, 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
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
