Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
Solution Manual for Canadian Income Taxation 2022-2023 25th Edition
by William Buckwold, Joan Kitunen, Matthew Roman
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?
Copyright © 2022 McGraw-Hill Education Ltd. 1
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
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
Tax Jurisdictions - Federal, Provincial, Foreign
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, 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 the 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 courses of action to minimize
the tax cost, in the same way that decisions are made regarding 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.
Copyright © 2022 McGraw-Hill Education Ltd. 2
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. ―Tax aplanning aand atax aavoidance amean athe asame athing.‖ aIs athis astatement atrue?
aExplain.
2. What adistinguishes atax aevasion afrom atax aavoidance aand atax aplanning?
3. Does aCanada aRevenue aAgency adeal awith aall atax aavoidance aactivities ain athe
asame away? aExplain.
4. The apurpose aof atax aplanning ais ato areduce aor adefer athe atax acosts aassociated awith
afinancial atransactions. aWhat aare athe ageneral atypes aof atax aplanning aactivities?
aBriefly aexplain ahow aeach aof athem amay areduce aor adefer athe atax acost.
5. ―It ais aalways abetter ato apay atax alater arather athan asooner.‖ aIs athis astatement atrue?
aExplain.
6. When acorporate atax arates aare a13% aand atax arates afor aindividuals aare a40%, ais ait
aalways abetter afor athe aindividual ato atransfer atheir abusiness ato aa acorporation?
7. ―As along aas aall aof athe aincome atax arules aare aknown, aa atax aplan acan abe
adeveloped awith acertainty.‖ aIs athis astatement atrue? aExplain.
8. What abasic askills aare arequired ato adevelop aa agood atax aplan?
9. An aentrepreneur ais adeveloping aa anew abusiness aventure aand ais aplanning ato araise
aequity acapital afrom aindividual ainvestors. aTheir aadviser aindicates athat athe aventure
acould abe astructured aas aa acorporation a(i.e., ashares aare aissued ato athe ainvestors)
aor aas aa alimited apartnership a(i.e., apartnership aunits aare asold). aBoth astructures
aprovide alimited aliability afor a the ainvestors. aShould athe aentrepreneur aconsider athe
atax apositions aof athe aindividual ainvestors? aExplain. aWithout adealing awith aspecific
atax arules, awhat ageneral atax afactors ashould aan ainvestor aconsider abefore amaking
aan ainvestment?
10. What ais aa atax aavoidance atransaction?
11. ―If aa atransaction a(or aa aseries aof atransactions) athat aresults ain aa atax abenefit awas
anot aundertaken aprimarily afor abona afide abusiness, ainvestment, aor afamily apurposes,
athe ageneral aanti-avoidance arule awill aapply aand aeliminate athe atax abenefit.‖ aIs athis
astatement atrue? aExplain.
Copyright © 2022 McGraw-Hill Education Ltd. 3
Instructor Solutions Manual Chapter Three
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
Solutions ato aReview aQuestions
R2-1 a There a is a a a distinction a between a tax a planning a and a tax a avoidance. a Tax
a planning a is a the aprocess aof aarranging afinancial atransactions ain aa amanner athat
areduces aor adefers athe atax acost aand athat aarrangement ais aprovided afor ain athe
aIncome aTax aAct aor ais anot aspecifically a prohibited. aIn aother awords, athe
aarrangement ais achosen afrom aa areasonably aclear aset aof aoptions awithin athe aAct.
In acontrast, atax aavoidance ainvolves aa atransaction aor aseries aof atransactions, athe
amain apurpose aof awhich ais ato aavoid aor areduce athe atax aotherwise apayable. aWhile
aeach atransaction ain athe aprocess amay abe alegal aby aitself, athe aseries aof atransactions
acause aa aresult anot aintended aby athe atax asystem.
R2-2 a Both atax aplanning aand atax aavoidance aactivities aclearly apresent athe afull afacts aof
aeach atransaction, aallowing athem ato abe ascrutinized aby aCRA. aIn acomparison, atax
aevasion ainvolves aknowingly aexcluding aor aaltering athe afacts awith athe aintention ato
adeceive. aFailing ato areport aan aamount aof arevenue aknown ato aexist aor adeducting aa
afalse aexpense aare aexamples aof atax aevasion.
R2-3 a CRA adoes anot adeal awith aall atax aavoidance atransactions ain athe asame away. aIn
ageneral, aCRA aattempts ato adivide atax aavoidance atransactions abetween athose athat
aare aan aabuse aof athe atax asystem aand athose athat aare anot. aWhen aan aaction ais
aabusive, aCRA awill aattempt ato adeny athe aresulting abenefits aby aapplying aone aof athe
aanti-avoidance arules ain athe aIncome aTax aAct.
R2-4 There aare athree ageneral atypes aof atax aplanning aactivities:
Shifting aincome afrom aone atime-period ato aanother.
Transferring aincome ato aanother aentity.
Converting athe anature aof aincome afrom aone atype ato aanother.
Shifting aincome ato aanother atime-period acan abe aa abenefit aif ait aresults ain aa alower
arate aof atax aapplying ato athe aincome. aEven aif aa alower arate aof atax ais anot aachieved,
aa abenefit amay abe a gained afrom adelaying athe apayment aof atax ato aa afuture atime-
period.
Shifting aincome ato aan aalternate ataxpayer a(for aexample, afrom aan aindividual ato aa
acorporation) amay abeneficially aalter athe aamount aand atiming aof athe atax.
There aare aseveral atypes aof aincome awithin athe atax asystem asuch aas aemployment
aincome, abusiness aincome, acapital agains aand aso aon. aEach atype aof aincome ais
agoverned aby aa adifferent aset aof arules. aFor asome atypes aof aincome, athe atiming, athe
aamount aof aincome arecognized, aand athe aeffective atax arate ais adifferent afrom aother
atypes. aBy aconverting aone atype aof aincome ato aanother, aa abenefit amay abe agained aif
athe atiming aof aincome arecognition, athe aamount arecognized, aand/or athe aeffective atax
arate ais afavorable.
R2-5 a a The astatement ais anot atrue. aPaying atax alater amay abe aan aadvantage abecause ait
adelays athe atax acost aand afrees aup acash afor aother apurposes. aHowever, athe adelay
amay aresult ain aa ahigher arate aof atax ain athe afuture ayear acompared ato athe acurrent
ayear. aIn asuch acircumstances, athere ais aa atrade-off abetween athe atiming aof athe atax
aand athe aamount aof atax apayable.
Copyright © 2022 McGraw-Hill Education Ltd. 4
Instructor Solutions Manual Chapter Three
Solution Manual for Canadian Income Taxation 2022-2023 25th Edition
by William Buckwold, Joan Kitunen, Matthew Roman
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?
Copyright © 2022 McGraw-Hill Education Ltd. 1
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
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
Tax Jurisdictions - Federal, Provincial, Foreign
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, 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 the 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 courses of action to minimize
the tax cost, in the same way that decisions are made regarding 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.
Copyright © 2022 McGraw-Hill Education Ltd. 2
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. ―Tax aplanning aand atax aavoidance amean athe asame athing.‖ aIs athis astatement atrue?
aExplain.
2. What adistinguishes atax aevasion afrom atax aavoidance aand atax aplanning?
3. Does aCanada aRevenue aAgency adeal awith aall atax aavoidance aactivities ain athe
asame away? aExplain.
4. The apurpose aof atax aplanning ais ato areduce aor adefer athe atax acosts aassociated awith
afinancial atransactions. aWhat aare athe ageneral atypes aof atax aplanning aactivities?
aBriefly aexplain ahow aeach aof athem amay areduce aor adefer athe atax acost.
5. ―It ais aalways abetter ato apay atax alater arather athan asooner.‖ aIs athis astatement atrue?
aExplain.
6. When acorporate atax arates aare a13% aand atax arates afor aindividuals aare a40%, ais ait
aalways abetter afor athe aindividual ato atransfer atheir abusiness ato aa acorporation?
7. ―As along aas aall aof athe aincome atax arules aare aknown, aa atax aplan acan abe
adeveloped awith acertainty.‖ aIs athis astatement atrue? aExplain.
8. What abasic askills aare arequired ato adevelop aa agood atax aplan?
9. An aentrepreneur ais adeveloping aa anew abusiness aventure aand ais aplanning ato araise
aequity acapital afrom aindividual ainvestors. aTheir aadviser aindicates athat athe aventure
acould abe astructured aas aa acorporation a(i.e., ashares aare aissued ato athe ainvestors)
aor aas aa alimited apartnership a(i.e., apartnership aunits aare asold). aBoth astructures
aprovide alimited aliability afor a the ainvestors. aShould athe aentrepreneur aconsider athe
atax apositions aof athe aindividual ainvestors? aExplain. aWithout adealing awith aspecific
atax arules, awhat ageneral atax afactors ashould aan ainvestor aconsider abefore amaking
aan ainvestment?
10. What ais aa atax aavoidance atransaction?
11. ―If aa atransaction a(or aa aseries aof atransactions) athat aresults ain aa atax abenefit awas
anot aundertaken aprimarily afor abona afide abusiness, ainvestment, aor afamily apurposes,
athe ageneral aanti-avoidance arule awill aapply aand aeliminate athe atax abenefit.‖ aIs athis
astatement atrue? aExplain.
Copyright © 2022 McGraw-Hill Education Ltd. 3
Instructor Solutions Manual Chapter Three
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2022-2023 Ed.
Solutions ato aReview aQuestions
R2-1 a There a is a a a distinction a between a tax a planning a and a tax a avoidance. a Tax
a planning a is a the aprocess aof aarranging afinancial atransactions ain aa amanner athat
areduces aor adefers athe atax acost aand athat aarrangement ais aprovided afor ain athe
aIncome aTax aAct aor ais anot aspecifically a prohibited. aIn aother awords, athe
aarrangement ais achosen afrom aa areasonably aclear aset aof aoptions awithin athe aAct.
In acontrast, atax aavoidance ainvolves aa atransaction aor aseries aof atransactions, athe
amain apurpose aof awhich ais ato aavoid aor areduce athe atax aotherwise apayable. aWhile
aeach atransaction ain athe aprocess amay abe alegal aby aitself, athe aseries aof atransactions
acause aa aresult anot aintended aby athe atax asystem.
R2-2 a Both atax aplanning aand atax aavoidance aactivities aclearly apresent athe afull afacts aof
aeach atransaction, aallowing athem ato abe ascrutinized aby aCRA. aIn acomparison, atax
aevasion ainvolves aknowingly aexcluding aor aaltering athe afacts awith athe aintention ato
adeceive. aFailing ato areport aan aamount aof arevenue aknown ato aexist aor adeducting aa
afalse aexpense aare aexamples aof atax aevasion.
R2-3 a CRA adoes anot adeal awith aall atax aavoidance atransactions ain athe asame away. aIn
ageneral, aCRA aattempts ato adivide atax aavoidance atransactions abetween athose athat
aare aan aabuse aof athe atax asystem aand athose athat aare anot. aWhen aan aaction ais
aabusive, aCRA awill aattempt ato adeny athe aresulting abenefits aby aapplying aone aof athe
aanti-avoidance arules ain athe aIncome aTax aAct.
R2-4 There aare athree ageneral atypes aof atax aplanning aactivities:
Shifting aincome afrom aone atime-period ato aanother.
Transferring aincome ato aanother aentity.
Converting athe anature aof aincome afrom aone atype ato aanother.
Shifting aincome ato aanother atime-period acan abe aa abenefit aif ait aresults ain aa alower
arate aof atax aapplying ato athe aincome. aEven aif aa alower arate aof atax ais anot aachieved,
aa abenefit amay abe a gained afrom adelaying athe apayment aof atax ato aa afuture atime-
period.
Shifting aincome ato aan aalternate ataxpayer a(for aexample, afrom aan aindividual ato aa
acorporation) amay abeneficially aalter athe aamount aand atiming aof athe atax.
There aare aseveral atypes aof aincome awithin athe atax asystem asuch aas aemployment
aincome, abusiness aincome, acapital agains aand aso aon. aEach atype aof aincome ais
agoverned aby aa adifferent aset aof arules. aFor asome atypes aof aincome, athe atiming, athe
aamount aof aincome arecognized, aand athe aeffective atax arate ais adifferent afrom aother
atypes. aBy aconverting aone atype aof aincome ato aanother, aa abenefit amay abe agained aif
athe atiming aof aincome arecognition, athe aamount arecognized, aand/or athe aeffective atax
arate ais afavorable.
R2-5 a a The astatement ais anot atrue. aPaying atax alater amay abe aan aadvantage abecause ait
adelays athe atax acost aand afrees aup acash afor aother apurposes. aHowever, athe adelay
amay aresult ain aa ahigher arate aof atax ain athe afuture ayear acompared ato athe acurrent
ayear. aIn asuch acircumstances, athere ais aa atrade-off abetween athe atiming aof athe atax
aand athe aamount aof atax apayable.
Copyright © 2022 McGraw-Hill Education Ltd. 4
Instructor Solutions Manual Chapter Three
