Taxation
What transaction below is considered to be at "arm's length"?
Generally speaking, arm's length individuals are not related by blood, adoption or marriage.
In January of this year, Ming disposed of capital property that was subject to capital gains tax. His proceeds of disposition were $20,000, while the adjusted cost base on the property was $10,000.
He incurred no expenses in the acquisition or sale of the property.
Standby Charge Employer owns automobile
Standby charge = 2% x (number of months the vehicle is available for use) x (total original cost of the vehicle including all PST, GST, HST) - (employee reimbursements attributable to the standby charge made no later than 45 days after the end of the year)
Employer leases automobile
Standby charge = 2/3 x ((monthly lease cost excluding insurance or other itemized charges) x (number of months the vehicle is available for use)) - (employee reimbursements attributable to the standby charge made no later than 45 days after the end of the year)
Select the term that best represents the process undertaken to minimize tax liabilities on personal income or business profits through the use of allowable deductions.
Tax planning involves activities and transactions that reduce or eliminate tax. They are completely legal and operate within the intended and accepted intention of the law from the perspective of the Canada Revenue Agency (CRA).
Employee stock option plans
Taxable benefit = (value of shares acquired) - (cost to acquire the shares)
Select the statements that are true with regard to the Canadian income-tax system.
The Constitution Act, 1867 grants both the federal and provincial governments the exclusive authority to impose income taxes. Note that municipal governments and regional governments have no constitutional standing themselves and levy taxes solely through the legislative prerogative of the province/territory where they are located. The constitutional powers of the federal government to levy taxes are virtually unlimited. On the other hand, the taxation powers of the provincial governments are constitutionally limited. Provinces have the authority to impose direct income taxes only on income earned in the province or income earned by residents of the province.
Anita's stock portfolio has a fair market value of $10,000. She sells the portfolio to her brother, David, for $2,500, which is her adjusted cost base. Her intention was to avoid tax on the capital gain and to benefit David who is in a lower tax bracket.
The Income Tax Act deems Anita to have received fair market value on the transfer of her portfolio. In this case, David's adjusted cost base on the portfolio is $10,000, the fair market value of the portfolio.
Home loans:
When an employer makes a loan to an employee to purchase a home,
Shana has a stock portfolio with a fair market value (FMV) of $35,000 which she has decided to sell to her mother for $15,000, the same amount as Shana's ACB for the portfolio. What is Shana's capital gain on this sale?
Where an asset is transferred to a non-arm's-length party for an amount less than the FMV of the asset, there is deemed to be inadequate consideration. The Act deems the proceeds of disposition to be the FMV of the asset, although the buyer's ACB for the asset is set at the amount of actual consideration. The gain is therefore calculated as $35,000 - $15,000 = $20,000.
Explanation: Elementary and secondary school scholarships and bursaries are not taxable. Post-secondary school scholarships, fellowships and bursaries are not taxable when received for the current year and the student is a full-time qualifying student for the current, prior or subsequent year
Which of the following individuals' income indicated below is tax-free?
This year, Willimena donated $100,000 to the local hospital, which is a registered charity. Willimena's net income in the current year is $75,000, and the top federal tax bracket is $214,368. Which statement regarding Willimena's situation is correct?
Willimena may carry any unused donation amount forward up to 5 years. Generally, charitable donations may be claimed up to a limit of 75% of the taxpayer's net income. Any charitable donation amount that a taxpayer cannot or does not claim in the taxation year can be carried forward and used in any of the subsequent five years.
Superficial loss
applies when a taxpayer incurs a loss on the disposition of capital property and an identical property is acquired or reacquired by the taxpayer or an affiliated person within the period of 30 days before and 30 days after a disposition
Adjusted cost base
commonly referred to by the acronym "ACB" is a defined term within the Income Tax Act. In general terms, adjusted cost base refers to the dollar amount paid (in Canadian dollars) for the property.
Carol, whose taxable income is $230,371, donated $40,000 in 2019. What is her donation tax credit can be calculated?
$300, derived as 15% x $200, (first $200 of donation amount) $6,600, derived as 33% x $20,000 (the amount of her taxable income of $230,371 in excess of the top bracket of $210,371) $5,742, derived as 29% x $19,800 (total donations of $40,000 in excess of $200 and $20,000) The total amount is derived by adding together the result of each step: $300 + $6,600 + $5,742 = $12,642
Paula sold her shares of New Idea Inc. for $15,000 and paid 2% commission on the sale. Her adjusted cost base (ACB) of the shares was $15,500.
($15,000 - (15,000 x .02))- $15,500 15,000 - 300 - 15,500 = $14,700 - $15,500 = -$800.00
if an individual uses one room (as qualifying workspace) in a home that has seven rooms in total,
14.3% (1 ÷ 7) of eligible expenses are deductible.
Hetta's employer leases an automobile for her exclusive use throughout the year. The employer's monthly lease cost is $600. Hetta did not reimburse her employer for the use of the automobile.
2/3 x $600 x 12 months = $400 per month x 12 months = $4,800 This $4,800 is treated as a taxable benefit that is included in Hetta's income.
Allowable business investment loss
50% of a business investment loss. Deductible against any income for up to 10 years, after which it reverts to a net capital loss and follows the net capital loss rules
Amira purchased shares of a software company in her non-registered account for $22,000 plus commissions of $250. When she sold her shares she received $19,850 less commissions of $350. What is Amira's capital loss on the stock sale
Capital Gain (or Capital Loss) = Proceeds of Dispositions - (ACB + Expenses of Disposition) Therefore: Gain/loss = (19,850-350) - (22,000+250) = $19,500 - $22,250 = -$2,750
Capital cost allowance
Capital gain/loss = (proceeds of disposition) - (ACB + disposition expenses) Taxable capital gain = 50% of capital gain Allowable capital loss = 50% of capital loss
The Chen family has one child, Daniel, age nine. Daniel attended overnight camp for four weeks this past summer, at a cost of $700 per week, while his parents both worked. Daniel's mother earns $85,000, while his father earns $91,000.
Daniel's mother can claim a childcare expense of $500 ($125 per week maximum for overnight camp).
Delmer is a first nations person who lives on a reserve and works as a dentist. Delmer has spent the majority of his career working off the reserve but recently started a new position at a dental practice on the reserve. Delmer is not sure how his income tax and payroll deductions may change given the new role. Which of the following statements is CORRECT?
Employment and self-employment income that is exempt is also exempt from Canada Pension Plan (CPP) contributions. Note, however, that either the employer or employee may elect to participate in the CPP.
Capital cost allowance
Expenditures that are capital in nature are deducted over a period of time by using the capital cost allowance (CCA) system.
Your client, Phil, meets with you for an annual review. Phil is particularly interested in discussing taxes, and asks you to help him better understand income tax deductions and credits that may be available to him. Which statement should you offer to Phil? a) Tax credits offer an equal amount of tax relief regardless of your income or tax bracket
Explanation: A credit differs from a tax deduction, which provides a greater tax benefit to qualifying individuals as their income rises and they are subject to tax at a higher marginal tax rate. By using tax credits, the tax system can be neutralized so eligible taxpayers receive an equal amount of tax relief regardless of their income or tax bracket.
Tom is age 66, and just retired. He as a variety of income sources, including his defined contribution pension plan (DCPP), Canada Pension Plan (CPP), regular RRIF payments, and an annuity payment from a deferred profit sharing plan (DPSP). With regards to the pension income amount tax credit, which of Tom's sources of income would be excluded from the calculation of his eligible pension income?
Explanation: Amounts such as Old Age Security, CPP, death benefits and retiring allowances do not qualify for the pension income amount tax credit.
Your client, Greg, is meeting with you for an annual review. This year, Greg had a gross income of $130,000 and paid $39,000 in taxes. Greg has both a Deferred Profit Sharing Plan (DPSP) and a Group RRSP with his employer. He would like to better understand his taxes, and would also like to engage in some tax planning initiatives. Which of the following statements should you offer to Greg?
Explanation: An individual's average tax rate is less than or equal to marginal tax rate.
Carrie, who is an income beneficiary of a trust, recently turned 25. Last year she received $5,600 of dividend income. Of the income received, $4,200 of dividend income came from a major Canadian corporation and the balance came from a US public company. Identify the statement regarding the applicable tax consequences that is true.
Explanation: Dividends received from non-resident corporations must be included in income and are not eligible for the gross-up calculation or DTC or any other special tax treatment. Dividends from US are fully taxable
Your client, Frederick, established an inter vivos trust last year. This year, the trust has received $1,500 interest income, and $8,700 dividends. Frederick is meeting with you for an investment review, and wants to better understand the tax obligations and reporting requirements regarding the trust. What should you tell Frederick?
Explanation: Income retained in the trust is taxed to the trust at the top marginal tax rate applicable for the trust's province of residence.
On December 1, last year, Gord purchased a $10,000, 5-year investment contract, paying 5% interest compounded annually. While the interest on Gord's investment is calculated and compounded annually, it is paid at the end of the 5-year term when the investment matures. What approximate amount of interest income must Gord report this year, relative to this investment?
Explanation: Interest income received or receivable during a calendar year must be reported as interest income for the calendar year, whether it is received that year or not. Taxes are to be paid in the year the interest income is earned. $10,000 x 5% = $500 (note there is no compounding to factor in as this is year 1).
Hannah was injured in a car accident, and was awarded a settlement of $50,000. She invested the $50,000 settlement in her non-registered investment account and purchased a Canadian bond mutual fund. Hanna earned $750 in income from the fund, which she then sold for $51,000. Which statements properly describe the tax consequences to Hanna? i) The $50,000 settlement is included in Hanna's income in the year received ii) The $50,000 settlement is paid tax-free to Hannah iii) The $750 income from the bond fund is tax-free iv) The $1,000 gain from the bond fund is taxable as a capital gain
Explanation: Some income sources are not taxable, such as awards for personal injuries. While these types of income are not taxable, subsequent income earned on these amounts is taxable.
Identify the term that best represents a taxpayer deliberately misrepresenting the true state of his financial affairs in order to reduce the amount of tax owing to the Canada Revenue Agency (CRA).
Explanation: Tax evasion occurs when taxpayers attempt to deceive the CRA by knowingly reporting less tax payable than what the law obligates them to pay. Tax evasion is illegal and can subject the taxpayer to both criminal and civil prosecution. Tax avoidance occurs when taxpayers legally apply the law to reduce or eliminate taxes payable in ways that the CRA considers potentially abusive of the spirit, if not the letter, of the Act. Tax planning involves activities and transactions that reduce or eliminate tax. They are not only completely legal, but they also operate within the intended and accepted intention of the law from the perspective of the CRA.
Grant is age 50 and makes a salary of $120,000 per year. He contributed $10,000 to his RRSP this year and purchased 1,000 shares of RTP Corp when the share price was $10. Throughout the year, Grant received a total of $340 in eligible dividends from RTP Corp, and subsequently sold the stock later that year when the share price was $11.30. Grant is in a 42% marginal tax rate, and gross-up for eligible dividends is 38% with a corresponding dividend tax credit (DTC) of 26%. Which of the statements regarding Grant's situation is correct?
Explanation: Taxpayers can deduct their contributions to an RRSP, PRPP or RPP, subject to certain limitations in the calculation of an individual's net income in the prior year.
Tina works at the federal government. This year, her gross salary from her job is $85,000 and she paid $23,800 in federal and provincial income tax. She made a $1,000 RRSP contribution and received an income tax deduction of $312. In her non-registered portfolio, Tina holds several US equity where she has earned both capital gains and dividends. What can we conclude about Tina's situation?
Explanation: The effective marginal tax rate for a capital gain is 50% of the marginal tax rate, because the capital gain inclusion rate is 50%. The deduction of $312 tells us Tina's marginal tax rate is 31.2% and therefore her capital gain effective marginal rate is half of this amount which is 15.6%
Frank, age 63, and Linda, age 65, are retired and each have an income of approximately $100,000. The bulk of Linda's income comes from her defined benefit pension plan (DBPP), CPP and OAS, while Frank's income consists primarily of CPP, and RRIF and TFSA withdrawals. The couple have approached you for advice regarding income splitting opportunities. How should you advise them?
Explanation: The transferring spouse or common-law partner may be able to lower his or her net income enough to reduce the impact of the Old Age Security clawback.
Many years ago, Edna purchased stock in RTB Corp for $10,000, which is her adjusted cost base (ACB) of the stock. Last week, when the fair market value (FMV) of the RTB stock was $50,000, Edna sold the stock to her adult daughter, Jane, for $10,000. Today, Jane sold the stock at the current fair market value of $50,000. Which of the following will result from these transactions? i) Edna will incur a capital gain of $40,000ii) Edna will have a deemed disposition of $10,000iii) Jane will incur a capital gain of $40,000iv) Jane acquired the stock with an ACB of $50,000
Explanation: When an asset is transferred to a non-arm's-length party for an amount less than the fair market value of the asset, there is deemed to be inadequate consideration. The Income Tax Act deems the proceeds of disposition to be the fair market value of the asset ($50,000), although the buyer's (Jane's) adjusted cost base for the asset is set at the amount of actual consideration ($10,000).
Sivy has accepted a new position as a controller at a company located in another city. From her current home, Sivy faces a 100-kilometre commute to her new job. If Sivy decides to move closer to her new employer to reduce her commute, she will have more time for her family and friends.
For eligible expenses associated with the move to be tax-deductible, Sivy must meet the distance criteria. As long as the commute between Sivy's new residence and new work location is 60 kilometres or less
Emma has received a total of $3,200 in eligible dividends this year. She is in a 42% marginal tax rate. Assume a dividend gross-up rate of 38% and a combined federal and provincial dividend tax credit (DTC) of 24%. How much tax must Emma pay in regards to her dividends? Round your answer to the nearest cent.
Grossed up amount: $3,200 x 1.38 = $4,416 Tax payable: $4,416 x 0.42 = $1,854.72 DTC: $4,416 x 0.24 = $1,059.84 Net tax payable = $1,854.72 - $1,059.84 = $794.88
Wilson and Gail were married for nine years before they separated in July of last year. Based on a verbal agreement that Wilson and Gail negotiated, Wilson pays Gail a support payment of $1,200 per month, although they did not specifically allocate this amount between child support and spousal support. Wilson paid Gail $6,000 for the period August to December of last year.
In the absence of a written agreement stipulating child support and spousal support amounts, the Canada Revenue Agency assumes the entire payment to be child support, which is not taxable to Ellen nor tax-deductible for Sam
Samuel loaned $200,000 to his spouse, Joan, who used the money to establish a bookstore. The money was used to pay the first and last month's rent on the building, purchase inventory and cover leasehold improvements. The money Joan earns from the bookstore is business income, not property income, so attribution does not apply to income Joan earns from the business. Samuel loaned an additional $100,000 to Joan, which she used to acquire an interest in a limited partnership (she was not actively involved). Joan earned $15,000 in income from the partnership.
In this case, because it is a limited partnership and Joan is a limited partner, the $15,000 is considered property income and is attributed to Samuel.
Casey has 4 nieces and nephews; Dianne, Donna, Paul and Stephen, ages 14, 16, 19 and 20 respectively. Casey had an excellent year financially so he decided to gift a $10,000 Canada Savings Bond (CSB) to each of them. The interest earned in the first year was $245 per CSB. Which of the nieces and nephews will have to treat the $245 as income for the taxation year?
Income earned on property transferred from a taxpayer to a minor is attributed back to the taxpayer if the taxpayer does not deal at arm's length with the minor or if the minor is a niece or nephew. As such, the attribution rules apply to transfers from a taxpayer to the taxpayer's child, grandchild, great-grandchild, niece, or nephew. A minor is an individual under 18 years of age for the entire year (i.e., has not turned age 18 by December 31). Attribution rules do not apply to: capital gains on the property; and to income earned on the reinvestment of the original income. Since Paul and Stephen are over the age of 18, they will be responsible for the tax associated with the income earned on their bonds.
Eligible dividends
Individual taxpayers who received eligible dividends in 2019 from a public Canadian corporation are subject to a 38% gross-up on the dividend.
Non-eligible dividends
Individual taxpayers who received non-eligible dividends in 2019 are subject to a 15% gross-up on the dividend and a federal non-eligible dividend tax credit of 9.03% of the grossed-up amount.
If Keith from the previous example used the vehicle for business purposes at least 50% of the time, and if his personal portion of the total kilometres travelled averaged 750 kilometres per month, Keith is eligible for a reduced standby charge
Keith's reduced standby charge is calculated as follows: $7,200 x (750 ÷ 1,667) = $3,239
George and Linda are common law partners. George has an income of $35,000 while Linda's income is $150,000. In her non-registered portfolio, Linda had a bond fund with an adjusted cost base (ACB) of $13,000. She gifted the fund to George when the fair market value of the fund was $24,000. This year, George received a total of $300 income from the fund. Today he sold the fund at the current fair market value (FMV) of $25,000. Which of the following is a result of these transactions?
Linda must declare $300 income received from the fundWhen an individual transfers or lends property, either directly or indirectly, to his or her spouse or common-law partner (or to a person who has since become the individual's spouse or common-law partner): Any income or loss from the property is attributed to the transferring individual Any taxable capital gain or allowable capital loss resulting from the disposition of the property is attributed to the transferring individual
Maria sells her XYZ shares for $50,000 when her adjusted cost base is $75,000. Maria's common-law partner, Shartha, buys $50,000 worth of XYZ shares within 30 days of Maria's disposition.
Maria cannot claim the capital loss at the time she disposes of the XYZ shares because of the superficial loss rules. However, the $26,000 capital loss is added to the adjusted cost base of Shartha's XYZ shares. Shartha's adjusted cost base is $76,000 (her purchase price of $50,000 plus the $26,000 superficial loss Maria experienced).
Employer-paid training and educational costs are a taxable benefit to the employee, unless the training is primarily for the benefit of the employer.
Moham is the director of marketing at NetPro Software, where he has worked for the past five years. To increase his knowledge of accounting and finance, Moham enrolled in an executive MBA program at a local university. NetPro Software paid Moham's tuition — $20,000 per year for two years —because they felt the Moham would be of greater value to the organization after completing the degree. He would have a more solid grasp of accounting and finance concepts. In this case, the $20,000 for each of the two years is a non-taxable benefit for Moham.
A reduced standby charge may be available when all of the following criteria are met: The employer must specify that the vehicle is required for business Personal-use of the automobile must be less than 50% Personal-use of the automobile must average less than 1,667 kilometres per month (i.e., 20,004 kilometres per year)
Reduced standby charge = (basic standby charge) x ((average personal-use kilometres per month) ÷ 1,667)
Identify the type of payment that would be considered "taxable income" by Canada Revenue Agency (CRA)?
Spousal support payments (unlike child support payments) are tax-deductible by the payer and taxable to the recipient. Spousal support payments (unlike child support payments) are tax-deductible by the payer and taxable to the recipient.
Jasper is required to pay quarterly tax installments. He was late on a recent installment and is concerned about potential interest costs. Which of the following statements is CORRECT regarding his situation? b) Jasper should pay his next installment early to help offset the interest cost.
The Income Tax Act stipulates that interest must be paid on late instalments from the time the instalment is due until the date the instalment/final tax payment is made. Interest credits can be earned on pre-paid or overpaid instalments. The effect of these credits can work to the taxpayer's advantage. If a taxpayer is late making an instalment, this can be offset by making an early payment on a subsequent instalment or by overpaying the subsequent instalment. Interest paid by the government on an early payment can offset interest accrued due to a previous late payment.
Amber, who is 75 years old, has a net income of $50,000. $12,210 Income in excess of threshold ($50,000 - $37,790) 1,831 Reduction ($12,210 x 15%) 5,662 Age amount claimed ($7,494 - $1,831)
The age tax credit for Amber's age amount tax credit is $5,662 x 15% = $849. This means Amber can reduce her federal taxes owing by $849.
Identify the individuals who qualify to claim the "amount for an eligible dependent" tax credit. Assume no one is living in a common-law relationship.
The amount for an eligible dependant may be claimed if: The taxpayer was single, divorced, separated, or widowed; The taxpayer supported a dependant; The dependant lived with the taxpayer (except if attending school). In addition, the dependant must have been either: The taxpayer's parent or grandparent by blood, marriage, common-law partnership, or adoption; The taxpayer's child, grandchild, brother, or sister by blood, marriage, common-law partnership, or adoption and must be either under age 18 or mentally or physically infirm.
In preparation for retirement and to provide an emergency fund, Samantha sold a number of rare coins directly to a dealer this year for $14,200. The adjusted cost base (ACB) on the coins was $4,600. She also sold her stamp collection for $8,200, which had an ACB of $8,850. Samantha paid the dealer a $350 commission on the sales. Calculate Samantha's total capital gain on the 2 transactions.
The disposition of non-depreciable property results in a capital gain or loss. Listed personal property is subject to gains/losses, and includes: prints, etchings, drawings, paintings, or sculptures of other similar works of art; jewelry; rare folios, rare manuscripts, or rare books; stamps; or, coins. Proceeds: (14,200 + 8,200) - ACB (4,600 + 8, 850) - commissions: (350) = $8,600.
Who sets the prescribed rate? How often is the prescribed rate changed?
The federal government establishes the prescribed interest rate each calendar quarter as the average rate (rounded to the next highest whole percentage if the average is not a whole percentage) charged on 90-day Government of Canada treasury bills issued during the first month of the preceding quarter.
Identify the employment benefits that are generally considered non-taxable to the employee? Subsidized meals Discounts on merchandise offered to all employees Personal use of frequent flyer points earned through employer-paid business Employer paid parking
The following benefits are considered non-taxable to an employee: Discounts on merchandise available to general employee population (not select employees); Uniforms and special clothing; Subsidized meals.
Shelby's earned income was $9,000, while her spouse, Sandy, earned $53,000. To allow Shelby to work, they incurred childcare expenses of $12,000 for the daycare that three-year-old Christy attended and $3,000 for after-school care for six-year-old Connor.
The maximum amount that Shelby can claim for childcare expenses is $6,000, the least of $15,000 (actual expenses incurred), $16,000 (2 children under age 7, maximum $8,000 each) and $6,000 (2/3 x earned income of $9,000).
Keith's employer provides him with an automobile valued at $30,000 (including HST). The vehicle was available to Keith for the entire past year. Keith did not reimburse his employer for expenses associated with the use of the automobile.
This creates a standby charge of: 2% x 12 months x $30,000 = $600 per month x 12 months = $7,200 This $7,200 is treated as a taxable benefit that is included in Keith's income.
Pat must use his own financial resources to complete the purchase or accept a prescribed rate loan from Sam with terms of repayment and a reasonable (or prescribed) rate of interest.
To avoid attribution, Pat must pay Sam interest on the loan (according to the terms of the loan agreement) during the year or within 30 days following year-end. Sam must include the interest payment in his income for the year he receives it.
Patrick paid the following medical expenses that he has not yet claimed: November last year, $1,200 for orthodontic work for his daughter Jan this year, $1,200 for additional orthodontic work for his daughter May this year, $500 for new eyeglasses for his son December this year, $750 for elective surgery for his partner
To maximize the value of Patrick's medical expense claim, he should claim medical expenses incurred during the 12-month period ending in November this year. This will pick up the $1,200 paid in November last year, plus $1,200 and $500 paid this year before the end of November, for total medical expenses of $2,900. While the threshold reduces this amount, Patrick still ends up with a medical expense claim. The remaining $750 of medical expenses incurred in December of this year can be used when calculating Patrick's (or his partner's) next year's medical expenses.
Forgiven loans
When an employer forgives a loan made to an employee, an imputed benefit applies. The benefit is the face value of the forgiven loan amount.
Low-interest loans:
When an employer provides a low-interest loan to an employee, an imputed interest benefit applies. The benefit is calculated by multiplying the prescribed interest rate by the outstanding loan amount and subtracting the amount of any interest paid during the year or paid no later than 30 days after the end of the year.
Interest-free loans:
When an employer provides an interest-free loan to an employee, an imputed interest benefit applies and is calculated by multiplying the prescribed interest rate by the outstanding loan amount for the relevant tax period.
On the first business day in January, Jacob gave his wife Anna $10,000. She then bought shares in a well-known technology company. If she sells the shares by mid-year for $12,500, what is the correct taxable consequence?
When an individual transfers or lends property, either directly or indirectly, to his or her spouse or common-law partner (or to a person who has since become the individual's spouse or common-law partner): Any income or loss from the property is attributed to the transferring individual Any taxable capital gain or allowable capital loss resulting from the disposition of the property is attributed to the transferring individual. Jacob will have taxable capital gain $1,250.
Other property
includes capital property that does not fall within the definition of personal-use property or listed personal property and is acquired for the purpose of earning income. Examples of items included in this category are capital investments (i.e., stocks, bonds and marketable securities) and business assets such as rental property and equipment.
Listed personal property
is a special subset of personal-use property. The phrase listed personal property is literally true: A print, etching, drawing, painting, sculpture or other similar work of art Jewellery A rare folio, rare manuscript or rare book A stamp A coin
Personal-use property
is defined as property that is used primarily for personal use or enjoyment by the taxpayer or by a person related to the taxpayer. It includes items such as automobiles, boats, recreational equipment, a cottage, a principal residence and other similar items.
PBR Corp is a Canadian Controlled Private Corporation (CCPC). This year, PBR Corp earned a significant amount of interest income in its corporate investment account. Regarding PBR's reporting and accounting, which of the following statements are correct?
n: The tax rate that applies to a corporation's aggregate investment income is 50.67%. The corporation must add the refundable portion (30.67%) of the 50.67% to its refundable dividend tax on hand (RDTOH) account where it remains until the corporation later pays taxable dividends to its shareholders. The refundable portion of 30.67% is derived as 20% of the federal rate plus the 10.67% additional refundable tax.
Chris and Terry are neighbors, and are both vintage car collectors. They are considering a transaction that would be economically beneficial to both of them, but concerned about any potential adverse tax consequences due to the nature of their relationship and the transaction. What should Chris and Terry be aware of in this situation?
n: When individuals who would normally be considered arm's length "act in concert" with respect to an element of common interest, the courts have found that they could be considered to be non-arm's length. This typically could arise when two or more parties demonstrate behaviour that is not truly independent. They could, for example, be working in concert to derive a benefit that they would not offer to a true arm's length party.
With regard to interest charges on late or deficient amounts of income tax owing (excluding instalments), select the statements that are true. Interest charges apply from the due date of the tax payment until the payment is made. Both late filing penalties and interest will be charged. The rate of interest charged is set by Canada Revenue Agency. The rate of interest is reviewed and set annually.
the government imposes a penalty of 5% of the unpaid tax. The government imposes an additional 1% penalty for every additional month the tax return is late. . A second occurrence penalty is calculated as 10% of the unpaid amount plus an additional 2% per month to a maximum of 20 months.
For example, if an individual uses a 400-square-foot home office in a 4,000- square-foot home, and the space qualifies as a deductible workspace
then 10% (400 ÷ 4,000) of reasonable eligible expenses are deductible.
Basic capital cost allowance formula
CCA = undepreciated capital cost (of the class) x prescribed rate (for the class)
formula for deriving the amount of a capital gain or loss on the disposition of an asset is
Capital gain/loss = proceeds of disposition less (adjusted cost base + expenses associated with the disposition)
With regard to the Canadian income tax systems, which of the following statements are true?
: A dollar of reduced taxes puts more money in an individual's pocket than a dollar of incremental income because a dollar of tax savings is ready to spend whereas a dollar of incremental income still has to be taxed. Tax evasion occurs when taxpayers attempt to deceive the CRA by knowingly reporting less tax payable than what the law obligates them to pay. Tax planning involves activities and transactions that reduce or eliminate tax. They are not only completely legal, but they also operate within the intended and accepted intention of the law from the perspective of the CRA. In order to better equip the CRA to deal with abusive tax-avoidance schemes, in 1988 the Finance Department revised the Act to include a general anti-avoidance rule (GAAR). The GAAR provisions in section 245 of the Act are designed to impose taxes on any financial gain that accrues to a taxpayer as the result of a transaction or series of transactions that were undertaken with no bona fide purpose other than the avoidance of tax.
Sheraz, who lived in Manitoba with his spouse Chris, passed away this year. Sheraz left his portfolio of non-registered assets to Chris. The portfolio held shares with a market value of $29,000 and an adjusted cost base of $45,000. An election is made to opt out of the spousal rollover provision. Identify the statements that are true: Chris's ACB for the portfolio will be $29,000. Chris's ACB for the portfolio will be $45,000. Sheraz's estate will have a $16,000 capital loss that can be applied against any income. Sheraz's estate will have a $16,000 capital loss that can be applied only against capital gains.
: An individual is deemed to have disposed of all of his or her capital property at FMV immediately prior to his or her death. The individual who acquires the capital property upon the taxpayer's death is deemed to have received the property at a cost equal to the FMV. Therefore the transfer takes place at $29,000 and the loss is $45,000-29,000 = $16,000.
Under Canadian tax law, a person who visits Canada for a total of 183 or more days during the year is:
: Canada has a deeming rule under which persons who sojourn or visit Canada for a total of 183 or more days (not necessarily consecutively) during the year are deemed to be Canadian residents under the Act.
Gina has worked as a financial consultant for 20 years, and owns a rental property in Canada. She is now considering leaving Canada for a new position with an offshore investment firm located in a tax-free jurisdiction in the Caribbean. However, she still has some consulting opportunities in Canada which she feels could retain while living abroad. Gina is wondering what would be the potential consequences to her if she becomes a non-resident of Canada. What should Gina be aware of in this situation?
: Non-residents must pay a basic withholding tax of 25% on income earned in Canada from such sources as management fees, interest, estate and trust income, rents, royalties, and pension benefits.
Your client, Rhonda, is coming to meet with you tomorrow for an annual review. You call Rhonda in advance of the meeting, and ask her to bring her most recent Notice of Assessment. Which of the following pieces of information could you obtain from Rhonda's Notice of Assessment? i) RRSP contribution limitii) TFSA contribution limitiii) CPP contributions payableiv) OAS contributions payable
: RRSP contribution limit and CPP contributions payable are both included in the Notice of Assessment
Grant is age 50 and makes a salary of $120,000 per year. He contributed $10,000 to his RRSP this year and purchased 1,000 shares of RTP Corp when the share price was $10. Throughout the year, Grant received a total of $340 in eligible dividends from RTP Corp, and subsequently sold the stock later that year when the share price was $11.30. Grant is in a 42% marginal tax rate, and gross-up for eligible dividends is 38% with a corresponding dividend tax credit (DTC) of 26%. Which of the statements regarding Grant's situation is correct?
: Taxpayers can deduct their contributions to an RRSP, PRPP or RPP, subject to certain limitations in the calculation of an individual's net income in the prior year. Reduce net income by $110,000
Ken invested $30,000 in RTB Inc common shares. At the time of purchase, the share price was $30 and Ken purchased 1,000 shares. The investment performed very poorly, and Ken subsequently sold the shares when the fair market value (FMV) was $15,000. Two weeks later, RTB was trading at $10 per share, and Ken's wife, Jenna, purchased 1,000 shares. Jenna held the shares for over a year, and subsequently sold the shares at market price when the FMV was $20 per share. Which statement properly describes the outcome of this situation?
: The term superficial loss applies when a taxpayer incurs a loss on the disposition of capital property and an identical property is acquired or reacquired by the taxpayer or an affiliated person within the period of 30 days before and 30 days after a disposition. When an individual incurs such a capital loss, it is disallowed because it is viewed as a superficial loss. To balance the system, the superficial loss is added to the adjusted cost base of the reacquired property. When the reacquired property is eventually sold, the higher adjusted cost base reduces the capital gain. Jenna's ACB is therefore $10,000 + $15,000 = $25,000. She sold the shares for $20,000 and therefore has a capital loss of $5,000. Half of the loss ($2,500) is allowable for tax purposes.
Surtaxes
A surtax is a tax calculated based on taxes already owing, so is typically an additional layer of tax on top of the basic tax structure. Surtaxes are commonly directed at a particular segment of the higher income-earning population.
allowable business investment loss is commonly referred to as an ABIL.
ABIL = business investment loss x capital gains inclusion rate
Which statement properly describes the tax treatment of income received and purchases made by an Indian ("Indian" according to the CRA and the Indian Act)?
An Indian purchasing goods or services on the reserve is exempt from the goods and services tax (GST) or harmonized sales tax (HST).
Net capital loss
An allowable capital loss that is not used in the year incurred is added to the taxpayer's pool of net capital losses. It can be carried back three years or carried forward indefinitely. It can be claimed only against taxable capital gains, except in the year of death when it can be claimed against any type of income.
Which of the following situations would be considered an involuntary disposition?
An involuntary disposition includes the destruction, theft, foreclosure or expropriation of the property.
RRSP contributions
Any amount that an employer contributes to an employee's RRSP, or pays to cover the cost of RRSP administration, is a taxable benefit to the employee.
