SOLUTION MANUAL
CANADIAN INCOME TAXATION
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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?
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
Instructor Solutions Manual Chapter One
, 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.
,
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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.
Copyright © 2023 McGraw Hill Ltd. 1
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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
Copyright © 2023 McGraw Hill Ltd. 2
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 Ed.
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 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].
Copyright © 2023 McGraw Hill Ltd. 3
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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.
Copyright © 2023 McGraw Hill Ltd. 4
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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
Copyright © 2023 McGraw Hill Ltd. 5
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 Ed.
Reasonable Rate, Thus, Shifting Income From A Ltd. To B Ltd., The Transactions Are
Permissible And Will Not Be Challenged.
Copyright © 2023 McGraw Hill Ltd. 6
Instructor Solutions Manual Chapter Two
CANADIAN INCOME TAXATION
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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?
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
Instructor Solutions Manual Chapter One
, 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.
,
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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.
Copyright © 2023 McGraw Hill Ltd. 1
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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
Copyright © 2023 McGraw Hill Ltd. 2
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 Ed.
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 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].
Copyright © 2023 McGraw Hill Ltd. 3
Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 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
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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
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Instructor Solutions Manual Chapter Two
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 2024-2025 Ed.
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
