Multiple Choice Questions

Question MC 1 (43 minutes) [Chapters 2 to 8]

Determine the single most appropriate response to the following questions.
1) Carla lives in Detroit, Michigan, USA. She commutes daily to Windsor, Ontario, Canada,
where she is employed by Ford Motor Company of Canada Limited. She works 9 am to
5 pm, Monday through Friday. Which one of the following best indicates Carla’s residency
status for Canadian income tax purposes for 2011?
(a) A full-time resident
(b) A part-year resident
(c) A non-resident
(d) A deemed resident (sojourner)

2) ABC Inc. provides Ginger Kelly with a company car. The car is leased for $500/month
(including 13% HST and excluding insurance) and was made available to her for
eight months. ABC pays all of the operating costs which amounted to $3,500 in 2011. Ginger
drove 13,000 kilometres in 2011 of which 8,000 were for business. What is the minimum
taxable benefit that Ginger must include on her 2011 personal tax return?
(a) $2,200 rounded
(b) $1,500 rounded
(c) $3,517 rounded
(d) $4,850 rounded

3) Which of the following is a taxable benefit?

(a) A cash Christmas gift to an employee from the employer valued at $450.
(b) Payment of the tuition for an employee completing a degree that will benefit the
employer.
(c) A 20% discount on the employer’s merchandise, available to all employees.
(d) Subsidized meals offered to all employees of the company assuming the price is
approximately equal to the cost.

4) Scott Bicycle Manufacturing Ltd. is a CCPC. Brian Mills, one of the employees, was granted
a stock option on October 11, 2003 for 10,000 shares at $3 per share. Brian exercised the
stock option on September 30, 2006 when the market price was $6 per share. In February
2011, Brian purchased a new home and sold the shares for $7 each. The fair market value on
October 11, 2003 was $4. What is the effect of the above on Brian’s income for tax purposes,
assuming Brian wants to minimize taxes?
(a) $15,000 in 2006
(b) $15,000 in 2011
(c) $30,000 in 2006
(d) $35,000 in 2011
5) Theresa Gain presents the following information with her 2011 tax return:
Capital Gains:
Shares $1,500
Personal-use property 750
Listed personal property 600
Capital losses:
Shares $ 820
Personal-use property 1,100
Listed personal property 240
Listed personal property losses of prior years 105
Net capital losses from 2009 310
What is the minimum taxable capital gain (rounded to the nearest dollar) to be reported on
Theresa’s tax return?
(a) $468
(b) $843
(c) $1,264
(d) $1,000

6) Sunny River purchased an unlimited life franchise (arm’s length transaction) at a cost of
$100,000 during 2011. The maximum tax deduction related to the franchise for the taxation
year ending December 31, 2011 is:
(a) $2,275
(b) $10,000
(c) $4,550
(d) $5,250

7) On June 1, 2011 Beta Ltd, purchased a franchise for $91,000. The franchise has a limited life
of 13 years. Which one of the following amounts represents the maximum amount of capital
cost allowance that Beta can deduct for its year ended July 31, 2011?
(a) $4,778
(b) $7,000
(c) $3,500
(d) $1,170

8) Lambda sold a capital property on October 31, 2011 for $200,000 with a cash down payment
of $15,000. The balance of $185,000 is payable on October 31, 2015. The adjusted cost base
of the property was $115,000 and the selling costs were $7,000. Which one of the following
amounts represents the minimum taxable capital gain (rounded to the nearest dollar) in 2011?
(a) $39,000
(b) $5,850
(c) $7,800
(d) $15,600
9) ABC Ltd. is a manufacturer with a December 31 year-end. On January 1, 2011, the
undepreciated capital cost for Class 10.1 was $22,950. The Class 10.1 car was purchased in
2009 for $34,000. During 2011, it was sold for $21,000. A new automobile was purchased for
$36,160, which included HST of $4,160. ABC Ltd. is registered to collect and remit HST.
What is the maximum CCA allowed combined (rounded to the nearest dollar) for the two cars
for 2011?
(a) $5,385
(b) $5,085
(c) $8,303
(d) $7,943

10) Greg Smith is self employed psychologist. He meets with all of his clients in his 400 square
foot home office. The entire house has a square footage of 2,400 square feet. Greg incurred
the following costs:
Utilities $1,600
House insurance 700
Business liability insurance 500
House maintenance 1,000
Mortgage interest 3,700
Property tax 1,100
Office supplies 500
What are the total expenses deductible from business income?
(a) $1,000
(b) $1,350
(c) $1,517
(d) $2,350

11) K Corporation Inc. owns a restaurant business that it carries on in rented premises. The lease was
signed January 1, 2010 and expires on December 31, 2015 (six years in total), and has two
successive renewal options for two years each. K Corporation Inc. had an opening balance in
2011 in Class 13 of $30,000 that resulted from $32,000 of leasehold improvements made during
the 2010 taxation year. K Corp Inc. made an additional $14,000 of leasehold improvements to the
same premises during its 2011 taxation year-end which ends December 31, 2011. What is the
maximum CCA that K Corp. Inc. can claim in 2011 for its Class 13 assets?
(a) $1,000
(b) $3,000
(c) $5,000
(d) $6,000

12) During the 12-month period ended December 31, 2011 ABC Co. purchased a $40,000
(including tax of HST of 13%) passenger vehicle for use by its salesperson in conducting his
employment. What is the maximum capital cost allowance that ABC Co. can claim for 2011,
assuming that the company is a HST registrant (i.e., the company remits HST)?
(a) $6,000
(b) $5,000
(c) $4,500
(d) $4,860
Question MC 2 (25 minutes) [Chapters 2 to 8]

Determine the single most appropriate response to the following questions.

1) In 2011, Alpha’s employer provided him with an employer-owned automobile costing

$33,900 (including HST of $3,900) for 12 months. His kilometres for personal use were
5,000 out of a total of 20,000 kilometres. Operating costs paid by his employer during 2011
were $3,503 (including HST of $403). Which one of the following statements is true for
2011?
(a) Alpha’s minimum operating cost benefit is $1,017.
(b) Alpha’s minimum operating cost benefit is $1,200.
(c) Alpha cannot elect to use ½ of his standby charge as his operating cost benefit.
(d) Alpha’s minimum standby charge is $4,000.

2) Kappa Limited paid $10,000 to purchase computer applications software (before apply HST)
on January 31, 2011. Kappa Limited has a December 31 year-end. What is the maximum tax
deduction that Kappa Limited can claim in respect of the above expenditure for its taxation
year ended December 31, 2011, assuming that Kappa is registered to collect and remit HST?
(a) $5,000
(b) $2,000
(c) $525
(d) $10,000

3) Lambda Corporation sold an old warehouse on the waterfront in Toronto on August 15, 2011.
The City of Toronto purchased the property and intends to demolish the building and use the
land as part of a waterfront bicycle trail. The total proceeds paid to Lambda Corporation were
$420,000. The adjusted cost base of the land is $80,000. The capital cost of the building was
$90,000 and the UCC of the building was $12,000. Lambda Corporation has allocated all of
the proceeds to the land. What will be the impact on Division B income for Lambda
Corporation for the above sale?
(a) $170,000
(b) $110,000
(c) $164,000
(d) $125,000

4) Mu Mu made a permanent move to the United States on September 1 of this year, after
having lived in Canada all of her life. Mu is 22 years old. Which one of the following best
indicates Mu’s residency status for Canadian income tax purposes for this year?
(a) A full-time resident
(b) A part-year resident
(c) A non-resident
(d) A deemed resident (sojourner)
5) Xi Limited was incorporated in Nova Scotia on May 21, 1924. The corporation has never
carried on business in Canada, but held its annual directors’ meeting in Nova Scotia each year
from 1924 through 1934. Which one of the following best describes Xi Limited’s residency
status for Canadian income tax purposes for 2011?
(a) A deemed resident (sojourner)
(b) A full-time resident
(c) A non-resident
(d) A part-time resident

6) Pi has purchased a vacant lot. He hopes that someday, once he meets his future bride and
settles down, he will build a home and raise his family on the property. This year, Pi paid
$800 of property taxes and $1,000 of interest on the loan he obtained to purchase the lot.
Which ONE of the following statements is TRUE?
(a) Pi can deduct the $1,000 of interest but not the property taxes paid in this year on the
basis that the land may generate a capital gain on the land some day.
(b) Pi could deduct all of the above expenditures if he were to rent the land to a farmer for
the year for $2,000.
(c) The property is a personal-use property and, thus, none of the above expenditures can
ever be deducted, even if the property is rented in the year.
(d) Pi can claim the principal residence exemption on any future sale of the land if he decides
to sell the land without building a home.

7) Rho Limited is in the midst of constructing a new building to house its administrative staff.
The building began construction on December 4, 2010, and will be completed for occupancy
on January 31, 2012. Which of the following expenditures made during 2011 is
DEDUCTIBLE to Rho Limited in computing its income from business for its taxation year
ended December 31, 2011?
(a) CCA on new office furnishing in storage as of December 2011, pending occupancy of the
building.
(b) Cost paid to the security company to patrol and protect the property during 2011.
(c) Interest on the construction loan, related to the cost of the land on which the building is
significantly constructed.
(d) The landscaping costs related to the building paid during 2011.
Question MC 3 (18 minutes) [Chapters 3 to 8]

Determine the single most appropriate response to the following questions.

1) XYZ Ltd.’s income statement for accounting purposes for its year ended December 31, 2011
shows a profit of $180,000 from the sale of widgets to a valued customer. The gross proceeds
were $300,000 and the cost of sales was $120,000. The gross proceeds of $300,000 are
payable in four equal instalments of $75,000, due on June 1 each year, commencing June 1,
2011. The deduction necessary to reconcile accounting income to income for tax purposes for
2011 in respect of this transaction is:
(a) Nil
(b) $135,000
(c) $144,000
(d) $225,000

2) On March 20, 2011, a personal residence owned by James Day, which originally cost
$280,000, was converted into a rental property. At this time, the rental property had a fair
market value of $340,000. What is the maximum capital cost allowance that could be claimed
for 2011 on this rental property (assuming no restrictions)?
(a) $6,800
(b) $5,600
(c) $6,400
(d) $6,200

3) On April 1, 1998, Catherine purchased a condominium in Horseshoe Valley, Ontario, for

$30,000. She lived in the condominium until she married in August 2002. At that time, she
moved into a rented apartment in north Toronto, Ontario, with her new husband. She
commenced to rent her condominium in late 2002, at which time it was valued at $45,000. In
December 2011 she sold the condominium for $80,000 to generate some cash to pay for a
new house. Assuming that Catherine elected under subsection 45(2) in respect of the
condominium in 2002, what is the approximate minimum taxable capital gain that she will
realize in 2011 on the sale?
(a) $50,000
(b) $11,905
(c) $7,143
(d) $9,524
4) Mega Ltd., which has a May 31 year-end, had its factory vandalized in August 2011. The
vandals managed to completely destroy a valuable piece of machinery. This was a
custom-designed manufacturing asset included in class 43 and is the only asset in the
class. The destroyed machinery had an original cost of $500,000 and an undepreciated
capital cost of $71,430. Mega received insurance proceeds of $345,000 for the
destroyed machinery. Due to advances in technology, a new machine cost only
$280,000 and was in place for use by December 1, 2011. What is the impact on income
for tax purposes to Mega for its taxation year ended May 31, 2012 in respect of the
above machinery?
(a) $273,670
(b) $965
(c) $1,608
(d) $70,000

5) Mr. T died on September 14, 2011 . At the date of his death, he had the following capital
assets, which were left to the beneficiaries indicated.
ACB/Capital Fair market
Asset UCC Beneficiary
Cost value
Shares in publicly traded company $10,000 n/a $100,000 Spouse
Car $40,000 $40,000 $10,000 Spouse
Rental building $45,000 $15,000 $150,000 Daughter

What is the minimum amount that must be included in Mr. T’s income for his final tax return
in respect of the above assets?
(a) $100,000
(b) $90,000
(c) $135,000
(d) $82,500
Question MC 4 (25 minutes) [Chapters 11, 12]
Determine the single most appropriate response to the following questions.
1) Adam Inc. is a taxable Canadian corporation. In 2011, the corporation contributed $180,000
to a registered amateur athletic association. In 2010, the corporation was unable to deduct
$63,000 of similar donations. In 2011, the income of the corporation for tax purposes
consisted of $310,000 of active business income and $10,000 of property income.
The maximum charitable donation deduction for Adam Inc. in 2011 is:
(a) $180,000
(b) $232,500
(c) $240,000
(d) $243,000

2) The following types of income have been taxed in a foreign jurisdiction in the current year.
Which one of those types of foreign income can result in foreign tax credits that can be
applied to Canadian income tax payable in other taxation years?
(a) Business income
(b) Employment income
(c) Property income
(d) Taxable capital gain

3) Jonathan owns 100% of Carweb.com Ltd. and owns 100% of Taxman Inc. Hence, they are
associated. Jonathan owns 10% of Internet Housefind Ltd., which is not an associated
company. Each of the three corporations has at least $500,000 of active business income
earned in Canada.
What is the maximum small business deduction combined (i.e., total combined SBD
deduction of all three companies) that the three corporations can claim on corporate income?
(a) $0
(b) $500,000
(c) $800,000
(d) $1,000,000

4) Waterloo Wholesale Ltd. (WWL) is wholly owned by Barbara, a resident of Canada, who also
owns all of the shares of Kitchener Klosets Ltd. (KKL). Both corporations have a March 31
year-end. KKL had both active business income and taxable income of $18,000 for its most
recent taxation year. Barbara has decided to allocate as much of the small business limit as is
needed to maximize the small business deduction for KKL.
Most of WWL’s income is from an active business carried on in Canada. The following
additional information pertains to WWL:
• Recapture of CCA on sale of operating assets $2,500
• Net taxable capital gains 3,000
• Charitable donations 1,500
• Division B net income for tax purposes 180,000
 What is the appropriate small business deduction for WWL for 2011?
(a) $27,920
(b) $30,090
(c) $28,560
(d) $29,120

5) Robin Ltd. is a corporation whose only business is providing accounting services for a fee to
Faith Ltd., a large, privately owned, arm’s length corporation. Shari and David are each 50%
shareholders and the only employees of Robin Ltd. Prior to the incorporation of Robin Ltd.,
both Shari and David were employed by Faith Ltd. in the accounting department. What type
of income is Robin Ltd. earning?
(a) Active business income
(b) Property income
(c) Specified investment business income
(d) Personal services business income

6) Elaine Ltd. is a Canadian-controlled private corporation. Its refundable dividend tax on hand
(RDTOH) account at December 31, 2010 was $35,000. For its 2011 taxation year, its
refundable portion of Part I tax was $23,000. The corporation received no dividends in 2011.
It paid taxable dividends of $60,000 in 2010 and $75,000 in 2011.
The balance in Elaine Ltd.’s (RDTOH) account at December 31, 2011 is:
(a) $13,000
(b) $33,000
(c) $35,000
(d) $38,000

7) Jay is an employee and 15% shareholder of Rick's Welding Shop Ltd. (Rick's). During the
2010 calendar year, Jay was having cash flow problems. Rick's gave Jay a loan of $5,000 on
May 1, 2010 to help him out. Rick's also gave Jay's son, Jake, a loan of $2,000 on
September 30, 2010 to help him meet expenses while at college. Rick's has said that Jay and
Jake can repay the loans whenever they can afford it. The loans remain outstanding as at
December 31, 2010. Rick's year-end for accounting and taxation purposes is December 31.
How much, and in which taxation year, is Jay required to include in his taxable income as a
result of the above transactions?
(a) $7,000 — 2010
(b) $7,000 — 2011
(c) $5,000 — 2010
(d) $5,000 — 2011
Question MC 5 (28 minutes) [Chapters 14 to 18]
Determine the single most appropriate response to the following questions.
1) Jim Bee filed his 2010 personal tax return on March 1, 2011. Neither he nor his spouse had
income from the carrying on of a business in 2010. The CRA mailed a Notice of Assessment
to Jim dated May 15, 2011, and Jim received it on May 30, 2011. If Jim disagrees with the
Notice of Assessment, he has until which one of the following dates to file a Notice of Objection?
(a) August 12, 2011
(b) August 29, 2011
(c) March 1, 2012
(d) April 30, 2012

2) Ken Kaye Ltd., a CCPC eligible for the small business deduction, has a January 31 year-end.
Due to the untimely departure of a key employee, the tax return for the year ended
January 31, 2009 was not filed until March 1, 2011. The unpaid tax on January 31, 2009 was
$5,500. In the past, all returns have been filed on time. What is the total penalty, excluding
interest that the corporation is required to pay?
(a) Nil
(b) $275
(c) $660
(d) $935

3) Alpha died on September 20, 2011 at the age of 97. By what date must the executrix of her
estate file Alpha’s final tax return?
(a) January 20, 2012
(b) March 20, 2012
(c) March 31, 2012
(d) April 30, 2012

4) Beta died on March 20, 2011. At the time of his death, Beta was employed as a secondary
school teacher. In addition, he operated technical writing consulting business as a
proprietorship with a December 31 year-end. The amounts earned to the time of his death were:
Salary
January 1, 2010 to December 31, 2010 $70,000
January 1, 2011 to March 20, 2011 16,000
Business income
January 1, 2010 to December 31, 2010 5,000
January 1, 2011 to March 20, 2011 1,300
Interest income
January 1, 2010 to December 31, 2010 2,000
January 1, 2011 to March 20, 2011 500
What is the amount of Beta’s income that should be reported in his final return?
(a) $16,000
(b) $17,800
(c) $22,800
(d) $94,800
5) Chi is one of a large number of shareholders of Pubco Ltd., a public corporation. She has
received an offer from Taikit Inc., another public corporation, to exchange all of her shares in
Pubco Inc., which are valued at $10,000, have a PUC of $1,000 and have an adjusted cost
base to her of $6,000, in return for shares of Taikit Inc. The Taikit Inc. shares, also, have a
value of $10,000 and a legal stated capital of $10,000. Which of the following amounts
represents the adjusted cost base of the Taikit Inc. shares received by Chi under section 85.1?
(a) $1,000
(b) $6,000
(c) $9,000
(d) $10,000

6) Delta is a member of a partnership with a December 31 year-end. Delta’s share of the 2011
partnership allocations was as follows: business loss of $25,000, and charitable donations of
$1,000. Delta took draws totalling $10,000 from the partnership during 2011. Delta’s adjusted
cost base (ACB) at January 1, 2011 was $59,000. What is the ACB of Delta’s partnership
interest at January 1, 2012?
(a) $23,000
(b) $24,000
(c) $25,000
(d) $33,000

7) A partnership interest was sold in 2011 by Epsilon for $13,000. The adjusted cost base of the
partnership interest was negative $2,000. Expenses of disposition were $1,000. Which one of
the following amounts represents the taxable capital gain realized on the sale?
(a) $5,000
(b) $6,000
(c) $7,000
(d) $8,000

8) Which one of the following statements pertaining to the tax implications of a partnership is
incorrect?
(a) Salaries to partners are not deductible by the partnership in the computation of its
income.
(b) Charitable donations made by a partnership are not deductible by the partnership, despite
the fact that partnerships are not taxable entities and, therefore, cannot obtain a tax credit.
(c) Business losses of a partnership can be allocated to the partners for them to deduct from
their other sources of income.
(d) Dividends received by a partnership are grossed up by the partnership in the calculation
of its income which is allocated to the partners.

9) Which one of the following items does not affect the calculation of the adjusted cost base of a
partnership interest?
(a) Interest on funds borrowed by a partner to make a capital contribution.
(b) Drawings made by partners.
(c) The non-allowable fraction of a capital loss.
(d) A political donation made by the partnership.
10) Gamma’s will provided for the creation of a trust on her death, which occurred in 2010.
Income from the trust is to be distributed equally to each of her four children. In 2011, the
trust earned $50,000 in cash dividends from Canadian-resident public corporations and
$20,000 in interest on Canadian bonds. The trust incurred interest expense of $2,000 on funds
borrowed to buy the investments. All of the dividends and $18,000 of the interest on the
bonds was distributed to the beneficiaries and the interest expense was claimed by the trust.
Which one of the following amounts represents the taxable income of one of the children
from the trust for 2011?
(a) $14,500
(b) $19,125
(c) $19,625
(d) $23,625

11) The country of residence of a discretionary trust and, hence, its liability for income tax in
Canada, is generally determined by which one of the following criteria?
(a) The country in which the settlor of the trust resided at the time the trust was created.
(b) The country in which the majority of the beneficiaries are resident.
(c) The country in which all or substantially all of the assets of the trust are situated.
(d) The country in which the majority of the trustees reside.

12) Alan Emm Inc. (AEI) has owned all of the shares of Sub Ltd. since the incorporation of the
latter in 1985. The shares of Sub Ltd. have an adjusted cost base of $100,000 to AEI and a
value of $900,000 now. Retained earnings in Sub Ltd., computed on a tax basis amount to
$600,000. AEI wants to sell the shares of Sub Ltd. and Grabit Ltd. is interested in purchasing
the shares. Sub Ltd. has $800,000 of cash that it does not need for its operations, and Grabit
Ltd. does not need. AEI will cause Sub Ltd. to pay a dividend of the excess cash and then AEI
will sell the shares of Sub Ltd. to Grabit Ltd. For $100,000. Which one of the following
choices represents the tax consequences of the transactions described to AEI assuming that
the appropriate designation is made?
(a) A tax-free dividend of $600,000 and a capital gain of $200,000.
(b) A tax-free dividend of $600,000 and a capital gain of $400,000.
(c) A tax-free dividend of $800,000 and a capital gain of nil.
(d) A tax-free dividend of $600,000 and a capital gain of $800,000.
13) Ms. Lambda, a Canadian resident, owned all of the common shares of Lambda
Enterprises Ltd. (LEL). The shares have a paid-up capital value and a cost of $75,000.
She transferred these shares under section 85 to a holding company, Holdco Inc., which
her two Canadian-resident adult children control, at a time when the value of the LEL
shares was $800,000. As consideration for the LEL shares transferred, she received from
Holdco Inc. a note with a principal amount of $500,000 and preferred shares with a fair
market value of $300,000, such that an elected amount of $500,000 was possible under
section 85. Ms. Lambda intended to offset all of the resultant $425,000 of capital gain
with her available QSBCS capital gains exemption. Which one of the following
statements is false?
(a) The PUC of the Holdco Inc. preferred shares is nil.
(b) Ms. Lambda is deemed to receive a dividend of $425,000 from Holdco Inc.
(c) Ms. Lambda’s ACB of the Holdco Inc. preferred shares is nil.
(d) Ms. Lambda is deemed to receive proceeds of disposition of $500,000 for the LEL
shares.

14) Mr. Pi is the sole beneficiary of a trust that arose on the death of his mother. She died on
March 15, 2010. March 15, the anniversary of the date of death, was chosen as the year-end
of the trust. Which one of the following statements is false?
(a) The trust’s tax return for the taxation year ended March 15, 2011 is due on June 12,
2011.
(b) The trust will pay federal tax on any of its income not distributed or payable to Mr. Pi
at the top federal personal rate of tax.
(c) In his 2011 tax return, Mr. Pi must report the income that is distributed to him out of
the trust for the trust’s taxation year ended March 15, 2011.
(d) Mr. Pi must include in his income amounts declared by the trust to be payable, but not
paid, to him at the end of the trust’s taxation year.
Question MC 6 (16 minutes) [Chapters 15 to 18]

Determine the single most appropriate response to the following questions.

1) On incorporation in 2006, a corporation issued 100 shares from treasury for $10 per share to
the owner-manager. In 2010, the owner-manager sold half of her shares to another individual
for $14 per share. In 2011, an employee purchased 20 shares from treasury for $16 per share.
All shares are of the same class. Which one of the following amounts represents the per-share
paid-up capital?
(a) $10
(b) $11
(c) $12.67
(d) $13.33

2) Alpha contributed an asset worth $15,000 to a corporation in return for shares with a paid-up
capital value and a retraction value of $20,000. Which one of the following will result from
the exchange?
(a) Alpha will be deemed to have realized a capital gain of $5,000.
(b) Alpha will be deemed to have received a stock dividend of $5,000.
(c) Alpha will be deemed to have received a dividend of $5,000.
(d) Alpha will have no immediate tax consequences. However, the adjusted cost base of the
shares will be reduced by $5,000, resulting in a capital gain of $5,000 on the ultimate
disposition of the shares.

3) Beta is the sole shareholder of a corporation which was capitalized with $100,000 of common
shares on incorporation. In 2009, Beta needed $30,000 and decided to reduce the paid-up
capital of the corporation by that amount on withdrawing the $30,000 in cash. In 2010, when
the shares were valued at $400,000, Beta caused the corporation to redeem 20% of the shares.
Which one of the following determines the tax consequences to Beta of the redemption of the
common shares?
(a) Beta will be deemed to realize a capital gain of $60,000.
(b) Beta will be deemed to receive a dividend of $60,000.
(c) Beta will be deemed to receive a dividend of $66,000 and realize a capital gain of nil.
(d) Beta will be deemed to receive a deemed dividend of $66,000 and realize a capital loss of
$6,000.

4) Delta is the sole shareholder of a corporation that has just completed a liquidation of all of its
assets. Delta will cause the corporation to wind up on the distribution of the net cash of
$500,000 after the payment of all liabilities in the corporation. The common shares of the
corporation have a paid-up capital value of $40,000 and Delta's adjusted cost base is also
$40,000. The capital dividend account balance of the corporation is $90,000. Which one of
the following represents the tax consequences to Delta?
(a) A deemed dividend of $370,000 and a capital gain of nil.
(b) A deemed dividend of $370,000 and a capital gain of $50,000.
(c) A deemed dividend of $460,000 and a capital gain of nil.
(d) A deemed dividend of $500,000 and a capital gain of $90,000.
5) Gamma transferred some equipment from his proprietorship to a corporation in which he
owned all of the shares. The capital cost of the equipment was $20,000, its UCC before the
transfer was $16,000 and it was valued at $40,000 at the time of the transfer. In order to
utilize some losses of the proprietorship that were about to expire, Gamma elected a transfer
price of $35,000 under subsection 85(1). Which one of the following amounts represents the
capital cost of the property to the corporation?
(a) $16,000
(b) $20,000
(c) $27,500
(d) $35,000

6) Chi transferred a non-depreciable capital property to her wholly owned corporation, electing
under subsection 85(1). The property was valued at $25,000 and had an adjusted cost base to
Chi of $15,000. The property was mortgaged for $5,000. As consideration for the transfer,
Chi received cash of $20,000 and a preferred share worth $1,000. The corporation assumed
the mortgage. Which one of the following choices represents the elected transfer price that
will result on the transfer and the adjusted cost base of the share, respectively?
(a) $15,000 and nil
(b) $25,000 and nil
(c) $26,000 and $5,000
(d) $25,000 and $24,000

7) Pi owns 75% of the common shares of an investment holding corporation and the remainder
of the shares is owned by his daughter. In this year, Pi transferred portfolio shares that cost
him $11,000 and were worth $17,000, electing at $11,000 under subsection 85(1). As
consideration for the transfer, he received a promissory note for $11,000 and preferred shares
with a retraction value of $4,000. Which one of the following choices represents the elected
transfer price and the adjusted cost base of the preferred shares, respectively?
(a) $13,000 and nil
(b) $11,000 and $4,000
(c) $11,000 and $6,000
(d) $13,000 and $4,000

8) Lambda transferred a non-depreciable capital property to a corporation. The fair market value
of the property was $130,000 and its adjusted cost base to him was $40,000. As consideration
for the property, he received a promissory note for $20,000, 10 preferred shares with a total
retraction value of $70,000 and 100 common shares worth a total of $40,000. On the transfer,
he elected under subsection 85(1) at $40,000. Which one of the following choices represents
the adjusted cost base of the preferred and common shares, respectively?
(a) nil and $20,000
(b) $12,727 and $7,273
(c) $20,000 and nil
(d) $70,000 and $40,000
Question MC 7 [Chapters 1 to 8]

Determine the single most appropriate response to the following questions.

1) An auditor reviewing French Corporation discovered that $100,000 of corporate revenue was
being deliberately recorded in the books as a debit to Bank and a credit to shareholders loan.
Which of the following statements is true:
(a) This transaction is an example of tax planning.
(b) This transaction is an example of tax avoidance.
(c) This transaction is an example of tax evasion.
(d) This transaction does not fit any the above categories.

2) Western Corporation and Eastern Corporation are both owned by the same sole shareholder.
An auditor reviewing Western Corporation discovers that the sole shareholder took steps to
direct income earned by Eastern Corporation to Western Corporation to prevent losses from
expiring in Western Corporation. Which of the following statements is true:
(a) This transaction is an example of tax planning.
(b) This transaction is an example of tax avoidance.
(c) This transaction is an example of tax evasion.
(d) This transaction does not fit any the above categories.

3) An auditor reviewing Mary's personal tax return sees that she purchased an RRSP to lower
her personal taxes. Which of the following statements is true:
(a) This transaction is an example of tax planning.
(b) This transaction is an example of tax avoidance.
(c) This transaction is an example of tax evasion.
(d) This transaction does not fit any the above categories.

4) Frank moved to Canada from Germany on February 20, 2011. Which of the following
accurately describes Frank's tax status for 2011?
(a) Frank will be taxed in Canada on all his worldwide income earned in 2011 because the
time he spent in Canada exceeds 183 days.
(b) Frank will be taxed in Canada on all his worldwide income earned in 2011, multiplied by
the number of days spent in Canada and divided by 365.
(c) Frank will be taxed in Canada on all his worldwide income earned from February 20,
2011 to December 31, 2011, except for gains or losses on the sale of capital property
owned prior to entering Canada.
(d) Frank will be taxed in Canada on all his worldwide income earned from February 20,
2011 to December 31, 2011.

5) Mountain Company is a company incorporated in the United States. It employs salespeople

who live in Canada but does not have an office or any establishment bearing the company
name in Canada. The salespeople visit Canadian customers, who then order from Mountain
Company and receive goods directly from the United States. Which of the following best
describes the tax status in Canada of Mountain Company?
 (a) Mountain Company is not taxable in Canada, because it does not have a permanent
establishment in Canada.
(b) Mountain Company is subject to a withholding tax under Part XIII of the Income Tax Act
on its gross revenue in Canada.
(c) Mountain Company is subject to tax only on its Canadian sales because the location of
company employees in Canada implies that there is a permanent establishment.
(d) Mountain Company is subject to a withholding tax under Part XIII of the Income Tax Act
on its net income earned in Canada.

6) CBS Inc. is a private corporation incorporated in Canada in 1990. All of its income is derived
from sources originating in Australia. All the CBS shareholders reside permanently in the
United States, where they make all the major decisions for the company. Which of the
following accurately describes CBS's tax status in Canada?
(a) CBS is not a resident of Canada and is taxed in Canada only on income earned from its
permanent establishment in Canada.
(b) CBS is a resident of Canada and taxed in Canada on its world income.
(c) CBS is not a resident of Canada and is not subject to tax in Canada.
(d) CBS is not a resident of Canada but is subject to a withholding tax on dividends paid to its
shareholders in the United States.

7) Which one of the following would be considered employment income for Canadian income
tax purposes for 2011?
(a) Amounts paid by your employer for counselling services in respect of mental and
physical health.
(b) A private health services plan premium paid by your employer.
(c) Benefits paid by your employer to a deferred profit sharing plan that does not pay out
until 2020.
(d) An all-expense-paid trip to Europe provided to you by a supplier of your company for
reaching a sales quota.

8) George is a long-haul truck driver for Truckers Incorporated. George transports wholesale
goods using his 18-wheeled truck from Windsor to Ottawa five days a week. While George
drives this route, he incurs food and beverage costs. As an employee of Truckers
Incorporated, what is George entitled to deduct, given that there is no reimbursement of any
food and beverages by the company and that he got a T2200 form signed?
(a) No deductions for food and beverages.
(b) 80% deduction for food and beverages.
(c) 50% deduction for food and beverages.
(d) 100% deduction for food and beverages.

9) Bill is the president and CEO of Connection Ltd. Connection Ltd.'s main business is to
provide motivational speeches to encourage higher productivity for its corporate clients. Bill
takes his wife, Mary, to Paris on a three-day convention on motivational speeches. Mary
represents Connection Ltd. at the convention, and hands out brochures and gives a talk on
motivational speeches, but she is not an employee of Bill's company. Which of the following
statements is true for 2011?
 (a) The cost of the hotel for Bill's wife would be added to Bill's employment income because
she is not an employee of the company; thus, a personal benefit was received.
(b) Fifty per cent of the trip's cost for Mary would be added to Bill's employment income
because she is not an employee of the company.
(c) The cost of the trip for Mary would be added to her personal tax return as employment
income even though she is not a regular employee of the company.
(d) No employee benefits will be added to either Bill's or Mary's income since Mary was
primarily engaged in business activities on behalf of Connection Ltd.

10) Sandy is given the choice to receive a pay raise, either as a salary increase of $7,200 or as a
benefit of a company leased car that will cost her employer $600 per month to rent, including
HST. Sandy has come to you for advice so that she can minimize her employment income
and thereby minimize her taxes. Which of the following statements is true?
(a) Sandy should be indifferent between the two choices.
(b) Sandy should accept the salary.
(c) Sandy should accept the leased automobile.
(d) Sandy should ask her employer to lease a cheaper car and then pay the difference
between the monthly leasing costs as part of her salary.

11) Henry operates a small consulting business from his home. The office in his home is his
principal place of business. Which of the following correctly describes the home office
expenses that can be deducted for tax purposes?
(a) Henry can only deduct property taxes, utilities, and repairs.
(b) Henry can deduct mortgage interest, property taxes, utilities, insurance, and repairs.
(c) Henry can only deduct property taxes and utilities.
(d) Henry does not qualify for home office deductions.

12) Bob is employed by a national real estate company and earns commission income. Mary is an
independent real estate broker and earns commission income. Both maintain an office in their
homes as a principal location of work. Which of the following statements is false regarding
the tax treatment of their incomes from real estate sales?
(a) Mary can incur a non-capital loss, but Bob cannot.
(b) Mary and Bob can deduct a portion of their property tax and house insurance
(c) Mary can deduct a portion of her home mortgage interest, but Bob cannot.
(d) Mary and Bob can claim CCA on their computers.

13) While examining the books and records in the general and administrative expense account of
MBA Corporation, you come across the following contribution to the registered pension plan
made by the company on behalf of two key employees for the year ended December 31,
2011:
Registered Pension Plan Employment compensation
2011 2011
President $15,000 $180,000
Vice President $14,000 95,000
 The pension plan is a defined contribution (money-purchase) plan. The contributions shown
above were matched by equal contributions made by the employees. Reconciling accounting
income to Division B income, you discover that the following portion of RPP contribution
should be disallowed from being expensed by the MBA Corporation for tax purposes for the
year ended December 31, 2011.
(a) $10,900
(b) $14,000
(c) $17,930
(d) $29,163

14) Which one of the following is deductible in computing income from a business or property?
(a) $6,000 of legal expenses related to the purchase of an investment in shares.
(b) Annual fees associated with the rental of a safety deposit box to store valuable corporate
records.
(c) Interest paid on a loan used exclusively to purchase investments in a tax-free savings
account.
(d) $6,000 of donations to a federal political party.

15) During its year ended December 31, 2011, ABC Ltd. purchased a new truck costing $50,000.
In the same year, the company sold an 18-wheeled truck (which had been purchased three
years earlier for $125,000) for $80,000. At the beginning of the current year, the Class 10
UCC balance was $70,000. Which one of the following amounts best represents the
maximum CCA deduction for Class 10 for 2011, assuming that all amounts are net of HST
because ABC Ltd. is an HST registrant?
(a) $6,000
(b) $12,000
(c) $15,000
(d) $25,500

16) Frames Inc. had a warehouse where it stored its inventory of picture frames, but a fire
destroyed the Class 1 building in September 2010. The original cost of the building was
$800,000, and the UCC value at the time was $540,000. The insurance company decided the
building was a write-off and paid Frames Inc. $750,000 for the building in October 2011.
Frames Inc. bought a new building by November 2011 for $900,000. What is the affect on
income for tax purposes to Frames Inc. for its taxation year ended December 31, 2011,
assuming they wish to minimize tax?
(a) CCA of $20,700 on the new building, resulting in a deferral on the recapture on the
disposition of the destroyed building.
(b) CCA of $18,000 on the new building, resulting in a deferral on the recapture on the
disposition of the destroyed building.
(c) CCA of $20,700 on the new building, resulting in recapture on the disposition of the
destroyed building.
(d) CCA of $41,400 on the new building, resulting in deferral on recapture on the
disposition of the destroyed building.
17) A taxpayer has a Class 8 pool with three office desks, originally costing $500 each, left in the
class. Which of the following statement is true when it comes to calculating CCA?
(a) A terminal loss occurs when there is a balance in the pool just before the last asset is sold.
(b) Recapture can occur even if there are still assets left in the pool. For example a sale of
an asset causes the pool's remaining UCC balance to become negative.
(c) Each desk should be set up as a separate Class 8 asset.
(d) When it comes to the sale of the Class 8 assets only the market value should be credited
to the pool.

18) A taxpayer purchased 2 computers in April 2011. The cost was made up of $8,000 for each
computer, plus system software of $1,000 for each computer, plus Microsoft PowerPoint of
$500 for each computer. Calculate the CCA for the year ended November 30, 2011.
(a) The CCA is $18,000 for the computers and $500 for the software.
(b) The CCA is $18,000 for the computers and $1,000 for the software.
(c) The CCA is $4,950 for the computers and $1,000 for the software.
(d) The CCA is $4,950 for the computers and $500 for the software.

19) On September 1, 2011, George bought a $10,000 three-year GIC that pays 9% interest per
year, compounded yearly. No interest is received until the maturity date of the GIC on August
31, 2014. Which one of the following statements is correct, assuming the figure is rounded to
the nearest dollar?
(a) In 2011, George must report $300 of interest income.
(b) In 2012, George must report $927 of interest income.
(c) In 2013, George must report $981 of interest income.
(d) In 2014, George must report all interest earned on the GIC.

20) Mary purchased a corporate bond on January 5, 2011 and, on the same day, gave it to her 17-
year-old daughter, Jill. Jill turned 18 on April 1, 2011. The bond paid Jill $3,000 in interest
during the year. Which one of the following statements is true?
(a) Neither Jill nor her mother has to report any interest income in 2011.
(b) Mary must report the $3,000 of interest income in her 2011 personal tax return.
(c) Jill and her mother can split the interest income according to the time the GIC was held
by each of them.
(d) Jill must report the entire $3,000 amount of interest income in her 2011 personal tax
return.

21) Walter has a rental property that he purchased in June 2007. The property was only rented out
to commercial businesses. The original cost of the building was $850,000, and the UCC was
$684,816. Walter incurred the following costs during 2011. What is the maximum CCA
Walter can claim on his personal income tax return for the rental property for 2011?
Gross rents received $230,000
Expenses related to earning rental income:
Advertising (for tenants).............................................................................. 5,000
Property taxes.............................................................................................. 60,000
Utilities (paid by tenants)............................................................................. Nil
 Interest on Mortgage of Building................................................................ 85,000
Maintenance................................................................................................. 45,000

(a) The maximum CCA on the building is $27,393.

(b) The maximum CCA on the building is $35,000.
(c) The maximum CCA on the building is $41,089.
(d) The maximum CCA on the building is $68,482.

22) Mr. Smith decided to have a garage sale. As it turned out, this was his lucky day. Five years
ago he bought a couch for $600, and at the garage sale he sold it for $1,200. The buyer
claimed that it was a rare antique couch that she had been looking for. Which one of the
following statements is correct?

(a) The couch is considered to be a personal-use property, and the capital gain is $200.
(b) The couch is considered to be a personal-use property, and the capital gain is $600.
(c) The couch is considered to be a listed personal property, and the capital gain is $200.
(d) The couch is considered to be a listed personal property, and the capital gain is $600.

23) On December 19, 2011, Jerry disposed of 3,500 shares of ABC Limited (a taxable Canadian
corporation) for proceeds equal to $80,000. Jerry had originally acquired the shares in 2008 at
a cost of $92,000, including brokerage fees. After the disposal, Jerry noticed that the shares of
ABC had fallen to an historical low level, and he now felt that they were definitely
undervalued. On January 3, 2012, Jerry decided to reinvest in shares of ABC Limited,
acquiring 3,500 shares for $75,000. What amount of loss should Jerry report on his 2011 tax
return with respect to the disposal of 3,500 shares on December 19? Assume that Jerry does
not engage in frequent stock transactions.
(a) $7,000
(b) $2,000
(c) $1,000
(d) Nil

24) Jeff disposed of two residential properties during the year. The details of the dispositions are
as follows:
Proceeds Cost Years Owned

Cottage $550,000 $250,000 2007-2011

House $750,000 $300,000 2002-2011

What is the minimum taxable capital gain that must be included in Jeff's 2011 personal tax
return?
(a) $67,500
(d) $45,000
(b) $30,000
(c) $15,000
25) John sold a rental property (ACB $250,000) to his wife, Deborah, for $400,000 on January 5,
2011. At the time of this sale, the fair market value was $600,000. Deborah held onto the
rental property until December 27, 2011, when she sold it for $850,000. What are the taxable
capital gains that John and Deborah must report on their 2011 tax returns with respect to the
sale of the rental property? Assume that neither individual has any principal residence claims
on the rental property.
(a) The taxable capital gains are $75,000 for John and $225,000 for Deborah.
(b) The taxable capital gains are $175,000 for John and $225,000 for Deborah.
(c) The taxable capital gains are $175,000 for John and $125,000 for Deborah.
(d) The taxable capital gains are $75,000 for John and $125,000 for Deborah.

26) Steve is employed as a teacher working for a local school board. By chance, he discovered on
the internet a used motor boat for sale for $4,000—a bargain price. He purchased the motor
boat and immediately sold it for a profit of $3,000. He did not use the boat. Which of the
following best describes the tax treatment of this transaction?
(a) The motor boat purchase is an investment, and the sale results in a taxable capital gain.
(b) The motor boat purchase is an investment, and the sale results in property income.
(c) The motor boat purchase is an adventure or concern in the nature of trade, and the sale
results in business income.
(d) The motor boat purchase is an adventure or concern in the nature of trade, and its sale
results in a taxable capital gain.

27) Gloria owned a non-residential building, purchased in 1995, the original cost of which was
$400,000, plus $150,000 for the cost of land. The UCC value of the building was $361,268,
and the land and building were sold for $750,000 in 2011. The split the taxpayer used
between land and building was $300,000 for building and $450,000 for land. Assuming that
Gloria wishes to minimize her taxes, what are the tax implications regarding the sale?
(a) A taxable capital gain for Gloria $119,366, and a terminal loss of $61,268.
(b) A taxable capital gain for Gloria $119,366, and a terminal loss of nil.
(c) A taxable capital gain for Gloria $150,000, and a terminal loss of $61,268.
(d) A taxable capital gain for Gloria $150,000, and a terminal loss of nil.

28) In 2011, Barry made two capital transactions that resulted in one currency gain of $1,500 and
one currency loss of $600. What are the capital gains on the foreign currency exchange for
2011?
(a) $450
(b) $900
(c) $350
(d) $700
29) Which of the following statements is true regarding the CRA's right to reassess an income tax
return?
(a) A tax return may be reassessed at any time if the taxpayer made any misrepresentation
that is attributable to carelessness.
(b) A tax return for a Canadian-controlled private corporation may be reassessed within four
years of the date on which the original assessment was mailed.
(c) A tax return for a public corporation may be reassessed within five years of the date on
which the original assessment was mailed.
(d) A tax return for an individual may be reassessed within four years of the date on which the
original assessment was mailed.

30) Mr. Smith sold land to Mr Jones for $100,000 in 2010. Mr. Smith received $20,000 and
provided Mr. Jones with a mortgage of $80,000. The original cost of the land was $75,000.
Mr. Smith elected to use a reserve, which resulted in a capital gain for 2010 of $5,000. In
2011, Mr. Jones decided to pay off the entire remaining debt. How much income must Mr.
Smith report in 2011?
a) $5,000 of capital gains in 2011.
b) $25,000 of capital gains in 2011
c) $80,000 of capital gains in 2011.
d) $20,000 of capital gains in 2011.

31) Ms. Thomas loaned $80,000 at 3% interest to James Ltd., a small under-financed corporation
owned by her friend, Ms. James. The purpose of the loan was to provide interim financing of
the James Ltd. business, while James Ltd. awaited longer-term financing. Ms. Thomas is not
in the money-lending business. The loan was unsecured and was repayable, with interest, no
later than the end of the year. At the end of the year, James Ltd. was informed that it would
not receive the long-term financing, so it was unable to repay the $80,000 loan. In fact, James
Ltd. was in such dire financial circumstances that it would not be able to repay the loan in the
foreseeable future and was only a few months away from being insolvent. Which of the
following options and its income tax consequences is best for Ms. Thomas?
a) Ms. Thomas can continue to hold the $80,000 debt owing to her by James Ltd. in the
hope that the corporation will receive the necessary financing from some source and
repay the loan at some time in the future.
b) Ms. Thomas can claim a reserve for doubtful debts of $40,000, deducting it from her
business income.
c) Ms. Thomas can elect to write off the debt by claiming a capital loss of $80,000 and
establishing the ACB of the debt at nil.
d) Ms. Thomas can elect to write off the debt, claiming a business loss of $80,000.