Solution Manual for Canadian Income Taxation
k k k k k k
kk 26th E
k
dition by William Buckwold
k k k k
All chapters 1-23 Covered
k k k
,TABLEkOFkCONTENT
Chapterk1kTaxationkItskRolekinkDecisionkMakingk Chapterk2
kFundamentalskofkTaxkPlanning
Chapterk3kLiabilitykforkTax,kIncomekDetermination,kandkAdministrationkofkthekIncomekTaxkSystemk Chapterk4kInco
mekfromkEmployment
Chapterk5kIncomekfromkBusiness
Chapterk6kThekAcquisition,kUse,kandkDisposalkofkDepreciablekPropertyk Chapterk7kI
ncomekfromkProperty
Chapterk8kGainskandkLosseskonkthekDispositionkofkCapitalkProperty-CapitalkGains
Chapterk9kOtherkIncome,kOtherkDeductions,kandkSpecialkRuleskforkCompletingkNetkIncomekforkTaxkPurposesk Chapterk
10kIndividuals:kDeterminationkofkTaxablekIncomekandkTaxeskPayable
Chapterk11kCorporations-AnkIntroduction
Chapterk12kOrganization,kCapitalkStructures,kandkIncomekDistributionskofkCorporationsk Chapterk13kTh
ekCanadian-ControlledkPrivatekCorporation
Chapterk14kMultiplekCorporationskandkTheirkReorganizationk Chapterk15k
Partnerships
Chapterk16kLimitedkPartnershipskandkJointkVenturesk Chapt
erk17kTrusts
Chapterk18kBusinesskAcquisitionskandkDivestitures-
AssetskversuskSharesk Chapterk19kBusinesskAcquisitionskandkDivestitures-Tax-
DeferredkSalesk Chapterk20kDomestickandkInternationalkBusinesskExpansion
Chapterk21kTaxkAspectskofkCorporatekFinancingk Chapterk2
2kIntroductionktokGST/HST
Chapterk23kBusinesskValuations
Chapterk1
Taxationk–kIt’skRolekinkBusinesskDecisionkMaking
ReviewkQuestions
1. Ifk incomek taxk isk imposedk afterk profitsk havek beenk determined,k whyk isk taxationk relevantk tok bus
inesskdecisionkmaking?
2. Mostkbusinesskdecisionskinvolvekthekevaluationkofkalternativekcourseskofkaction.kForkexample,k ak ma
rketingk managerk mayk bek responsiblek fork choosingk ak strategyk fork establishingk salesk ink newkgeo
graphicalkterritories.kBrieflykexplainkhowkthektaxkfactorkcankbekankintegralkpartkofkthisk decision.
3. Whatkarekthekfundamentalkvariableskofkthekincomektaxksystemkthatkdecision-
makerskshouldk bek familiarkwithksokthatktheykcankapplyktaxkissuesktoktheirkareaskofkresponsibility?
4. Whatkiskank“after-tax”kapproachktokdecisionkmaking?
,SolutionsktokReviewkQuestions
R1-
1k Oncek profitk isk determined,k thek Incomek Taxk Actk determinesk thek amountk ofk incomek taxk thatk r
esults.kHowever,k atk allk levelsk ofkmanagement,k alternativekcoursesk ofk actionk arek evaluated.k Ink man
ykcases,k thekchoicek ofkonek alternativekoverkthek otherk mayk affectk bothk thekamountk andk thek timingk
ofk futurek taxesk onk incomek generatedk fromk thatk activity.k Therefore,k thek personk makingk thosek decisi
onsk hask ak directk inputk intok futurek after-
taxk cashk flow.k Obviously,k decisionsk thatk reducekork postponekthekpaymentk ofktaxkaffectk thek ultima
tekreturnk onk investmentk and,kinkturn,k thekvaluekofkthekenterprise.kIncludingkthektaxkvariablekask akpa
rtkofkthekformalkdecisionkprocessk willkultimatelykleadktokimprovedkafter-taxkcashkflow.
R1-
2kExpansionkcankbekachievedkinknewkgeographickareaskthroughkdirectkselling,korkbykestablishingkak
formalkpresencekinktheknewkterritorykwithkakbranchk officekorkakseparatekcorporation.kTheknewk terri
toriesk maykalsokcrosskprovincialkorkinternationalkboundaries.kProvincialkincomektaxkratesk varykamon
gstk thekprovinces.kThekamountk ofk incomekthatk isksubjectk toktaxkinktheknewk provincek willkbekdifferent
kfork eachk ofk thek threek alternativesk mentionedk above.k Fork example,k withk directk selling,k nonek ofk the
k incomek isk taxedk ink thek newk province,k butk withk ak separatek corporation,k allk ofk thek incomek isk taxe
dk ink thek newk province.k Becausek thek taxk costk isk differentk ink eachk case,k taxationk isk ak relevantk pa
rtk ofk thek decisionk andk mustk bek includedk ink anyk cost-
benefitk analysisk thatkcompareskthekthreekalternativesk[Reg.k400-402.1].
R1-
3kAkbasickunderstandingk ofk thekfollowingk variablesk willksignificantlykstrengthenk akdecisionk maker'sk
abilityktokapplyktaxkissuesktoktheirkareakofkresponsibility.
TypeskofkIncome -
Employment,kBusiness,kProperty,kCapitalkgainsk Taxab
lekEntities - Individuals,kCorporations,kTrusts
AlternativekBusiness -
Corporation,kProprietorship,kPartnership,kLimitedk Structur
es partnership,kJointkarrangement,kIncomektrust
TaxkJurisdictions - Federal,kProvincial,kForeign
R1-
4k Allk cashk flowk decisions,k whetherk relatedk tok revenues,k expenses,k assetk acquisitionsk ork divestitu
res,k ork debtk andk equityk restructuring,k willk impactk thek amountk andk timingk ofk thek taxk cost.kTherefor
e,kcashkflowkexistskonlykonkankafterktaxkbasis,kand,kthektaxkimpactskwhetherkorknotk thek ultimatek res
ultkofk thek decisionk isk successful.k Ank after-taxk approachk tokk decision-
k makingk requiresk eachk decision-makerk tok thinkk "after-
tax"k fork everyk decisionk atk thek timek thek decisionkiskbeingkmade,kand,ktokconsiderkalternativekcourse
skofkactionktokminimizekthektaxkcost,k inktheksamekwaykthatkdecisionskarekmadekregardingkotherktype
skofkcosts.
Failurek tok applyk ank after-
taxk approachk atk thek timek thatk decisionsk arek madek mayk providek inaccuratekinformationkforkeva
luation,kand,kresultkinkakpermanentlykinefficientktaxkstructure.
, CHAPTERk2
FUNDAMENTALSkOFkTAXkPLANNING
ReviewkQuestions
1. “Taxkplanningkandktaxkavoidancekmeanktheksamekthing.”kIskthiskstatementktrue?kExplain.
2. Whatkdistinguishesktaxkevasionkfromktaxkavoidancekandktaxkplanning?
3. DoeskCanadakRevenuekAgencykdealk withkallk taxk avoidancekactivitiesk ink theksamekway?k Explain.
4. Thek purposek ofk taxk planningk isk tok reducek ork deferk thek taxk costsk associatedk withk financialk tra
nsactions.kWhatkarekthekgeneralktypeskofktaxkplanningkactivities?kBrieflykexplainkhowk eachk ofkthe
mkmaykreducekorkdeferkthektaxkcost.
5. “Itkiskalwayskbetterktokpayktaxklaterkratherkthanksooner.”kIskthiskstatementktrue?kExplain.
6. Whenkcorporatektaxkrateskarek13%kandktaxkrateskforkindividualskarek40%,kiskitkalwayskbetterkfork t
hekindividualktoktransferktheirkbusinessktokakcorporation?
7. “Askk longkk askk allkkofkkthekk incomekktaxkkruleskk arekkknown,kkakktaxkkplankk cankk bekkdevelopedkk wit
h
certainty.”kIskthiskstatementktrue?kExplain.
8. Whatkbasickskillskarekrequiredktokdevelopkakgoodktaxkplan?
9. Ankentrepreneurk isk developingk ak newkbusinesskkventurek andkiskkplanningk tok raisek equityk capita
lk fromk individualk investors.k Theirk adviserk indicatesk thatk thek venturek couldk bek structuredk ask ak c
orporationk (i.e.,k sharesk arek issuedk tok thek investors)k ork ask ak limitedk partnershipk(i.e.,kpartnershipk
unitskareksold).kBothkstructureskprovideklimitedkliabilitykforkthek investors.k Shouldk thek entrepreneurk
considerk thek taxk positionsk ofk thek individualk investors?k Explain.kWithoutk dealingk withkspecificktaxk
rules,kwhatk generalktaxkfactorsk shouldk ank investork considerkbeforekmakingkankinvestment?
10. Whatkiskaktaxkavoidancektransaction?
11. “Ifkaktransactionk(orkakserieskofktransactions)kthatkresultskinkaktaxkbenefitkwasknotkundertakenk prim
arilyk fork bonak fidek business,k investment,k ork familyk purposes,k thek generalk anti-
k avoidancekrulekwillkapplykandkeliminatekthektaxkbenefit.”kIskthiskstatementktrue?kExplain.
k k k k k k
kk 26th E
k
dition by William Buckwold
k k k k
All chapters 1-23 Covered
k k k
,TABLEkOFkCONTENT
Chapterk1kTaxationkItskRolekinkDecisionkMakingk Chapterk2
kFundamentalskofkTaxkPlanning
Chapterk3kLiabilitykforkTax,kIncomekDetermination,kandkAdministrationkofkthekIncomekTaxkSystemk Chapterk4kInco
mekfromkEmployment
Chapterk5kIncomekfromkBusiness
Chapterk6kThekAcquisition,kUse,kandkDisposalkofkDepreciablekPropertyk Chapterk7kI
ncomekfromkProperty
Chapterk8kGainskandkLosseskonkthekDispositionkofkCapitalkProperty-CapitalkGains
Chapterk9kOtherkIncome,kOtherkDeductions,kandkSpecialkRuleskforkCompletingkNetkIncomekforkTaxkPurposesk Chapterk
10kIndividuals:kDeterminationkofkTaxablekIncomekandkTaxeskPayable
Chapterk11kCorporations-AnkIntroduction
Chapterk12kOrganization,kCapitalkStructures,kandkIncomekDistributionskofkCorporationsk Chapterk13kTh
ekCanadian-ControlledkPrivatekCorporation
Chapterk14kMultiplekCorporationskandkTheirkReorganizationk Chapterk15k
Partnerships
Chapterk16kLimitedkPartnershipskandkJointkVenturesk Chapt
erk17kTrusts
Chapterk18kBusinesskAcquisitionskandkDivestitures-
AssetskversuskSharesk Chapterk19kBusinesskAcquisitionskandkDivestitures-Tax-
DeferredkSalesk Chapterk20kDomestickandkInternationalkBusinesskExpansion
Chapterk21kTaxkAspectskofkCorporatekFinancingk Chapterk2
2kIntroductionktokGST/HST
Chapterk23kBusinesskValuations
Chapterk1
Taxationk–kIt’skRolekinkBusinesskDecisionkMaking
ReviewkQuestions
1. Ifk incomek taxk isk imposedk afterk profitsk havek beenk determined,k whyk isk taxationk relevantk tok bus
inesskdecisionkmaking?
2. Mostkbusinesskdecisionskinvolvekthekevaluationkofkalternativekcourseskofkaction.kForkexample,k ak ma
rketingk managerk mayk bek responsiblek fork choosingk ak strategyk fork establishingk salesk ink newkgeo
graphicalkterritories.kBrieflykexplainkhowkthektaxkfactorkcankbekankintegralkpartkofkthisk decision.
3. Whatkarekthekfundamentalkvariableskofkthekincomektaxksystemkthatkdecision-
makerskshouldk bek familiarkwithksokthatktheykcankapplyktaxkissuesktoktheirkareaskofkresponsibility?
4. Whatkiskank“after-tax”kapproachktokdecisionkmaking?
,SolutionsktokReviewkQuestions
R1-
1k Oncek profitk isk determined,k thek Incomek Taxk Actk determinesk thek amountk ofk incomek taxk thatk r
esults.kHowever,k atk allk levelsk ofkmanagement,k alternativekcoursesk ofk actionk arek evaluated.k Ink man
ykcases,k thekchoicek ofkonek alternativekoverkthek otherk mayk affectk bothk thekamountk andk thek timingk
ofk futurek taxesk onk incomek generatedk fromk thatk activity.k Therefore,k thek personk makingk thosek decisi
onsk hask ak directk inputk intok futurek after-
taxk cashk flow.k Obviously,k decisionsk thatk reducekork postponekthekpaymentk ofktaxkaffectk thek ultima
tekreturnk onk investmentk and,kinkturn,k thekvaluekofkthekenterprise.kIncludingkthektaxkvariablekask akpa
rtkofkthekformalkdecisionkprocessk willkultimatelykleadktokimprovedkafter-taxkcashkflow.
R1-
2kExpansionkcankbekachievedkinknewkgeographickareaskthroughkdirectkselling,korkbykestablishingkak
formalkpresencekinktheknewkterritorykwithkakbranchk officekorkakseparatekcorporation.kTheknewk terri
toriesk maykalsokcrosskprovincialkorkinternationalkboundaries.kProvincialkincomektaxkratesk varykamon
gstk thekprovinces.kThekamountk ofk incomekthatk isksubjectk toktaxkinktheknewk provincek willkbekdifferent
kfork eachk ofk thek threek alternativesk mentionedk above.k Fork example,k withk directk selling,k nonek ofk the
k incomek isk taxedk ink thek newk province,k butk withk ak separatek corporation,k allk ofk thek incomek isk taxe
dk ink thek newk province.k Becausek thek taxk costk isk differentk ink eachk case,k taxationk isk ak relevantk pa
rtk ofk thek decisionk andk mustk bek includedk ink anyk cost-
benefitk analysisk thatkcompareskthekthreekalternativesk[Reg.k400-402.1].
R1-
3kAkbasickunderstandingk ofk thekfollowingk variablesk willksignificantlykstrengthenk akdecisionk maker'sk
abilityktokapplyktaxkissuesktoktheirkareakofkresponsibility.
TypeskofkIncome -
Employment,kBusiness,kProperty,kCapitalkgainsk Taxab
lekEntities - Individuals,kCorporations,kTrusts
AlternativekBusiness -
Corporation,kProprietorship,kPartnership,kLimitedk Structur
es partnership,kJointkarrangement,kIncomektrust
TaxkJurisdictions - Federal,kProvincial,kForeign
R1-
4k Allk cashk flowk decisions,k whetherk relatedk tok revenues,k expenses,k assetk acquisitionsk ork divestitu
res,k ork debtk andk equityk restructuring,k willk impactk thek amountk andk timingk ofk thek taxk cost.kTherefor
e,kcashkflowkexistskonlykonkankafterktaxkbasis,kand,kthektaxkimpactskwhetherkorknotk thek ultimatek res
ultkofk thek decisionk isk successful.k Ank after-taxk approachk tokk decision-
k makingk requiresk eachk decision-makerk tok thinkk "after-
tax"k fork everyk decisionk atk thek timek thek decisionkiskbeingkmade,kand,ktokconsiderkalternativekcourse
skofkactionktokminimizekthektaxkcost,k inktheksamekwaykthatkdecisionskarekmadekregardingkotherktype
skofkcosts.
Failurek tok applyk ank after-
taxk approachk atk thek timek thatk decisionsk arek madek mayk providek inaccuratekinformationkforkeva
luation,kand,kresultkinkakpermanentlykinefficientktaxkstructure.
, CHAPTERk2
FUNDAMENTALSkOFkTAXkPLANNING
ReviewkQuestions
1. “Taxkplanningkandktaxkavoidancekmeanktheksamekthing.”kIskthiskstatementktrue?kExplain.
2. Whatkdistinguishesktaxkevasionkfromktaxkavoidancekandktaxkplanning?
3. DoeskCanadakRevenuekAgencykdealk withkallk taxk avoidancekactivitiesk ink theksamekway?k Explain.
4. Thek purposek ofk taxk planningk isk tok reducek ork deferk thek taxk costsk associatedk withk financialk tra
nsactions.kWhatkarekthekgeneralktypeskofktaxkplanningkactivities?kBrieflykexplainkhowk eachk ofkthe
mkmaykreducekorkdeferkthektaxkcost.
5. “Itkiskalwayskbetterktokpayktaxklaterkratherkthanksooner.”kIskthiskstatementktrue?kExplain.
6. Whenkcorporatektaxkrateskarek13%kandktaxkrateskforkindividualskarek40%,kiskitkalwayskbetterkfork t
hekindividualktoktransferktheirkbusinessktokakcorporation?
7. “Askk longkk askk allkkofkkthekk incomekktaxkkruleskk arekkknown,kkakktaxkkplankk cankk bekkdevelopedkk wit
h
certainty.”kIskthiskstatementktrue?kExplain.
8. Whatkbasickskillskarekrequiredktokdevelopkakgoodktaxkplan?
9. Ankentrepreneurk isk developingk ak newkbusinesskkventurek andkiskkplanningk tok raisek equityk capita
lk fromk individualk investors.k Theirk adviserk indicatesk thatk thek venturek couldk bek structuredk ask ak c
orporationk (i.e.,k sharesk arek issuedk tok thek investors)k ork ask ak limitedk partnershipk(i.e.,kpartnershipk
unitskareksold).kBothkstructureskprovideklimitedkliabilitykforkthek investors.k Shouldk thek entrepreneurk
considerk thek taxk positionsk ofk thek individualk investors?k Explain.kWithoutk dealingk withkspecificktaxk
rules,kwhatk generalktaxkfactorsk shouldk ank investork considerkbeforekmakingkankinvestment?
10. Whatkiskaktaxkavoidancektransaction?
11. “Ifkaktransactionk(orkakserieskofktransactions)kthatkresultskinkaktaxkbenefitkwasknotkundertakenk prim
arilyk fork bonak fidek business,k investment,k ork familyk purposes,k thek generalk anti-
k avoidancekrulekwillkapplykandkeliminatekthektaxkbenefit.”kIskthiskstatementktrue?kExplain.
