TEST BANK
Solution Manual for Canadian Income Taxation 26th Edition By
William Buckwold
,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`bu
siness`decision`making?
2. Most`business`decisions`involve`the`evaluation`of`alternative`courses`of`action.`For`exam
ple,`a`marketing`manager`may`be`responsible`for`choosing`a`strategy`for`establishing`sale
s`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`responsi
bility?
4. What`is`an`―after-tax‖`approach`to`decision`making?
. 1
Instructor`Solutions`Manual`Chapter`One
,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.`I
n`many`cases,`the`choice`of`one`alternative`over`the`other`may`affect`both`the`amount`and`th
e`timing`of`future`taxes`on`income`generated`from`that`activity.`Therefore,`the`person`maki
ng`those`decisions`has`a`direct`input`into`future`after-
tax`cash`flow.`Obviously,`decisions`that`reduce`or`postpone`the`payment`of`tax`affect`the`ul
timate`return`on`investment`and,`in`turn,`the`value`of`the`enterprise.`Including`the`tax`variab
le`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`establis
hing`a`formal`presence`in`the`new`territory`with`a`branch`office`or`a`separate`corporation.`T
he`new`territories`may`also`cross`provincial`or`international`boundaries.`Provincial`income`t
ax`rates`vary`amongst`the`provinces.`The`amount`of`income`that`is`subject`to`tax`in`the`ne
w`province`will`be`different`for`each`of`the`three`alternatives`mentioned`above.`For`exampl
e,`with`direct`selling,`none`of`the`income`is`taxed`in`the`new`province,`but`with`a`separate`c
orporation,`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`m
aker's`ability`to`apply`tax`issues`to`their`area`of`responsibility.
Types`of`Income -
Employment,`Business,`Property,`Capital`gains`Tax
able`Entities - Individuals,`Corporations,`Trusts
Alternative`Business -
Corporation,`Proprietorship,`Partnership,`Limited`Str
uctures partnership,`Joint`arrangement,`Income`trust
Tax`Jurisdictions - Federal,`Provincial,`Foreign
R1-
4`All`cash`flow`decisions,`whether`related`to`revenues,`expenses,`asset`acquisitions`or`div
estitures,`or`debt`and`equity`restructuring,`will`impact`the`amount`and`timing`of`the`tax`cost.
`Therefore,`cash`flow`exists`only`on`an`after`tax`basis,`and,`the`tax`impacts`whether`or`not` th
e` ultimate` result` of` the` decision` is` successful.` An` after-tax` approach` to` decision-
making`requires`each`decision-maker`to`think`"after-
tax"`for`every`decision`at`the`time`the`decision`is`being`made,`and,`to`consider`alternative`c
ourses`of`action`to`minimize`the`tax`cost,`in`the`same`way`that`decisions`are`made`regardin
g`other`types`of`costs.
Failure` to` apply` an` after-
tax` approach` at` the` time` that` decisions` are` made` may` provide`inaccurate`information`for`
evaluation,`and,`result`in`a`permanently`inefficient`tax`structure.
, CHAPTER`1
TAXATION―`ITS`ROLE`IN`BUSINESS`DECISION`MAKING
. 2
Instructor`Solutions`Manual`Chapter`One
Solution Manual for Canadian Income Taxation 26th Edition By
William Buckwold
,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`bu
siness`decision`making?
2. Most`business`decisions`involve`the`evaluation`of`alternative`courses`of`action.`For`exam
ple,`a`marketing`manager`may`be`responsible`for`choosing`a`strategy`for`establishing`sale
s`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`responsi
bility?
4. What`is`an`―after-tax‖`approach`to`decision`making?
. 1
Instructor`Solutions`Manual`Chapter`One
,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.`I
n`many`cases,`the`choice`of`one`alternative`over`the`other`may`affect`both`the`amount`and`th
e`timing`of`future`taxes`on`income`generated`from`that`activity.`Therefore,`the`person`maki
ng`those`decisions`has`a`direct`input`into`future`after-
tax`cash`flow.`Obviously,`decisions`that`reduce`or`postpone`the`payment`of`tax`affect`the`ul
timate`return`on`investment`and,`in`turn,`the`value`of`the`enterprise.`Including`the`tax`variab
le`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`establis
hing`a`formal`presence`in`the`new`territory`with`a`branch`office`or`a`separate`corporation.`T
he`new`territories`may`also`cross`provincial`or`international`boundaries.`Provincial`income`t
ax`rates`vary`amongst`the`provinces.`The`amount`of`income`that`is`subject`to`tax`in`the`ne
w`province`will`be`different`for`each`of`the`three`alternatives`mentioned`above.`For`exampl
e,`with`direct`selling,`none`of`the`income`is`taxed`in`the`new`province,`but`with`a`separate`c
orporation,`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`m
aker's`ability`to`apply`tax`issues`to`their`area`of`responsibility.
Types`of`Income -
Employment,`Business,`Property,`Capital`gains`Tax
able`Entities - Individuals,`Corporations,`Trusts
Alternative`Business -
Corporation,`Proprietorship,`Partnership,`Limited`Str
uctures partnership,`Joint`arrangement,`Income`trust
Tax`Jurisdictions - Federal,`Provincial,`Foreign
R1-
4`All`cash`flow`decisions,`whether`related`to`revenues,`expenses,`asset`acquisitions`or`div
estitures,`or`debt`and`equity`restructuring,`will`impact`the`amount`and`timing`of`the`tax`cost.
`Therefore,`cash`flow`exists`only`on`an`after`tax`basis,`and,`the`tax`impacts`whether`or`not` th
e` ultimate` result` of` the` decision` is` successful.` An` after-tax` approach` to` decision-
making`requires`each`decision-maker`to`think`"after-
tax"`for`every`decision`at`the`time`the`decision`is`being`made,`and,`to`consider`alternative`c
ourses`of`action`to`minimize`the`tax`cost,`in`the`same`way`that`decisions`are`made`regardin
g`other`types`of`costs.
Failure` to` apply` an` after-
tax` approach` at` the` time` that` decisions` are` made` may` provide`inaccurate`information`for`
evaluation,`and,`result`in`a`permanently`inefficient`tax`structure.
, CHAPTER`1
TAXATION―`ITS`ROLE`IN`BUSINESS`DECISION`MAKING
. 2
Instructor`Solutions`Manual`Chapter`One
