Solution Manual for Canadian Income Taxation
26th Edition by William Buckwold
All chapters 1-23 Covered
,TABLE OF CONTENT
Chapter 1 Taxation Its Role in Decision Making
Chapter 2 Fundamentals of Tax Planning
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Chapter 4 Income from Employment
Chapter 5 Income from Business
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Chapter 7 Income from Property
Chapter 8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Chapter 11 Corporations-An Introduction
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Chapter 13 The Canadian-Controlled Private Corporation
Chapter 14 Multiple Corporations and Their Reorganization
Chapter 15 Partnerships
Chapter 16 Limited Partnerships and Joint Ventures
Chapter 17 Trusts
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Chapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Chapter 20 Domestic and International Business Expansion
Chapter 21 Tax Aspects of Corporate Financing
Chapter 22 Introduction to GST/HST
Chapter 23 Business Valuations
Chapter 1
Taxation – It’s Role in Business Decision Making
Review Questions
1. If income tax is imposed after profits have been determined, why is taxation relevant to
business decision making?
2. Most business decisions involve the evaluation of alternative courses of action. For example,
a marketing manager may be responsible for choosing a strategy for establishing sales in
new geographical territories. Briefly explain how the tax factor can be an integral part of this
decision.
3. What are the fundamental variables of the income tax system that decision-makers should be
familiar with so that they can apply tax issues to their areas of responsibility?
4. What is an “after-tax” approach to decision making?
,Solutions to Review Questions
R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that
results. However, at all levels of management, alternative courses of action are evaluated. In
many cases, the choice of one alternative over the other may affect both the amount and the
timing of future taxes on income generated from that activity. Therefore, the person making
those decisions has a direct input into future after-tax cash flow. Obviously, decisions that
reduce or postpone the payment of tax affect the ultimate return on investment and, in turn,
the value of the enterprise. Including the tax variable as a part of the formal decision process
will ultimately lead to improved after-tax cash flow.
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by establishing a
formal presence in the new territory with a branch office or a separate corporation. The new
territories may also cross provincial or international boundaries. Provincial income tax rates
vary amongst the provinces. The amount of income that is subject to tax in the new province
will be different for each of the three alternatives mentioned above. For example, with direct
selling, none of the income is taxed in the new province, but with a separate corporation, all
of the income is taxed in the new province. Because the tax cost is different in each case,
taxation is a relevant part of the decision and must be included in any cost-benefit analysis
that compares the three alternatives [Reg. 400-402.1].
R1-3 A basic understanding of the following variables will significantly strengthen a decision
maker's ability to apply tax issues to their area of responsibility.
Types of Income - Employment, Business, Property, Capital gains
Taxable Entities - Individuals, Corporations, Trusts
Alternative Business - Corporation, Proprietorship, Partnership, Limited
Structures partnership, Joint arrangement, Income trust
Tax Jurisdictions - Federal, Provincial, Foreign
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, or debt and equity restructuring, will impact the amount and timing of the tax
cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or not
the ultimate result of the decision is successful. An after-tax approach to decision-
making requires each decision-maker to think "after-tax" for every decision at the time the
decision is being made, and, to consider alternative courses of action to minimize the tax cost,
in the same way that decisions are made regarding other types of costs.
Failure to apply an after-tax approach at the time that decisions are made may provide
inaccurate information for evaluation, and, result in a permanently inefficient tax structure.
, CHAPTER2 o
FUNDAMENTALS OF TAX PLANNING o o o
Review Questions
o
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
o o o o o o o o o o o o o
2. What distinguishes tax evasion from tax avoidance and tax planning?
o o o o o o o o o
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
o o o o o o o o o o o o o
oExplain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with
o o o o o o o o o o o o o o
financial transactions. What are the general types of tax planning activities? Briefly
o o o o o o o o o o o o
explain how each of them may reduce or defer the tax cost.
o o o o o o o o o o o o
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
o o o o o o o o o o o o o o o
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for
o o o o o o o o o o o o o o o o o
the individual to transfer their business to a corporation?
o o o o o o o o o
7. “As long as all of the income tax rules are known, a tax plan can be developed with
oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo
certainty.” Is this statement true? Explain. o o o o o
8. What basic skills are required to develop a good tax plan?
o o o o o o o o o o
9. An entrepreneur is developing a new business venture and is planning to raise
o o o o o o o o o o o o o o
oequity capital from individual investors. Their adviser indicates that the venture
o o o o o o o o o o
could be structured as a corporation (i.e., shares are issued to the investors) or as a
o o o o o o o o o o o o o o o o
limited partnership (i.e., partnership units are sold). Both structures provide limited
o o o o o o o o o o o
liability for the investors. Should the entrepreneur consider the tax positions of the
o o o o o o o o o o o o o
individual investors? Explain. Without dealing with specific tax rules, what general tax
o o o o o o o o o o o o
factors should an investor consider before making an investment?
o o o o o o o o o
10. What is a tax avoidance transaction?
o o o o o
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
o o o o o o o o o o o o o o o o
o primarily for bona fide business, investment, or family purposes, the general anti-
o o o o o o o o o o o
oavoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.
o o o o o o o o o o o o o
26th Edition by William Buckwold
All chapters 1-23 Covered
,TABLE OF CONTENT
Chapter 1 Taxation Its Role in Decision Making
Chapter 2 Fundamentals of Tax Planning
Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
Chapter 4 Income from Employment
Chapter 5 Income from Business
Chapter 6 The Acquisition, Use, and Disposal of Depreciable Property
Chapter 7 Income from Property
Chapter 8 Gains and Losses on the Disposition of Capital Property-Capital Gains
Chapter 9 Other Income, Other Deductions, and Special Rules for Completing Net Income for Tax Purposes
Chapter 10 Individuals: Determination of Taxable Income and Taxes Payable
Chapter 11 Corporations-An Introduction
Chapter 12 Organization, Capital Structures, and Income Distributions of Corporations
Chapter 13 The Canadian-Controlled Private Corporation
Chapter 14 Multiple Corporations and Their Reorganization
Chapter 15 Partnerships
Chapter 16 Limited Partnerships and Joint Ventures
Chapter 17 Trusts
Chapter 18 Business Acquisitions and Divestitures-Assets versus Shares
Chapter 19 Business Acquisitions and Divestitures-Tax-Deferred Sales
Chapter 20 Domestic and International Business Expansion
Chapter 21 Tax Aspects of Corporate Financing
Chapter 22 Introduction to GST/HST
Chapter 23 Business Valuations
Chapter 1
Taxation – It’s Role in Business Decision Making
Review Questions
1. If income tax is imposed after profits have been determined, why is taxation relevant to
business decision making?
2. Most business decisions involve the evaluation of alternative courses of action. For example,
a marketing manager may be responsible for choosing a strategy for establishing sales in
new geographical territories. Briefly explain how the tax factor can be an integral part of this
decision.
3. What are the fundamental variables of the income tax system that decision-makers should be
familiar with so that they can apply tax issues to their areas of responsibility?
4. What is an “after-tax” approach to decision making?
,Solutions to Review Questions
R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that
results. However, at all levels of management, alternative courses of action are evaluated. In
many cases, the choice of one alternative over the other may affect both the amount and the
timing of future taxes on income generated from that activity. Therefore, the person making
those decisions has a direct input into future after-tax cash flow. Obviously, decisions that
reduce or postpone the payment of tax affect the ultimate return on investment and, in turn,
the value of the enterprise. Including the tax variable as a part of the formal decision process
will ultimately lead to improved after-tax cash flow.
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by establishing a
formal presence in the new territory with a branch office or a separate corporation. The new
territories may also cross provincial or international boundaries. Provincial income tax rates
vary amongst the provinces. The amount of income that is subject to tax in the new province
will be different for each of the three alternatives mentioned above. For example, with direct
selling, none of the income is taxed in the new province, but with a separate corporation, all
of the income is taxed in the new province. Because the tax cost is different in each case,
taxation is a relevant part of the decision and must be included in any cost-benefit analysis
that compares the three alternatives [Reg. 400-402.1].
R1-3 A basic understanding of the following variables will significantly strengthen a decision
maker's ability to apply tax issues to their area of responsibility.
Types of Income - Employment, Business, Property, Capital gains
Taxable Entities - Individuals, Corporations, Trusts
Alternative Business - Corporation, Proprietorship, Partnership, Limited
Structures partnership, Joint arrangement, Income trust
Tax Jurisdictions - Federal, Provincial, Foreign
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, or debt and equity restructuring, will impact the amount and timing of the tax
cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or not
the ultimate result of the decision is successful. An after-tax approach to decision-
making requires each decision-maker to think "after-tax" for every decision at the time the
decision is being made, and, to consider alternative courses of action to minimize the tax cost,
in the same way that decisions are made regarding other types of costs.
Failure to apply an after-tax approach at the time that decisions are made may provide
inaccurate information for evaluation, and, result in a permanently inefficient tax structure.
, CHAPTER2 o
FUNDAMENTALS OF TAX PLANNING o o o
Review Questions
o
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
o o o o o o o o o o o o o
2. What distinguishes tax evasion from tax avoidance and tax planning?
o o o o o o o o o
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
o o o o o o o o o o o o o
oExplain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with
o o o o o o o o o o o o o o
financial transactions. What are the general types of tax planning activities? Briefly
o o o o o o o o o o o o
explain how each of them may reduce or defer the tax cost.
o o o o o o o o o o o o
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
o o o o o o o o o o o o o o o
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for
o o o o o o o o o o o o o o o o o
the individual to transfer their business to a corporation?
o o o o o o o o o
7. “As long as all of the income tax rules are known, a tax plan can be developed with
oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo oo
certainty.” Is this statement true? Explain. o o o o o
8. What basic skills are required to develop a good tax plan?
o o o o o o o o o o
9. An entrepreneur is developing a new business venture and is planning to raise
o o o o o o o o o o o o o o
oequity capital from individual investors. Their adviser indicates that the venture
o o o o o o o o o o
could be structured as a corporation (i.e., shares are issued to the investors) or as a
o o o o o o o o o o o o o o o o
limited partnership (i.e., partnership units are sold). Both structures provide limited
o o o o o o o o o o o
liability for the investors. Should the entrepreneur consider the tax positions of the
o o o o o o o o o o o o o
individual investors? Explain. Without dealing with specific tax rules, what general tax
o o o o o o o o o o o o
factors should an investor consider before making an investment?
o o o o o o o o o
10. What is a tax avoidance transaction?
o o o o o
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
o o o o o o o o o o o o o o o o
o primarily for bona fide business, investment, or family purposes, the general anti-
o o o o o o o o o o o
oavoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.
o o o o o o o o o o o o o
