Tax

Chapter 8 CCA

(Choice C) Correct! When an asset is added to a class the Accelerated Investment Incentive is applied to,
the half-year rule does not apply.

(Choice D) Correct! The declining-balance method with a single rate is used for most CCA classes.

(Choice A) Correct! This is subject to a Class 8 separate class election since it cost more than $1,000.

(Choice B) Incorrect. There is a “no recapture” and “no terminal loss” rule in place for Class 10.1 assets
on which immediate expensing was not claimed. Incorrect calculation: Opening 2023 UCC = $34,000 −
($34,000 × 30% × 1.5) = $18,700; recapture = $34,000 − $18,700 = $15,300.

(Choice D) Correct! This correctly outlines the two conditions for interest deductibility in such situations.
The interest is deductible if the funds are used by the corporation to earn Canadian source income that
is not exempt from tax, and the corporation was not in a position to borrow funds on its own on terms
comparable with those obtained by the shareholder.

Correct!

Terminal loss on old photocopier: $10,890 − $7,800 $ 3,090

CCA on new photocopier: ($24,600 + $7,800) × 20% × 1 ½ 9,720
Reduction in net and taxable income $ 12,810

SC always makes any elections to minimize its net income for tax purposes. A separate class
election is available on the photocopier as it is a qualifying asset with a cost greater than $1,000.
When original photocopier is sold, a terminal loss may be claimed. The cost of the new
photocopier is added to separate Class 8.

Correct!

Class 8: Office furniture: $200,000 × 20% × 1 ½ $ 60,000

Class 12: Computer software: $50,000 × 100% 50,000
Class 53: Manufacturing equipment: $90,000 × 100% 90,000
Maximum CCA claim $200,000

Correct! Year 1 reserve is the lesser of:

 ($159,375 + $159,375) / $375,000 × $175,000 = $148,750

 $175,000 × 4/5 = $140,000
Reserve that may be claimed in Year 2 is the lesser of:

 $159,375 / $375,000 × $175,000 = $74,375

 $175,000 × 3/5 = $105,000

Previous year reserve $140,000 less current-year reserve $74,375 = $65,625 capital gain subject
to tax in Year 2.

(Choice B) Correct! This is known as the anniversary accrual and is only applicable to individuals.

(Choice A) Correct! Jazz sold 1,200 shares and repurchased 800 shares within 30 days of the sale;
therefore, a superficial loss arises on 800 of the shares, but the capital loss on the other 400 shares is
realized. 400 shares × ($5.00 selling price − $6.80 ACB) = $720 loss

(Choice C) Incorrect. Gifting of property to a relative is not excluded from the deemed
disposition rules.

(Choice D) Correct! This is true with respect to a disposition of property.

Correct! Capital gain: $430,000 − 290,000 = $140,000

Reserve is the lesser of:

I. [($430,000 − $129,000) / $430,000] × $140,000 = $98,000

II. $140,000 × 4/5 = $112,000

Taxable capital gain to be included in Year 1: ($140,000 − $98,000) × ½ = $21,000

(Choice A) Correct! Property taxes and interest charges are considered carrying charges on vacant land.

(Choice D) Correct! Advertising is a deductible expense, even when it is incurred while the building the
advertising relates to is under construction.

(Choice C) Correct! $120,000 is paid within 180 days of December 31 and is deductible in Year 1. The
excess cannot be deducted until Year 2: Year 1 = $20,000 × 6 = $120,000; Year 2 = $20,000 + $10,000 =
$30,000.

(Choice A) Correct! General reserves (estimated reserves) are not deductible for tax purposes and must
be added back on the Schedule 1.

(Choice A) Incorrect. The interest is deductible to the corporation to the extent the shareholder pays
interest to the corporation, not to the extent the corporation pays interest to the bank, plus any interest
benefit included in the shareholder’s personal income in the year.

(Choice C) Incorrect. A franchise granted for an indefinite period is included in Class 14.1. Only limited-
life intangible assets are included in Class 14.
(Choice B) Incorrect. While the cost of the supplies is deductible, Jim cannot deduct the value of
his own labour, even if it is at market rates. Labour costs pertaining to repairs would only be
deductible if they were paid to a person performing the services other than Jim.

(Choice C) Correct! Accounting fees for the preparation of a personal tax return are deductible if
the taxpayer needs advice and help related to the determination of business or property income
for tax purposes. It does not matter how much net rental income is generated in order for the tax
preparation costs t

(Choice A) Correct! Warranty costs are deductible when cash is paid to satisfy the warranty
liability. Therefore, add back the accounting expense and deduct the actual cash paid.o be
deductible.

(Choice D) Incorrect. Accounts payable are not a reserve because they are not based on an
estimation.

(Choice D) Correct! This is interest earned applicable on the September 30, Year 3 anniversary
date: $100,000 × 1.03 × 3% = $3,090.

(Choice C) Correct! $42,500 + $120 + $1,400 + (0.5 × $4,500) + $1,000 = $47,270. Interest on
late payroll tax remittances, golf membership fees, 50% of lunches, and the accounting loss on
the sale of shares are added back to net income per the reviewed financial statements.

(Choice A) Correct! A floating weighted average method is allowed under the ITA.

(Choice D) Correct! In the year the option is granted, the grantor is considered to have realized a
capital gain equal to the option price; if the option expires, the grantee is considered to have
realized an allowable capital loss in the year the option expires.

(Choice C) Correct! The cost of legal fees incurred to collect an overdue accounts receivable
would be fully deductible because the legal fees were incurred to earn income (collect A/R).

(Choice B) Correct! Because CCA is discretionary, adding the interest to the cost of the depreciable
property can preserve the deduction for a later date when the company is profitable, with no risk that
the losses will expire.

(Choice D) Correct! This is the false statement. If the accounting allowance for doubtful accounts is
based on anything other than specific identification of doubtful accounts, the accounting allowance for
doubtful accounts will not be equal to the reserve for bad debts that is permitted for tax purposes.

(Choice C) Correct! This is the false statement. A reserve may only be claimed for proceeds not yet due.
If all of the proceeds have been collected by the end of the second year, there are no proceeds due at
the end of the second year and a reserve may not be claimed at that time.

(Choice C) Correct! (500 × $45) − {(100 × $50) + (400 × $40) + [400 × ($50 − $42)]} = ($1,700). The loss on
December 15 of the previous year is considered a superficial loss because the shares were reacquired
within 30 days of being sold (January 7, of the current year, is less than 30 days after December 15, of
the previous year). Superficial losses are denied and are added to the ACB of the reacquired shares.

(Choice D) Incorrect. Interest paid during the construction period on a loan is considered a soft cost.
Deduction is prohibited under ITA 18(3.1). The interest is added to the cost of the building.

(Choice C) Correct! Regardless of whether or not dividends on shares are paid in a given year, there is
always the possibility that they will be declared and paid in future years. If there is a reasonable
expectation, at the time the shares are acquired, that the shareholder will receive dividends at some
point in time, the interest is deductible (refer to Folio S3-F6-C1).

(Choice A) Correct! Pension expense is deductible on a cash basis if the contributions are made within
120 days of the year end of the corporation.

(Choice A) Correct! Net income is calculated as $45,000 employment income, plus the taxable capital
gain on the sale of the painting (listed personal property) of $3,000 ($7,000 − $1,000 minimum adjusted
cost base = $6,000 capital gain × 50% = $3,000 taxable capital gain). The allowable capital loss of $2,500
($9,000 − $14,000 = $5,000 capital loss × 50% = $2,500 allowable capital loss) on the disposal of the
shares can be used to offset the taxable capital gains on the disposition of the listed personal property.
Therefore, after the allowable capital loss is fully applied, a $500 taxable capital gain remains.

Correct! $1,000 corporate profits − ($1,000 × 13%) = $870 corporate dividend

$870 × 1.15 gross-up = $1,000.50 individual taxable income

$1,000.50 × 45% = $450.23 individual taxes owing

($1,000.50 − $870) = $130.50 gross-up × 87% = $113.54 dividend tax credit

$870 personal dividend − $450.23 taxes + $113.54 dividend tax credit = $533.31 after-tax cash

(Choice A) Correct! Who must pay income tax is established in Division A.

Choice C) Correct! Both provincial and federal tax legislation are primary sources of interpretation of tax
law.

Correct! The calculation is:

Price per
Year No. of shares Price
share
1 5,000 $ 141,700 $28.34
2 10,000 $ 300,000 $30.00
3 8,000 $ 200,000 $25.00
23,000 $ 641,700 $27.90
6 (4,000) $(111,600) $27.90
8 6,000 $ 161,100 $26.85
9 7,000 $ 224,000 $32.00
32,000 $ 915,200 $28.60
Year 10 sale:

Proceeds $440,000
ACB $314,600 = 11,000 × $28.60
Capital gain $125,400
50%
Taxable capital gain $ 62,700

Correct! This is calculated as follows:

Property A Property B Total

Rent $12,000 $38,000 $ 50,000
Utilities and property tax (3,000) (5,000) (8,000)
Mortgage interest (13,000) (10,000) (23,000)
Net rental income before CCA (4,000) 23,000 19,000
CCA:
Property A: $100,000 × 5% (5,000)
Property B: $275,000 × 4% (11,000)
Net rental income after CCA $ 3,000

Property A is a Class 3 property (5% CCA rate) and Property B is a Class 1 property (4% CCA
rate).

(Choice A) Incorrect. “Includes” indicates that the definition is not exhaustive, and the elements
listed are only examples.

(Choice B) Correct! The implication is that one is directed to other rules or a specific procedure.

(Choice C) Incorrect. “Means” indicates that the definition is all-inclusive — that is, nothing can
be added.

(Choice D) Incorrect. “Deemed” means that the ITA characterizes or treats a form of income or
a transaction in a specific manner, regardless of the legal reality.

Correct! The superficial loss is added to the ACB of the identical property that has been
reacquired. Calculation:

ACB: [(1,000 − 250) × $25] + $600 + $2,790 = $22,140

Number of shares held: 1,000 − 250 + 150 = 900

WAC/share: $22,140 / 900 = $24.60

(Choice A) Correct! Construction is completed on the earlier of the day on which the construction is
completed or the day on which 90% of the building is used for the purposes it was constructed for. In this
example, construction was completed on July 31, which is the earlier of these two dates.

(Choice C) Correct! This statement is true. The shared annual business limit of $500,000 will be reduced
for a group of associated companies with total taxable capital employed in Canada in the previous year
in excess of $10,000,000.

(Choice B) Incorrect. This statement is false. Mako is not a PSB because it is associated with Shark. If it
was not associated, it could be considered a PSB because it does not employ more than five full-time
employees.

(Choice C) Correct! The notice of objection must be filed within 90 days after the notice of reassessment.

(Choice D) Correct! [10% + (2% × 4 months)] × $1,200 = $216. This is his second offence in three years
and therefore the penalty rates are increased from 5% to 10% for the base penalty and from 1% to 2%
for the monthly penalty.

(Choice C) Correct! The final return must be filed by the later of six months after the date of death and
the normal filing deadline for the deceased for the year of death. As John was self-employed in Year 6,
his normal filing deadline would have been June 15, Year 7, which is more than six months after the date
of death.

(Choice A) Correct! The tax payment was due on April 30, Year 3. The penalty calculation for a repeated
offence is 10% of the tax that was unpaid at the filing deadline plus 2% for each complete month that the
unpaid tax is owing (up to a maximum of 20 months). The filing deadline for employed individuals is April
30. April 30 to June 14 represents one complete month; therefore, the penalty is calculated as (10% +
2%) × $70,000 = $8,400. The interest calculation (from May 1, Year 3, to June 14, Year 3) is calculated as
({[$70,000 + 8,400] × [1 + (0.05/365)]45} − $78,400) = $485. Penalty and interest total = $8,400 + $485 =
$8,885.

(Choice B) Correct! A federal tax abatement of 10% is available on taxable income earned in a province
or territory of Canada [ITA 124(1)].

(Choice D) Incorrect. While it is true that dividends received is part of determining aggregate investment
income included in net income for tax purposes, it is not true that dividends are always subject to Part IV
tax as there are instances where Part IV tax will not apply (for example, dividends received by a public
corporation).

(Choice B) Correct! There is a base penalty of 5% of the tax owing plus 1% for each full month the return
remains unfiled. The tax return for self-employed individuals is due on June 15. Thus, the return is
outstanding an additional two months (June 16 to July 15, and July 16 to August 15). This works out to
$4,000 × [5% + (1% × 2 months)] = $280. The return was not unfiled for the full month between August
16 and September 15, so there is no penalty for this month.

(Choice B) Incorrect. This incorrectly excludes the interest on overdue receivables, which is a
component of ABI since it is incidental to the business. Incorrect calculation:
 Net income for tax purposes $56,000
Less:
Interest on overdue receivables (4,000)
Investment income included in net income (2,000)
Net Canadian ABI $50,000

(Choice C) Incorrect. This incorrectly excludes interest on overdue receivables, which is part of
the active business, and starts from taxable income rather than net income for tax purposes.
Incorrect calculation:

Taxable income $47,000

Less:
Interest on overdue receivables (4,000)
Investment income included in net income (2,000)
Net Canadian ABI $41,000

(Choice D) Incorrect. This incorrectly starts from taxable income rather than net income for tax
purposes. Incorrect calculation:

Taxable income $47,000

Less:
Investment income included in net income (2,000)
Net Canadian ABI $45,000

(Choice C) Correct! This was determined as follows:

Business loss ($273,000)

Taxable capital gains realized in the year 13,500
Canadian-source interest income 27,200
Dividends from taxable Canadian corporations 48,000
Net income ($184,300)
Division C deductions
Dividends (48,000)
Net allowable capital loss (13,500)
Non-capital loss ($245,800)

(Choice D)
Incorrect. This was incorrectly determined as follows:

Business loss ($273,000)

Taxable capital gains realized in the year 13,500
Canadian-source interest income 27,200
Dividends from taxable Canadian corporations 48,000
Net income ($184,300)
Division C deductions
Dividends (48,000)
Net allowable capital loss (0)
Non-capital loss ($232,300)

No amount of the net allowable capital loss was claimed. Even if net income is negative, net
allowable capital losses may be claimed to the extent of the lesser of the net allowable capital
loss carryforward and taxable capital gains included in net income in the year.

Correct!

Eligible portfolio dividends $25,000

Interest income (Canadian) on long-term investments 10,000
Total AAII $35,000

The dividend from the wholly-owned subsidiary is not included, as it is from a connected
corporation.

Unit 3: Chapter 21

(Choice A) Correct! This statement is false. The full amount of the EAP is not taxable. A specified portion
of the EAP is deemed to be from the CESG and the CLB. This portion of the payment is taxable income to
the student. Also, any portion of the payment that represents accumulated income earned in the plan is
taxable income to the student [ITA 56(1)(q), 146.1(1)]. The capital portion of the EAP is not taxed.

(Choice A) Incorrect. This statement is false. While the earnings are not taxed when funds are withdrawn
from a TFSA, the amounts can also be withdrawn tax free from an RRSP under the HBP. The TFSA is not
the best option as the TFSA is contributed with after-tax income. Therefore, he will have less to
contribute if he uses the TFSA [$20,000 × (1 − 0.35) = $13,000)]

(Choice D) Correct! The capital part of the withdrawal will not be taxed, while the income part of the
withdrawal will be taxed on RESP.

Choice A) Correct! The penalty for excess contributions will be ($10,000 − $6,000) × 1% × 4 months =
$160. At the beginning of 2023, the individual is no longer in an over-contribution situation because the
contribution limit for 2023 is $6,500 and the over-contribution is $4,000 at the end of 2022.
If amount is withdrawn from TFSA, the taxpayer gets contribution room back but not in case of RRSP.

Choice A) Incorrect. This statement is false. If sufficient contributions are made, then the annual
maximum catch-up is $1,000 in CESG.

(Choice B) Incorrect. This statement is false. The maximum annual basic CESG is 20% ×
$2,500 = $500.

(Choice C) Correct! This statement is true. If the individual does not make a contribution in a
year, no CESG is available for that year, but unused grant room can be carried forward to future
years.

(Choice B) Correct! This was determined as: $108,900 + $12,100 − $1,200 = $119,800. [Employment
income net of RPP contribution + RPP contribution − rental loss, all for 2022.]

(Choice C) Correct! [($75,000 × 9) × (2% − 1.5%)] × 3 years = $10,125. This is PSPA.

(Choice D) Correct! TFSA contribution room is increased by withdrawal amounts, in the year following
the year of withdrawal. The maximum is the $25,600 withdrawn in Year 2, plus $6,000 for Year 2 and
$6,500 for Year 3.

(Choice C) Correct! This was determined as: $88,200 + $10,600 − $4,000. [Salary, plus employment stock
option benefit which is included in employment income, less spousal support paid.]

Unit 4 mcq’s all

(Choice B) Incorrect. This statement is false. A taxpayer who claims an eligible dependent credit
for a dependent may also claim a Canada caregiver credit but may claim a family caregiver
amount (with a lower basis $2,499 compared to $7,499 − 2023) for that dependent.

(Choice C) Correct! This statement is true. There is no requirement for the dependent taxpayer
to live with the taxpayer claiming the credit.

(Choice D) Incorrect. This statement is false. A taxpayer making support payments for a child is
not permitted to claim an eligible dependent credit for that child. If no support payments are
made and the taxpayers have joint custody, each of the taxpayers may claim an eligible
dependent credit for one of the children.

(Choice A) Correct! A CCPC is not controlled directly or indirectly by a combination of one or more non-
resident persons and one or more public corporations.

(Choice D) Correct! Payments out of a registered retirement income fund are eligible for the pension
income tax credit because they are considered qualifying pension income for the pension income tax
credit.

(Choice A) Correct! This is a limiting factor; the foreign non-business income tax credit is limited to the
lesser of foreign taxes actually paid or Canadian tax otherwise payable calculated by formula.
(Choice C) Correct! The dividend received is considered split income. Shelly is subject to tax on split
income, since she is under age 18 and received dividend income from a private corporation. The
dividend is subject to tax at the top personal tax rate (federal 33% + provincial). The only tax credit
allowed is the dividend tax credit [74.5(13) and 120.4(1)].

(Choice B) Correct! Using excess cash to purchase inventory for the business will increase the
proportion of the company’s assets used in an active business, thereby purifying it without any
tax consequences.

(Choice C) Incorrect. Purification techniques that will be taxable include paying dividends to
shareholders, paying salaries or bonuses to owner-managers, and complex transactions that move
the non-qualifying assets into another company.

(Choice B) Correct! This is a false statement. To prove that a transaction is an abusive transaction, it is
the CRA’s responsibility, not the taxpayer’s responsibility, to show that it cannot reasonably be concluded
that allowing a tax benefit would be consistent with the object, spirit, or purpose of the provisions relied
on by the taxpayer.

(Choice A) Correct! The dividend must be paid or recorded in the company’s books as having been paid
before the end of the corporation’s taxation year. It will be included on a T5 corresponding to the
calendar year in which it was declared and paid.

(Choice C) Correct! The level of taxable capital employed in Canada is not considered in
determining whether the shares are qualified small business corporation shares.

(Choice D) Incorrect. This statement is true. The 90% test must be met at the time of sale of the
shares. In the 24 months preceding the sale of the shares, it is only necessary for 50% of the fair
value of the assets of the corporation to be used in an active business carried on primarily in
Canada.

(Choice B) Correct! Barry and Chen have formed a joint venture because revenues will be allocated to
each of them and they will determine their own amount for expenses to be deducted in determining net
income for tax purposes. In a partnership, the net profit and losses are determined for the partnership
and are then allocated to each partner as specified in the agreement. In other words, a key difference is
that venturers share gross revenues whereas partners share profits and losses.

(Choice D) Incorrect. Jenn does not qualify for the Canada caregiver amount because Jenn cannot claim
the eligible dependant credit for her sister. She could claim the Canada Caregiver credit however.

(Choice D) Correct! The CRA is a government agency that is charged with the administration and
enforcement of income tax laws.

(Choice C) Correct! This statement is true. Total tax paid when the income is flowed through the
corporation is 15% + [(1 − 15%) × 37%] = 46.45%, which is greater than the 45% rate the individual would
pay on proprietorship income. However, the taxpayer wishes to expand the business. The corporate tax
rate is 15% and the taxpayer’s personal marginal rate on proprietorship income is 45%. When the income
is flowed through the corporation, there is a significant opportunity for tax deferral that is not available if
the business income is earned in a proprietorship.

(Choice B) Correct! Dividends are paid out of after-tax corporate income, and after-tax cash kept by the
shareholder manager will depend on corporate tax paid and the DTCs for the shareholder manager. The
combination of the corporate tax rate and the DTC may result in after-tax cash kept by the shareholder
manager being less than after-tax cash that is kept through payment of salary. Therefore, the corporate
tax rate is considered in determining whether to pay salary or dividends.

Choice B) Incorrect. The imputed interest benefit is classified as property income when the
individual is considered to have received the loan in the individual’s capacity as a shareholder.

(Choice C) Correct! The imputed interest benefit will be classified as employment income
because the individual is considered to have received the loan in the individual’s capacity as an
employee and not as a shareholder

(Choice A) Correct! Preetpaul is a specified employee because he owns at least 10% of the shares of
ABC. In order for the loan to be excluded from his income, the loan must be used to acquire a home for
his own occupation. A rental property would therefore not be considered a home for Preetpaul’s
occupation.

(Choice D) Correct! This is true. If the taxpayer has a positive balance in their CNIL account, dividends
paid out of the corporation will reduce the CNIL balance, resulting in greater availability of the capital
gains deductions.

Choice B) Correct! This statement is true. Because the loan has been outstanding for two balance sheet
dates (March 31, Year 2, and March 31, Year 3) it must be included in Clark’s income in the year the loan
was made (Year 2). The amount repaid is deductible to the taxpayer in the year of repayment (Year 3).

(Choice D) Correct! This statement is false. Whether there is an advantage or disadvantage to flowing
business income that is either above or below the business limit through a corporation depends on the
corporate tax rate, the individual’s personal tax rate and the dividend tax credit rates. Corporate,
personal, and dividend tax credit rates vary by province. As a result, whether there is an advantage or
disadvantage will vary by province and not by type of income.

(Choice A) Correct! The net capital loss that may be carried back is the lesser of the taxable capital gain
in Year 3 ($2,000) and the net capital loss realized in Year 4: ($5,000 – $2,500) × ½ = $1,250.

Correct! Eligible expenses total $18,850 (legal fees $3,800 + adoption agency fee $8,000 +
flights and accommodations $6,800 + immigration fees $250).

The amount of credit is the lesser of eligible expenses and $18,210 (the max per adoption).

(Choice C) Correct! The disability credit of $9,428 may be transferred to a supporting person.
For a child under age 18 during the year there is also a supplement available of $5,500. This
amount is reduced by any child care costs in excess of $3,221. The maximum that Reehan can
claim is equal to $9,428 + $5,500 − ($5,000 − $3,221) = $13,149.
(Choice D)

Correct! This amount was determined as follows:

$200 at 15% $ 30
($240,000 – $235,675) = $4,325 × 33% 1,427
On ($15,800 – $200 – $4,325) × 29% 3,270
Charitable donation tax credit $ 4,727

(Choice D) Correct! The Canada caregiver tax credit is correctly calculated as follows: $7,999 ×
15% = $1,200.

(Choice D) Correct! First choose the lesser of $5,000 and tuition paid in the year. The $4,900 of
tuition, which is the lesser of the two amounts, is lowered by the amount necessary to eliminate
Erin’s own taxes. This is calculated as: $20,000 − $165 (enhanced CPP contribution) − $15,000
(basic personal) − $1,368 (employment) − ($962 - $165) (CPP) − $326 (EI) = $2,324. Therefore,
the maximum amount to transfer is $4,900 − $2,324 = $2,576.