Canadian Income Taxation, 2023/2024:
Planning and Decision Making
26th Edition
By William Buckwold
Complete Chapter Solutions Manual
are included (Ch 1 to 23)
** Immediate Download
** Swift Response
** All Chapters included
** Excel Solutions
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
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?
. 1
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 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.
. 2
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
2. What distinguishes tax evasion from tax avoidance and tax planning?
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
Explain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
transactions. What are the general types of tax planning activities? Briefly explain how
each of them may reduce or defer the tax cost.
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better
for the individual to transfer their business to a corporation?
7. “As long as all of the income tax rules are known, a tax plan can be developed with
certainty.” Is this statement true? Explain.
8. What basic skills are required to develop a good tax plan?
9. An entrepreneur is developing a new business venture and is planning to raise equity
capital from individual investors. Their adviser indicates that the venture could be
structured as a corporation (i.e., shares are issued to the investors) or as a limited
partnership (i.e., partnership units are sold). Both structures provide limited liability for the
investors. Should the entrepreneur consider the tax positions of the individual investors?
Explain. Without dealing with specific tax rules, what general tax factors should an investor
consider before making an investment?
10. What is a tax avoidance transaction?
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
primarily for bona fide business, investment, or family purposes, the general anti-
avoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.
. 1
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Solutions to Review Questions
R2-1 There is a distinction between tax planning and tax avoidance. Tax planning is the process
of arranging financial transactions in a manner that reduces or defers the tax cost and that
arrangement is provided for in the Income Tax Act or is not specifically prohibited. In other
words, the arrangement is chosen from a reasonably clear set of options within the Act.
In contrast, tax avoidance involves a transaction or series of transactions, the main purpose
of which is to avoid or reduce the tax otherwise payable. While each transaction in the
process may be legal by itself, the series of transactions cause a result not intended by the
tax system.
R2-2 Both tax planning and tax avoidance activities clearly present the full facts of each
transaction, allowing them to be scrutinized by CRA. In comparison, tax evasion involves
knowingly excluding or altering the facts with the intention to deceive. Failing to report an
amount of revenue known to exist or deducting a false expense are examples of tax
evasion.
R2-3 CRA does not deal with all tax avoidance transactions in the same way. In general, CRA
attempts to divide tax avoidance transactions between those that are an abuse of the tax
system and those that are not. When an action is abusive, CRA will attempt to deny the
resulting benefits by applying one of the anti-avoidance rules in the Income Tax Act.
R2-4 There are three general types of tax planning activities:
• Shifting income from one time-period to another.
• Transferring income to another entity.
• Converting the nature of income from one type to another.
Shifting income to another time-period can be a benefit if it results in a lower rate of tax
applying to the income. Even if a lower rate of tax is not achieved, a benefit may be gained
from delaying the payment of tax to a future time-period.
Shifting income to an alternate taxpayer (for example, from an individual to a corporation)
may beneficially alter the amount and timing of the tax.
There are several types of income within the tax system such as employment income,
business income, capital gains and so on. Each type of income is governed by a different
set of rules. For some types of income, the timing, the amount of income recognized, and
the effective tax rate is different from other types. By converting one type of income to
another, a benefit may be gained if the timing of income recognition, the amount
recognized, and/or the effective tax rate is favorable.
R2-5 The statement is not true. Paying tax later may be an advantage because it delays the tax
cost and frees up cash for other purposes. However, the delay may result in a higher rate
of tax in the future year compared to the current year. In such circumstances, there is a
trade-off between the timing of the tax and the amount of tax payable.
R2-6 There is not always an advantage to transfer income to a corporation when the corporate
tax rate is lower than that of the individual shareholder. While an immediate lower tax rate
results, remember that the corporation may be required to distribute some or all of its
after-tax income to the shareholder, which causes a second level of tax. Whether or not an
advantage is achieved depends on the amount of that second level of tax and when it
. 2
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
occurs. Other factors may also be relevant such as the tax treatment of a possible business
failure or sale.
R2-7 The statement is not true. Knowing the tax rules is, of course, a major element in the tax
planning process, but it does not guarantee the expected outcome. Planning means that
certain steps are taken now in preparation for certain activities that may occur in the future.
However, those anticipated activities might not occur and the desired tax result may not be
achieved. Tax planning also requires that one must anticipate and speculate on possible
future scenarios and relate them to the current tax planning steps. Those scenarios are
never certain.
R2-8 To develop a good tax plan, one must be able to:
• Understand the fundamentals of the income tax system.
• Anticipate the complete cycle of transactions.
• Develop optional methods of achieving the desired business result and analyze each of
their tax implications.
• Speculate on possible future scenarios and assess their likelihood.
• Measure the time value of money.
• Place the tax issue in perspective by applying common sense and sound business
judgement.
• Understand the tax position of other parties involved in the transaction.
R2-9 Yes, the entrepreneur should consider the tax position of the potential investors. They will
be taking a risk in accepting the investment. If the entrepreneur knows the tax effect on the
investors, of each alternative organization structure, the entrepreneur can choose the one
that provides investors the most favorable tax treatment (i.e., one that reduces their after-
tax loss if the investment fails, or increases their after-tax income if it succeeds). Before
making the investment, the investor should determine the tax impact on:
• income earned by the venture,
• income distributed to the investor,
• losses incurred by the venture,
• the loss of the investment if the venture fails, and
• the gain on the investment when it is eventually sold.
R2-10 A tax avoidance transaction is a term used within the general anti-avoidance rule (GAAR)
of the Income Tax Act. An avoidance transaction is a transaction or series of transactions
that results in a tax benefit and was not undertaken primarily for bona fide business,
investment or family purposes [ITA 245].
R2-11 The statement is not true. In order for the tax benefit to be denied under the general anti-
avoidance rule (GAAR), the transaction, in addition to not being primarily for bona fide
business, investment or family purposes, must be considered to be a misuse or abuse of
the income tax system as a whole. What constitutes a misuse or abuse is not always clear.
However, certain avoidance transactions are permitted and others are not [ITA 245(3), IC
88-2].
___________________________________________________________
. 3
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Key Concept Questions
QUESTION ONE
The Income Tax Act contains a general anti-avoidance rule (GAAR) in section 245. Consider
each of the following situations and determine whether the GAAR will likely apply.
1. Christine Jensen transferred her consulting business to a corporation primarily to obtain the
benefit of the low corporate tax rate.
2. Paul Devi owns 100% of the shares of P Ltd. He provides services to P Ltd. In the current
year he received no remuneration for his services because the payment of a salary to Paul
would increase the amount of the loss that P Ltd. will incur in the year.
3. A Canadian-controlled private corporation pays its shareholder/manager a bonus that will
reduce the corporation’s income to the amount eligible for the low tax rate. The bonus is not
in excess of a reasonable amount.
4. A profitable Canadian corporation has a wholly owned Canadian subsidiary that is
sustaining losses and needs additional capital to carry on its business. The subsidiary could
borrow the funds from its bank but could not obtain any tax saving in the current year by
deducting the interest expense due to its loss situation. Therefore, the parent corporation
borrows the funds from its bank and subscribes for additional common shares of the
subsidiary. The parent corporation reduces its taxable income by deducting the interest
expense. The subsidiary uses the funds to earn income from its business.
CPA Competency 6.1.1 GAAR. Income tax reference: ITA 245(1),(2),(3),(4); IC 88-2.
QUESTION TWO
John Ivanov has owned all of the shares of Corporation A and Corporation B since their inception.
In the current year, John had Corporation A transfer, on a tax-deferred basis, property used in its
business to Corporation B. The reason for the transfer is to enable Corporation B to apply the
income earned on the transferred assets against its non-capital losses.
Will the general anti-avoidance rule (GAAR) apply to disallow the tax benefit?
CPA Competency 6.1.1 GAAR. Income tax reference: ITA 245(1),(2),(3),(4); IC 88-2.
. 4
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Solutions to Key Concept Questions
KC 2-1
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:
1) A tax benefit results from a transaction or part of a series of transactions [ITA 245(1) –
“tax benefit” definition],
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit [ITA 245(3) – “Avoidance
transaction” definition],
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole [ITA 245(4)].
For the transactions described in the four situations:
• A tax benefit results in each case,
• The transactions have been undertaken primarily to obtain a tax benefit and are,
for that reason, avoidance transactions, and
• The transactions are not subject to any other anti-avoidance rule in the Act.
Therefore, the issue to be determined is whether the tax benefit would result in a misuse or abuse
of the Act, read as a whole.
Situation 1: There is nothing in the Act that prohibits Christine from incorporating her business.
The incorporation is consistent with the Act read as a whole and, therefore, the GAAR would not
apply.
Situation 2: There is no provision in the Act requiring a salary be paid to Paul and the failure to
pay a salary is, therefore, not contrary to the scheme of the Act read as a whole. The GAAR would
not apply to deem a salary to be paid by P Ltd. or received by Paul.
Situation 3: The Act recognizes the deductibility of reasonable business expenses, which include
bonuses. The payment of the bonus is not an abusive transaction and, therefore, the GAAR
should not apply to the payment.
Situation 4: The borrowing by the parent corporation is for the purpose of gaining or producing
income as required by paragraph 20(1)(c) of the Act. The GAAR should, therefore, not apply. In
fact, CRA has indicated, in comfort letters, that where one corporation (A Ltd.) borrows from a
financial institution to invest in shares of another corporation (B Ltd.) and B Ltd. re-loans the funds
back to A Ltd. and charges interest at a reasonable rate, thus, shifting income from A Ltd. to B
Ltd., the transactions are permissible and will not be challenged.
. 5
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
KC 2-2
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is used when specific anti-avoidance provisions do not suffice.
For the GAAR to apply, the following four conditions must exist:
1) A tax benefit results from a transaction or part of a series of transactions,
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit,
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole.
In the case of John and his two corporations:
• The transaction does result in a tax benefit as using the losses will reduce tax,
• It appears that the transaction was undertaken primarily for the tax benefit, and
• There is no provision in the Income Tax Act prohibiting the transfer of the property on a
tax-deferred basis to a related corporation nor the deduction of the losses by Corporation
B,
So, the question that remains is whether the transaction is an abusive transaction.
Since the Act contains specific provisions permitting the transfer of losses between related
corporations, the transfer in question is consistent with the scheme of the Act and, therefore, is
not an abusive transaction. Thus, the GAAR should not apply.
However, had the transfer of a property been undertaken to avoid a specific rule, such as a rule
designed to preclude the deduction of losses after the acquisition of control of a corporation by
an arm's length person, such a transfer would be a misuse of the provisions of the Act and be
subject to the GAAR [IC88-2].
Where the GAAR applies, the tax benefit that results from an avoidance transaction is denied. In
order to determine the amount of the tax benefit that is denied, the provision indicates that the tax
consequences of the transaction to a person will be determined as is reasonable in the
circumstances.
. 6
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
CHAPTER 3
LIABILITY FOR TAX, INCOME DETERMINATION, AND ADMINISTRATION OF THE
INCOME TAX SYSTEM
Review Questions
1. Which of the following entities are subject to income tax?
(a) proprietorship
(b) individual
(c) joint venture
(d) trust
(e) limited partnership
(f) corporation
(g) partnership
2. Describe how the income earned by any of the non-taxable entities listed in Question 1 is
included in the Canadian tax system.
3. How and when does income earned by a corporation affect the tax position of an
individual who is a shareholder?
4. In describing who is liable for tax in Canada, the Income Tax Act simply states, “An income
tax shall be paid, as required by this Act, on the taxable income for each taxation year of
every person resident in Canada at any time in the year.” Accepting that “person” includes
an individual and a corporation, briefly discuss the meaning and ramifications of this
statement.
5. In what circumstances are non-residents subject to Canadian income tax?
6. Can a Canadian resident be subject to tax in Canada as well as in a foreign country on the
same earned income? If yes, explain how. Also, what mechanism is available to minimize
double taxation?
7. Explain the difference between net income for tax purposes and taxable income for the
taxable entities.
8. Explain what is meant by the statutory scheme, and describe the scheme’s relevance to
the Canadian income tax system.
9. For tax purposes, would you prefer that a financial loss be a capital loss or a business loss?
Explain.
10. Explain the difference between income from property and a gain on the sale of capital
property.
11. You may have heard that “corporations are entitled to more deductions for tax purposes
than individuals.” Based on your reading of Chapter 3, is this statement true? Explain.
12. If an individual earns a living as a lawyer, what possible categories of income, for tax
purposes, may the person generate? Describe the circumstances for each possible
classification.
13. What types of income for tax purposes may result when a profit is achieved on the sale
of property (e.g., land)?
14. Individual A, a Canadian resident, owns and operates a profitable small farm in North
Dakota, U.S. They also have a large amount of money earning interest in an American
bank. Individual B, also a Canadian resident, owns 100% of the shares of an American
Copyright © 2023 McGraw-Hill Education Ltd. 1
Instructor Solutions Manual Chapter Three
Planning and Decision Making
26th Edition
By William Buckwold
Complete Chapter Solutions Manual
are included (Ch 1 to 23)
** Immediate Download
** Swift Response
** All Chapters included
** Excel Solutions
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
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?
. 1
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 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.
. 2
Instructor Solutions Manual Chapter One
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
2. What distinguishes tax evasion from tax avoidance and tax planning?
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
Explain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
transactions. What are the general types of tax planning activities? Briefly explain how
each of them may reduce or defer the tax cost.
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better
for the individual to transfer their business to a corporation?
7. “As long as all of the income tax rules are known, a tax plan can be developed with
certainty.” Is this statement true? Explain.
8. What basic skills are required to develop a good tax plan?
9. An entrepreneur is developing a new business venture and is planning to raise equity
capital from individual investors. Their adviser indicates that the venture could be
structured as a corporation (i.e., shares are issued to the investors) or as a limited
partnership (i.e., partnership units are sold). Both structures provide limited liability for the
investors. Should the entrepreneur consider the tax positions of the individual investors?
Explain. Without dealing with specific tax rules, what general tax factors should an investor
consider before making an investment?
10. What is a tax avoidance transaction?
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
primarily for bona fide business, investment, or family purposes, the general anti-
avoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.
. 1
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Solutions to Review Questions
R2-1 There is a distinction between tax planning and tax avoidance. Tax planning is the process
of arranging financial transactions in a manner that reduces or defers the tax cost and that
arrangement is provided for in the Income Tax Act or is not specifically prohibited. In other
words, the arrangement is chosen from a reasonably clear set of options within the Act.
In contrast, tax avoidance involves a transaction or series of transactions, the main purpose
of which is to avoid or reduce the tax otherwise payable. While each transaction in the
process may be legal by itself, the series of transactions cause a result not intended by the
tax system.
R2-2 Both tax planning and tax avoidance activities clearly present the full facts of each
transaction, allowing them to be scrutinized by CRA. In comparison, tax evasion involves
knowingly excluding or altering the facts with the intention to deceive. Failing to report an
amount of revenue known to exist or deducting a false expense are examples of tax
evasion.
R2-3 CRA does not deal with all tax avoidance transactions in the same way. In general, CRA
attempts to divide tax avoidance transactions between those that are an abuse of the tax
system and those that are not. When an action is abusive, CRA will attempt to deny the
resulting benefits by applying one of the anti-avoidance rules in the Income Tax Act.
R2-4 There are three general types of tax planning activities:
• Shifting income from one time-period to another.
• Transferring income to another entity.
• Converting the nature of income from one type to another.
Shifting income to another time-period can be a benefit if it results in a lower rate of tax
applying to the income. Even if a lower rate of tax is not achieved, a benefit may be gained
from delaying the payment of tax to a future time-period.
Shifting income to an alternate taxpayer (for example, from an individual to a corporation)
may beneficially alter the amount and timing of the tax.
There are several types of income within the tax system such as employment income,
business income, capital gains and so on. Each type of income is governed by a different
set of rules. For some types of income, the timing, the amount of income recognized, and
the effective tax rate is different from other types. By converting one type of income to
another, a benefit may be gained if the timing of income recognition, the amount
recognized, and/or the effective tax rate is favorable.
R2-5 The statement is not true. Paying tax later may be an advantage because it delays the tax
cost and frees up cash for other purposes. However, the delay may result in a higher rate
of tax in the future year compared to the current year. In such circumstances, there is a
trade-off between the timing of the tax and the amount of tax payable.
R2-6 There is not always an advantage to transfer income to a corporation when the corporate
tax rate is lower than that of the individual shareholder. While an immediate lower tax rate
results, remember that the corporation may be required to distribute some or all of its
after-tax income to the shareholder, which causes a second level of tax. Whether or not an
advantage is achieved depends on the amount of that second level of tax and when it
. 2
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
occurs. Other factors may also be relevant such as the tax treatment of a possible business
failure or sale.
R2-7 The statement is not true. Knowing the tax rules is, of course, a major element in the tax
planning process, but it does not guarantee the expected outcome. Planning means that
certain steps are taken now in preparation for certain activities that may occur in the future.
However, those anticipated activities might not occur and the desired tax result may not be
achieved. Tax planning also requires that one must anticipate and speculate on possible
future scenarios and relate them to the current tax planning steps. Those scenarios are
never certain.
R2-8 To develop a good tax plan, one must be able to:
• Understand the fundamentals of the income tax system.
• Anticipate the complete cycle of transactions.
• Develop optional methods of achieving the desired business result and analyze each of
their tax implications.
• Speculate on possible future scenarios and assess their likelihood.
• Measure the time value of money.
• Place the tax issue in perspective by applying common sense and sound business
judgement.
• Understand the tax position of other parties involved in the transaction.
R2-9 Yes, the entrepreneur should consider the tax position of the potential investors. They will
be taking a risk in accepting the investment. If the entrepreneur knows the tax effect on the
investors, of each alternative organization structure, the entrepreneur can choose the one
that provides investors the most favorable tax treatment (i.e., one that reduces their after-
tax loss if the investment fails, or increases their after-tax income if it succeeds). Before
making the investment, the investor should determine the tax impact on:
• income earned by the venture,
• income distributed to the investor,
• losses incurred by the venture,
• the loss of the investment if the venture fails, and
• the gain on the investment when it is eventually sold.
R2-10 A tax avoidance transaction is a term used within the general anti-avoidance rule (GAAR)
of the Income Tax Act. An avoidance transaction is a transaction or series of transactions
that results in a tax benefit and was not undertaken primarily for bona fide business,
investment or family purposes [ITA 245].
R2-11 The statement is not true. In order for the tax benefit to be denied under the general anti-
avoidance rule (GAAR), the transaction, in addition to not being primarily for bona fide
business, investment or family purposes, must be considered to be a misuse or abuse of
the income tax system as a whole. What constitutes a misuse or abuse is not always clear.
However, certain avoidance transactions are permitted and others are not [ITA 245(3), IC
88-2].
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Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Key Concept Questions
QUESTION ONE
The Income Tax Act contains a general anti-avoidance rule (GAAR) in section 245. Consider
each of the following situations and determine whether the GAAR will likely apply.
1. Christine Jensen transferred her consulting business to a corporation primarily to obtain the
benefit of the low corporate tax rate.
2. Paul Devi owns 100% of the shares of P Ltd. He provides services to P Ltd. In the current
year he received no remuneration for his services because the payment of a salary to Paul
would increase the amount of the loss that P Ltd. will incur in the year.
3. A Canadian-controlled private corporation pays its shareholder/manager a bonus that will
reduce the corporation’s income to the amount eligible for the low tax rate. The bonus is not
in excess of a reasonable amount.
4. A profitable Canadian corporation has a wholly owned Canadian subsidiary that is
sustaining losses and needs additional capital to carry on its business. The subsidiary could
borrow the funds from its bank but could not obtain any tax saving in the current year by
deducting the interest expense due to its loss situation. Therefore, the parent corporation
borrows the funds from its bank and subscribes for additional common shares of the
subsidiary. The parent corporation reduces its taxable income by deducting the interest
expense. The subsidiary uses the funds to earn income from its business.
CPA Competency 6.1.1 GAAR. Income tax reference: ITA 245(1),(2),(3),(4); IC 88-2.
QUESTION TWO
John Ivanov has owned all of the shares of Corporation A and Corporation B since their inception.
In the current year, John had Corporation A transfer, on a tax-deferred basis, property used in its
business to Corporation B. The reason for the transfer is to enable Corporation B to apply the
income earned on the transferred assets against its non-capital losses.
Will the general anti-avoidance rule (GAAR) apply to disallow the tax benefit?
CPA Competency 6.1.1 GAAR. Income tax reference: ITA 245(1),(2),(3),(4); IC 88-2.
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Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
Solutions to Key Concept Questions
KC 2-1
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:
1) A tax benefit results from a transaction or part of a series of transactions [ITA 245(1) –
“tax benefit” definition],
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit [ITA 245(3) – “Avoidance
transaction” definition],
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole [ITA 245(4)].
For the transactions described in the four situations:
• A tax benefit results in each case,
• The transactions have been undertaken primarily to obtain a tax benefit and are,
for that reason, avoidance transactions, and
• The transactions are not subject to any other anti-avoidance rule in the Act.
Therefore, the issue to be determined is whether the tax benefit would result in a misuse or abuse
of the Act, read as a whole.
Situation 1: There is nothing in the Act that prohibits Christine from incorporating her business.
The incorporation is consistent with the Act read as a whole and, therefore, the GAAR would not
apply.
Situation 2: There is no provision in the Act requiring a salary be paid to Paul and the failure to
pay a salary is, therefore, not contrary to the scheme of the Act read as a whole. The GAAR would
not apply to deem a salary to be paid by P Ltd. or received by Paul.
Situation 3: The Act recognizes the deductibility of reasonable business expenses, which include
bonuses. The payment of the bonus is not an abusive transaction and, therefore, the GAAR
should not apply to the payment.
Situation 4: The borrowing by the parent corporation is for the purpose of gaining or producing
income as required by paragraph 20(1)(c) of the Act. The GAAR should, therefore, not apply. In
fact, CRA has indicated, in comfort letters, that where one corporation (A Ltd.) borrows from a
financial institution to invest in shares of another corporation (B Ltd.) and B Ltd. re-loans the funds
back to A Ltd. and charges interest at a reasonable rate, thus, shifting income from A Ltd. to B
Ltd., the transactions are permissible and will not be challenged.
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Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
KC 2-2
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is used when specific anti-avoidance provisions do not suffice.
For the GAAR to apply, the following four conditions must exist:
1) A tax benefit results from a transaction or part of a series of transactions,
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit,
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole.
In the case of John and his two corporations:
• The transaction does result in a tax benefit as using the losses will reduce tax,
• It appears that the transaction was undertaken primarily for the tax benefit, and
• There is no provision in the Income Tax Act prohibiting the transfer of the property on a
tax-deferred basis to a related corporation nor the deduction of the losses by Corporation
B,
So, the question that remains is whether the transaction is an abusive transaction.
Since the Act contains specific provisions permitting the transfer of losses between related
corporations, the transfer in question is consistent with the scheme of the Act and, therefore, is
not an abusive transaction. Thus, the GAAR should not apply.
However, had the transfer of a property been undertaken to avoid a specific rule, such as a rule
designed to preclude the deduction of losses after the acquisition of control of a corporation by
an arm's length person, such a transfer would be a misuse of the provisions of the Act and be
subject to the GAAR [IC88-2].
Where the GAAR applies, the tax benefit that results from an avoidance transaction is denied. In
order to determine the amount of the tax benefit that is denied, the provision indicates that the tax
consequences of the transaction to a person will be determined as is reasonable in the
circumstances.
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Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2023-2024 Ed.
CHAPTER 3
LIABILITY FOR TAX, INCOME DETERMINATION, AND ADMINISTRATION OF THE
INCOME TAX SYSTEM
Review Questions
1. Which of the following entities are subject to income tax?
(a) proprietorship
(b) individual
(c) joint venture
(d) trust
(e) limited partnership
(f) corporation
(g) partnership
2. Describe how the income earned by any of the non-taxable entities listed in Question 1 is
included in the Canadian tax system.
3. How and when does income earned by a corporation affect the tax position of an
individual who is a shareholder?
4. In describing who is liable for tax in Canada, the Income Tax Act simply states, “An income
tax shall be paid, as required by this Act, on the taxable income for each taxation year of
every person resident in Canada at any time in the year.” Accepting that “person” includes
an individual and a corporation, briefly discuss the meaning and ramifications of this
statement.
5. In what circumstances are non-residents subject to Canadian income tax?
6. Can a Canadian resident be subject to tax in Canada as well as in a foreign country on the
same earned income? If yes, explain how. Also, what mechanism is available to minimize
double taxation?
7. Explain the difference between net income for tax purposes and taxable income for the
taxable entities.
8. Explain what is meant by the statutory scheme, and describe the scheme’s relevance to
the Canadian income tax system.
9. For tax purposes, would you prefer that a financial loss be a capital loss or a business loss?
Explain.
10. Explain the difference between income from property and a gain on the sale of capital
property.
11. You may have heard that “corporations are entitled to more deductions for tax purposes
than individuals.” Based on your reading of Chapter 3, is this statement true? Explain.
12. If an individual earns a living as a lawyer, what possible categories of income, for tax
purposes, may the person generate? Describe the circumstances for each possible
classification.
13. What types of income for tax purposes may result when a profit is achieved on the sale
of property (e.g., land)?
14. Individual A, a Canadian resident, owns and operates a profitable small farm in North
Dakota, U.S. They also have a large amount of money earning interest in an American
bank. Individual B, also a Canadian resident, owns 100% of the shares of an American
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Instructor Solutions Manual Chapter Three
