?
A?
VI
TU
_S
ED
OV
PR
AP
,AP
TABLE OF CONTENTS
PRByrd & Chen's Canadian Tax Principles (2025-2026 Edition) - Solutions Manual
Gary Donell
VOLUME 1
Chapter 1
OV Introduction to Federal Taxation in Canada
Chapter 2 Procedures and Administration
R
Chapter 3 ED Income or Loss from an Office or Employment
U
Chapter 4 Taxable Income and Tax Payable for Individuals
Chapter 5 Capital Cost Allowance
SE
Chapter 6 Income or Loss from a Business
Chapter 7 Income or Loss from Property
_S
IS
Chapter 8 Capital Gains and Capital Losses
Chapter 9 Other Income and Deductions, and Other Issues
Chapter 10
ORetirement Savings and Other Special Income
TU
Arrangements
N
VOLUME 2
N
Chapter 11 Taxable Income and Tax Payable for Individuals
Revisited
VI
O
Chapter 12 Taxable Income and Tax Payable for Corporations
Chapter 13 Taxation of Corporate Investment Income
C
Chapter 14 Other Issues in Corporate Taxation
A?
ED
Chapter 15 Corporate Taxation and Management Decisions
Chapter 16 Rollovers under Section 85
Chapter 17
?
Other Corporate Rollovers and Sale of a Corporate
M
Business
Chapter 18 Partnerships
Chapter 19 Trusts and Estate Planning
Chapter 20 International Issues in Taxation
Chapter 21 GST/HST
,AP Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2025/26 Edition
Chapter 1 Instructor’s Solutions Manual
PR
Answers to Quick Review Questions
1. B. Gross income is part of net income but is not a step separate from net income.
OV
2. A
3. C. TIEAs are designed to share information with another country to address tax evasion. TIEAs are
not designed to address double taxation, which is the purpose of a tax treaty.
4. B. An individual is not a Canadian resident based solely on citizenship.
5. C
ED
6. E. The shares remain a source of income even if no income is actually received in a given year.
7. B
_S
8. B. The non-resident would have to own 25% of all the shares of a class issued by the corporation
for the shares to be taxable Canadian property. TU
G. D is the most important, and B the least important.
10. E
Solutions to Assignment Problems VI
Solution to AP 1-1
Although there may not be one single solution to this problem, and student answers will be
limited to their preliminary understanding of income tax concepts and procedures, this
A?
problem provides the basis for an interesting discussion of various qualitative characteristics.
Equity or Fairness The increase provides both horizontal and vertical equity. Individuals
with the same income will receive the same treatment, while individuals with different
amounts of income will be treated differently.
?
Neutrality The increase is not neutral. It targets high-income individuals and is likely to
influence their economic decisions.
Adequacy While the increase was intended to create additional revenues, there is some
evidence that the opposite has happened. This reflects the fact that high-income individuals
are sometimes in a position to move some, or all, of that income out of Canada (e.g., move
their residence to the U.S.) and to engage in complex income splitting transactions.
Flexibility With respect to flexibility, the rate can be changed at any time. However, as a
practical matter, such changes would need to be made on an annual basis.
, AP Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2025/26 Edition
Simplicity and Ease of Compliance This change would not appear to present any
compliance issues.
Certainty The increase makes it clear to individual taxpayers the amount of income tax that
PR
they will be required to pay.
Balance between Sectors Unfortunately, this change will increase the imbalance in the
Canadian tax system between corporate and individual taxpayers. Before the change,
individuals were already paying a disproportionate share of tax revenues. The intent of this
OV
change was to further increase this imbalance.
International Competitiveness This increase further widens the gap between Canadian
and U.S. personal income tax rates, making Canada far less competitive with the U.S.
However, Canadian income tax rates are not out of line with income tax rates in other
industrialized countries.
ED
Solution to AP 1-2
Instructor Note There is no definitive solution to this problem. What follows
_S
represents possible comments that could be made.
For the Canadian income tax system to be more competitive with the U.S., both individual
and corporate income tax rates would have to be lowered. The most obvious conflict that
TU
would arise would be with the ADEQUACY of revenues. Income tax rate reductions reduce
revenues and would create additional problems with the large budget deficits that exist in
Canada.
Another issue is BALANCE BETWEEN SECTORS. The Canadian system is heavily VI
dependent on individual income tax as opposed to corporate income tax. Lowering corporate
rates would further worsen this problem.
The question of NEUTRALITY could also be involved. Trying to match either U.S. individual
or U.S. corporate income tax rates could have an impact on economic decisions.
Depending on whether changes are made to corporate income tax rates or, alternatively,
A?
individual income tax rates, this could have an impact on FAIRNESS or EQUITY.
Trying to match income tax rates in the U.S. reduces the FLEXIBILITY of the Canadian
income tax system.
?
Solution to AP 1-3
A. Diamonds, South Africa In a monopoly, the tax will likely be shifted to employees
and/or consumers. The incidence shift will depend on competition in world markets and
employment levels. If the international diamond market is price sensitive and there is
high unemployment in South Africa, then the tax will be shifted almost entirely to
employees.
The shifting assumptions affect evaluation of the tax using the characteristics of a “good”
tax system. A tax that is entirely shifted to employees is similar to one on wages and is
non-neutral, as it affects the decisions of employees to continue working. Some
A?
VI
TU
_S
ED
OV
PR
AP
,AP
TABLE OF CONTENTS
PRByrd & Chen's Canadian Tax Principles (2025-2026 Edition) - Solutions Manual
Gary Donell
VOLUME 1
Chapter 1
OV Introduction to Federal Taxation in Canada
Chapter 2 Procedures and Administration
R
Chapter 3 ED Income or Loss from an Office or Employment
U
Chapter 4 Taxable Income and Tax Payable for Individuals
Chapter 5 Capital Cost Allowance
SE
Chapter 6 Income or Loss from a Business
Chapter 7 Income or Loss from Property
_S
IS
Chapter 8 Capital Gains and Capital Losses
Chapter 9 Other Income and Deductions, and Other Issues
Chapter 10
ORetirement Savings and Other Special Income
TU
Arrangements
N
VOLUME 2
N
Chapter 11 Taxable Income and Tax Payable for Individuals
Revisited
VI
O
Chapter 12 Taxable Income and Tax Payable for Corporations
Chapter 13 Taxation of Corporate Investment Income
C
Chapter 14 Other Issues in Corporate Taxation
A?
ED
Chapter 15 Corporate Taxation and Management Decisions
Chapter 16 Rollovers under Section 85
Chapter 17
?
Other Corporate Rollovers and Sale of a Corporate
M
Business
Chapter 18 Partnerships
Chapter 19 Trusts and Estate Planning
Chapter 20 International Issues in Taxation
Chapter 21 GST/HST
,AP Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2025/26 Edition
Chapter 1 Instructor’s Solutions Manual
PR
Answers to Quick Review Questions
1. B. Gross income is part of net income but is not a step separate from net income.
OV
2. A
3. C. TIEAs are designed to share information with another country to address tax evasion. TIEAs are
not designed to address double taxation, which is the purpose of a tax treaty.
4. B. An individual is not a Canadian resident based solely on citizenship.
5. C
ED
6. E. The shares remain a source of income even if no income is actually received in a given year.
7. B
_S
8. B. The non-resident would have to own 25% of all the shares of a class issued by the corporation
for the shares to be taxable Canadian property. TU
G. D is the most important, and B the least important.
10. E
Solutions to Assignment Problems VI
Solution to AP 1-1
Although there may not be one single solution to this problem, and student answers will be
limited to their preliminary understanding of income tax concepts and procedures, this
A?
problem provides the basis for an interesting discussion of various qualitative characteristics.
Equity or Fairness The increase provides both horizontal and vertical equity. Individuals
with the same income will receive the same treatment, while individuals with different
amounts of income will be treated differently.
?
Neutrality The increase is not neutral. It targets high-income individuals and is likely to
influence their economic decisions.
Adequacy While the increase was intended to create additional revenues, there is some
evidence that the opposite has happened. This reflects the fact that high-income individuals
are sometimes in a position to move some, or all, of that income out of Canada (e.g., move
their residence to the U.S.) and to engage in complex income splitting transactions.
Flexibility With respect to flexibility, the rate can be changed at any time. However, as a
practical matter, such changes would need to be made on an annual basis.
, AP Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2025/26 Edition
Simplicity and Ease of Compliance This change would not appear to present any
compliance issues.
Certainty The increase makes it clear to individual taxpayers the amount of income tax that
PR
they will be required to pay.
Balance between Sectors Unfortunately, this change will increase the imbalance in the
Canadian tax system between corporate and individual taxpayers. Before the change,
individuals were already paying a disproportionate share of tax revenues. The intent of this
OV
change was to further increase this imbalance.
International Competitiveness This increase further widens the gap between Canadian
and U.S. personal income tax rates, making Canada far less competitive with the U.S.
However, Canadian income tax rates are not out of line with income tax rates in other
industrialized countries.
ED
Solution to AP 1-2
Instructor Note There is no definitive solution to this problem. What follows
_S
represents possible comments that could be made.
For the Canadian income tax system to be more competitive with the U.S., both individual
and corporate income tax rates would have to be lowered. The most obvious conflict that
TU
would arise would be with the ADEQUACY of revenues. Income tax rate reductions reduce
revenues and would create additional problems with the large budget deficits that exist in
Canada.
Another issue is BALANCE BETWEEN SECTORS. The Canadian system is heavily VI
dependent on individual income tax as opposed to corporate income tax. Lowering corporate
rates would further worsen this problem.
The question of NEUTRALITY could also be involved. Trying to match either U.S. individual
or U.S. corporate income tax rates could have an impact on economic decisions.
Depending on whether changes are made to corporate income tax rates or, alternatively,
A?
individual income tax rates, this could have an impact on FAIRNESS or EQUITY.
Trying to match income tax rates in the U.S. reduces the FLEXIBILITY of the Canadian
income tax system.
?
Solution to AP 1-3
A. Diamonds, South Africa In a monopoly, the tax will likely be shifted to employees
and/or consumers. The incidence shift will depend on competition in world markets and
employment levels. If the international diamond market is price sensitive and there is
high unemployment in South Africa, then the tax will be shifted almost entirely to
employees.
The shifting assumptions affect evaluation of the tax using the characteristics of a “good”
tax system. A tax that is entirely shifted to employees is similar to one on wages and is
non-neutral, as it affects the decisions of employees to continue working. Some
