ris rdifferent rin reach rcase, rtaxation ris ra
rrelevant rpart rof rthe rdecision rand rmust rbe rincluded rin rany rcost-benefit ranalysis rthat rcompares rthe
rthree ralternatives r[Reg. r400-402.1].
R1-3 rA rbasic runderstanding rof rthe rfollowing rvariables rwill rsignificantly rstrengthen ra rdecision rmaker's
rability rto rapply rtax rissues rto rtheir rarea rof rresponsibility.
Types rof rIncome - Employment, rBusiness, rProperty, rCapital rgains
Taxable rEntities - Individuals, rCorporations, rTrusts
Alternative rBusiness - Corporation, rProprietorship, rPartnership, rLimited
Structures partnership, rJoint rarrangement, rIncome rtrust
Tax rJurisdictions - Federal, rProvincial, rForeign
R1-4 rAll rcash rflow rdecisions, rwhether rrelated rto rrevenues, rexpenses, rasset racquisitions ror rdivestitures,
ror rdebt rand requity rrestructuring, rwill rimpact rthe ramount rand rtiming rof rthe rtax rcost. r Therefore,
r cash r flow r exists r only r on r an r after r tax r basis, r and, r the r tax r impacts r whether ror rnot rthe rultimate
rresult rof rthe rdecision ris rsuccessful. rAn rafter-tax rapproach rto rdecision-making rrequires reach
rdecision-maker rto rthink r"after-tax" rfor revery rdecision rat rthertime rthe rdecision ris rbeing rmade, rand,
rto rconsider ralternative rcourses rof raction rto rminimize rthe rtax rcost, rin rthe rsame rway rthat rdecisions
, r are rmade rregarding rother rtypes rof rcosts.
Failure r to r apply r an r after-tax r approach r at r the r time r that r decisions r are r made r may r providerinaccurate
rinformation rfor r evaluation, r and, rresult rin ra r permanently rinefficient rtax rstructure.
CHAPTER r2
FUNDAMENTALS rOF rTAX rPLANNING
Review rQuestions
1. ―Tax rplanning rand rtax ravoidance rmean rthe rsame rthing.‖ rIs rthis rstatement rtrue? rExplain.
2. What rdistinguishes rtax revasion rfrom rtax ravoidance rand rtax rplanning?
3. Does rCanada rRevenue rAgency rdeal rwith rall rtax ravoidance ractivities rin rthe rsame rway? rExplain.
4. The rpurpose rof rtax rplanning ris rto rreduce ror rdefer rthe rtax rcosts rassociated rwith rfinancial
rtransactions. rWhat rare rthe rgeneral rtypes rof rtax rplanning ractivities? rBriefly rexplain rhow reach rof
r them rmay rreduce ror rdefer rthe rtax rcost.
5. ―It ris ralways rbetter rto rpay rtax rlater rrather rthan rsooner.‖ rIs rthis rstatement rtrue? rExplain.
6. When rcorporate rtax rrates rare r13% rand rtax rrates rfor rindividuals rare r40%, ris rit ralways rbetter rfor
rthe rindividual rto rtransfer rtheir rbusiness rto ra rcorporation?
7. ―As rlong ras rall rof rthe rincome rtax rrules rare rknown, ra rtax rplan rcan rbe rdeveloped rwith
rcertainty.‖ rIs rthis rstatement rtrue? rExplain.
8. What rbasic rskills rare rrequired rto rdevelop ra rgood rtax rplan?
9. An rentrepreneur ris rdeveloping ra rnew rbusiness rventure rand ris rplanning rto rraise requity rcapital
rfrom rindividual rinvestors. rTheir radviser rindicates rthat rthe rventure rcould rbe rstructured ras ra
rcorporation r(i.e., rshares rare rissued rto rthe rinvestors) ror ras ra rlimited rpartnership r (i.e.,
r partnership r units r are r sold). r Both r structures r provide r limited r liability r for rthe rinvestors.
rShould rthe rentrepreneur rconsider rthe rtax rpositions rof rthe rindividual rinvestors? rExplain.
rWithout rdealing rwith rspecific rtax rrules, rwhat rgeneral rtax rfactors rshould ran rinvestor rconsider
rbefore rmaking ran rinvestment?
10. What ris ra rtax ravoidance rtransaction?
11. ―If ra rtransaction r(or ra rseries rof rtransactions) rthat rresults rin ra rtax rbenefit rwas rnot rundertaken
rprimarily rfor rbona rfide rbusiness, rinvestment, ror rfamily rpurposes, rthe rgeneral ranti-avoidance
rrule rwill rapply rand reliminate rthe rtax rbenefit.‖ rIs rthis rstatement rtrue? rExplain.
