CHAPTER 1
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
,Review Questions
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1. If income tax is imposed after profits have been determined, why is taxation relevant
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wto business decision making?
w w w
2. Most business decisions involve the evaluation of alternative courses of action. For
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example, a marketing manager may be responsible for choosing a strategy for
w w w w w w w w w w w w
establishing sales in new geographical territories. Briefly explain how the tax factor can
w w w w w w w w w w w w w
be an integral part of this decision.
w w w w w w w
3. What are the fundamental variables of the income tax system that decision-makers should
w w w w w w w w w w w w
be familiar with so that they can apply tax issues to their areas of responsibility?
w w w w w w w w w w w w w w w
4. What is an ―after-tax‖ approach to decision making?
w w w w w w w
. 1
Instructor Solutions Manual Chapter One
w w w w
, CHAPTER 1
Solutions to Review Questions
w w w
R1-1 Once
w
TAXATION― ITS ROLE
profit is determined, w
IN BUSINESS
the Income DECISION
Tax Act determines w
MAKING
the amount wof income tax w w w w w w w w w w
that results. However, at all levels of management, alternative courses of action are
w w w w w w w w w w w w w
evaluated. In many cases, the choice of one alternative over the other may affect both
w w w w w w w w w w w w w w w
the amount and the timing of future taxes on income generated from that activity.
w w w w w w w w w w w w w w
Therefore, the person making those decisions has a direct input into future after-tax
w w w w w w w w w w w w w
cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the
w w w w w w w w w w w w w w
ultimate return on investment and, in turn, the value of the enterprise. Including the tax
w w w w w w w w w w w w w w w
variable as a part of the formal decision process will ultimately lead to improved after-
w w w w w w w w w w w w w w w
tax cash flow.
w w
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
w w w w w w w w w w w w w
establishing a formal presence in the new territory with a branch office or a separate
w w w w w w w w w w w w w w w
corporation. The new territories may also cross provincial or international boundaries.
w w w w w w w w w w w
Provincial income tax rates vary amongst the provinces. The amount of income that is
w w w w w w w w w w w w w w
subject to tax in the new province will be different for each of the three alternatives
w w w w w w w w w w w w w w w w
mentioned above. For example, with direct selling, none of the income is taxed in the
w w w w w w w w w w w w w w w
new province, but with a separate corporation, all of the income is taxed in the new
w w w w w w w w w w w w w w w w
province. Because the tax cost is different in each case, taxation is a relevant part of the
w w w w w w w w w w w w w w w w w
decision and must be included in any cost-benefit analysis that compares the three
w w w w w w w w w w w w w
alternatives [Reg. 400-402.1].
w w w
R1-3 A basic understanding of the following variables will significantly strengthen a decision
w w w w w w w w w w w w
maker's ability to apply tax issues to their area of responsibility.
w w w w w w w w w w w
Types of Income w w - Employment, Business, Property, Capital gains w w w w
Taxable Entities
w w - Individuals, Corporations, Trusts w w
Alternative Business w - Corporation, Proprietorship, Partnership, Limited w w w
Structures w partnership, Joint arrangement, Income trust w w w w
Tax Jurisdictions w - Federal, Provincial, Foreign w w
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
w w w w w w w w w w w w
divestitures, or debt and equity restructuring, will impact the amount and timing of the
w w w w w w w w w w w w w w
tax cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts
w w w w w w w w w w w w w w w w
whether or not the ultimate result of the decision is successful. An after-tax
w w w w w w w w w w w w w
approach to decision-making requires each decision-maker to think "after-tax" for
w w w w w w w w w w
every decision at the time the decision is being made, and, to consider alternative
w w w w w w w w w w w w w w
courses of action to minimize the tax cost, in the same way that decisions are made
w w w w w w w w w w w w w w w w
regarding other types of costs.
w w w w w
Failure to apply an after-tax approach at the time that decisions are made may
w w w w w w w w w w w w w
wprovide inaccurate information for evaluation, and, result in a permanently inefficient tax
w w w w w w w w w w w
structure.
w
. 2
, Instructor Solutions Manual Chapter One
w w w w
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
,Review Questions
w
1. If income tax is imposed after profits have been determined, why is taxation relevant
w w w w w w w w w w w w w
wto business decision making?
w w w
2. Most business decisions involve the evaluation of alternative courses of action. For
w w w w w w w w w w w
example, a marketing manager may be responsible for choosing a strategy for
w w w w w w w w w w w w
establishing sales in new geographical territories. Briefly explain how the tax factor can
w w w w w w w w w w w w w
be an integral part of this decision.
w w w w w w w
3. What are the fundamental variables of the income tax system that decision-makers should
w w w w w w w w w w w w
be familiar with so that they can apply tax issues to their areas of responsibility?
w w w w w w w w w w w w w w w
4. What is an ―after-tax‖ approach to decision making?
w w w w w w w
. 1
Instructor Solutions Manual Chapter One
w w w w
, CHAPTER 1
Solutions to Review Questions
w w w
R1-1 Once
w
TAXATION― ITS ROLE
profit is determined, w
IN BUSINESS
the Income DECISION
Tax Act determines w
MAKING
the amount wof income tax w w w w w w w w w w
that results. However, at all levels of management, alternative courses of action are
w w w w w w w w w w w w w
evaluated. In many cases, the choice of one alternative over the other may affect both
w w w w w w w w w w w w w w w
the amount and the timing of future taxes on income generated from that activity.
w w w w w w w w w w w w w w
Therefore, the person making those decisions has a direct input into future after-tax
w w w w w w w w w w w w w
cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the
w w w w w w w w w w w w w w
ultimate return on investment and, in turn, the value of the enterprise. Including the tax
w w w w w w w w w w w w w w w
variable as a part of the formal decision process will ultimately lead to improved after-
w w w w w w w w w w w w w w w
tax cash flow.
w w
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
w w w w w w w w w w w w w
establishing a formal presence in the new territory with a branch office or a separate
w w w w w w w w w w w w w w w
corporation. The new territories may also cross provincial or international boundaries.
w w w w w w w w w w w
Provincial income tax rates vary amongst the provinces. The amount of income that is
w w w w w w w w w w w w w w
subject to tax in the new province will be different for each of the three alternatives
w w w w w w w w w w w w w w w w
mentioned above. For example, with direct selling, none of the income is taxed in the
w w w w w w w w w w w w w w w
new province, but with a separate corporation, all of the income is taxed in the new
w w w w w w w w w w w w w w w w
province. Because the tax cost is different in each case, taxation is a relevant part of the
w w w w w w w w w w w w w w w w w
decision and must be included in any cost-benefit analysis that compares the three
w w w w w w w w w w w w w
alternatives [Reg. 400-402.1].
w w w
R1-3 A basic understanding of the following variables will significantly strengthen a decision
w w w w w w w w w w w w
maker's ability to apply tax issues to their area of responsibility.
w w w w w w w w w w w
Types of Income w w - Employment, Business, Property, Capital gains w w w w
Taxable Entities
w w - Individuals, Corporations, Trusts w w
Alternative Business w - Corporation, Proprietorship, Partnership, Limited w w w
Structures w partnership, Joint arrangement, Income trust w w w w
Tax Jurisdictions w - Federal, Provincial, Foreign w w
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
w w w w w w w w w w w w
divestitures, or debt and equity restructuring, will impact the amount and timing of the
w w w w w w w w w w w w w w
tax cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts
w w w w w w w w w w w w w w w w
whether or not the ultimate result of the decision is successful. An after-tax
w w w w w w w w w w w w w
approach to decision-making requires each decision-maker to think "after-tax" for
w w w w w w w w w w
every decision at the time the decision is being made, and, to consider alternative
w w w w w w w w w w w w w w
courses of action to minimize the tax cost, in the same way that decisions are made
w w w w w w w w w w w w w w w w
regarding other types of costs.
w w w w w
Failure to apply an after-tax approach at the time that decisions are made may
w w w w w w w w w w w w w
wprovide inaccurate information for evaluation, and, result in a permanently inefficient tax
w w w w w w w w w w w
structure.
w
. 2
, Instructor Solutions Manual Chapter One
w w w w
