Test Bank for Byrd and Chen's Canadian Tax Principles Volume 2 By Gary Donell Clarence | Complete All Chapters 2024/2025 | Newest Version

Test Bank for Byrd and Chen's Canadian Tax Principles Volume 2 By Gary Donell Clarence | Complete All Chapters 2024/2025 | Newest Version. Online Exercises 1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination benefit. What tax policy objective is served by this provision? Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that it is received in a single year can result in significant portions of it being subject to income tax rates higher than would have been the case had it been received over the several years during which it was earned. The deduction of such amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the amount paid to the amount that would have been paid if the amount had actually been received over several years. The objective of such provisions is fairness or equity. Type: ES Topic: Lump-sum payments - ITA 110.2 2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA provides for the types of losses that it identifies. Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the text up to Chapter 11 are as follows: • Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back. • Net Capital Loss: Unlimited forward and 3 years back • Listed Personal Property Losses: 7 years forward and 3 years back. • Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with unlimited carry forward in year 11. • Foreign Tax Credits: 10 years forward and 3 years back. Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward, but only against the partnership income to which they relate. Type: ES Topic: Loss carry overs - general concepts 3) When a business has several types of loss carry overs, why is it necessary to keep separate balances for each type? Answer: There are two reasons for having to track each type of loss carry forward separately. First, different types of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second, some types of losses can only be applied against the equivalent type of income (e.g., capital losses can only be carried over and applied against capital gains). Type: ES Topic: Loss carry overs - general concepts 4) Tax advisors will normally recommend that loss carry overs not be used to reduce taxable income to nil for an individual. What is the basis for this recommendation? Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be carried over to other years. This means that, unless an individual taxpayer has taxable income and federal income tax payable, the value of these credits is simply lost. This, in effect, is what would happen if various types of loss carry overs were used to reduce taxable income to nil. Type: ES Topic: Loss carry overs - individual 5) Briefly describe the income tax treatment of losses on listed personal property. Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on listed personal property for the year. If the loss cannot be used during the current year, it can be carried back three years or forward seven years. Type: ES Topic: Losses - listed personal property 6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the current and previous years to claim these amounts, which type of loss should be deducted first? Answer: There is no clear cut answer to this question. Net capital losses have an unlimited life but can only be carried over to the extent of net taxable capital gains in the carry over period. This would suggest that, if net taxable capital gains are present in the current year, the use of net capital losses should receive priority. This would be particularly true if additional net taxable capital gains are not expected in future years. In contrast, non-capital losses can be deducted against any type of income. However, the downside here is that their carry forward period is limited to 20 years. While no firm conclusion is available, in most cases the lengthy carry forward period for non-capital losses, would suggest using net capital losses first. However, this tentative conclusion would be altered if the taxpayer commonly has net taxable capital gains. Type: ES Topic: Loss carry overs - general concepts 7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his only income is a $50,000 taxable capital gain. He has asked your advice as to which of the two loss carry forwards he should claim. What advice would you give him? Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and will expire at the end of 20 years. In contrast, the net capital loss will never expire but can only be applied against net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss in the time remaining until it expires, he should claim that loss. Alternatively, if he feels that he is likely to have sufficient income in that period, but that he is unlikely to have further capital gains, he should claim the net capital loss. There is no clear answer to this question as it involves estimates about the future. Type: ES Topic: Loss carry overs - general concepts 8) If an individual dies and has a net capital loss in the year of the death or unused net capital losses from previous years, these balances are subject to a different treatment than would be the case if the individual were still alive. Briefly describe how this treatment is different. Answer: ITA 111(2) contains a special provision with respect to both net capital losses from years prior to death and to net capital losses arising in the year of death. Essentially, this provision allows these loss balances to be applied against any type of income in the year of death, or the immediately preceding year, as long as the capital gains deduction has not been claimed. If the capital gains deduction had been claimed in previous years then the net capital losses that can be claimed against any type of income will be reduced. Type: ES Topic: Losses - net capital losses at death 9) What is an Allowable Business Investment Loss (ABIL)? What special tax provisions are associated with this type of loss? Answer: An Allowable Business Investment Loss (ABIL) is the deductible portion of a capital loss resulting from the disposition of shares or debt of a small business corporation. The special provisions associated with this type of loss are: • It can be deducted against any type of income in the year in which it occurs. • To the extent it cannot be fully used it becomes part of a non-capital loss for that year and can be carried over to other years as a non-capital loss for 10 years after which it becomes part of a net capital loss for the eleventh year. • It is disallowed as an ABIL (i.e., it becomes a regular allowable capital loss), to the extent that the individual has previously used the capital gains deduction. • The realization of an ABIL reduces the annual gains limit that is used to determine the maximum capital gains deduction for the year. Type: ES Topic: Allowable business investment losses 10) What is a Small Business Corporation as defined in the ITA? Answer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private corporation (CCPC) of which "all or substantially all", of the FMV of its assets are used in an active business carried on "primarily" in Canada. The term "substantially all" generally means 90% or more, while "primarily" is generally interpreted to mean more than 50%. Type: ES Topic: Small business corporation - ITA 248(1) 11) With respect to the deductibility of their losses, farmers fall into three categories. What are these three categories and how are losses treated in each category? Answer: The three categories, along with the treatment of their losses, are as follows: Hobby Farmer - This is an individual who runs a farming operation on a part time basis as a hobby or as a way of enhancing his or her lifestyle. The operation has no reasonable expectation of a profit and therefore it is not a business and not a source of income. As a result its losses are not recognized for income tax purposes. Part Time Farmer - This is an individual for whom farming is subordinate to some other source of income. However, if there is a reasonable expectation of a profit and therefore a business, the individual farmer is allowed to deduct a portion of their farm losses. In each year, the portion of the farm loss that can be deducted against any source of income is limited to the first $2,500, plus one-half of the next $30,000, to a maximum amount of $17,500. Losses in excess of this deductible amount are referred to as restricted farm losses and, when they are carried over to earlier or later years, they can only be deducted to the extent of any farm income in that year. Full Time Farmer - This is an individual for whom farming is their principal source of income and activity. For this category of farmer, farm losses are fully deductible against any other source of income. Type: ES Topic: Losses - farming 12) The capital gains deduction is available when an individual taxpayer has a gain on the disposition of shares in a "qualified small business corporation" (QSBC shares). What are the conditions that must be met for the shares to qualify as QSBC shares? Answer: In order to be shares of a QSBC for the purposes of the capital gains deduction, the corporation must be a "small business corporation" at the time of the disposition of the shares. This means that substantially all (90% or more) of the FMV of its assets must be used to produce active business income, primarily (more than 50%) in Canada. If the small business corporation test is met, two other conditions must be met for the shares to qualify. These are as follows: • the shares must not be owned by anyone other than the individual or a related person for at least 24 months preceding the disposition; and • throughout that 24 month period, more than 50% of the FMV of the corporation's assets must be used in an active business carried on primarily in Canada. Type: ES Topic: Capital gains deduction - shares of a QSBC 13) An individual has a capital gain on qualified farm property (QFP). The individual has no other capital gains during the year. Explain how the annual gains limit would be calculated in determining the individual's capital gains deduction for the year. Answer: In these circumstances, the annual gains limit is equal to the taxable capital gain on the QFP, less: • Allowable capital losses realized during the current year. • Net capital loss carry overs from previous deducted in the current year. • Allowable Business Investment Losses realized during the current year. Type: ES Topic: Capital gains deduction - annual gains limit 14) In computing net income, ITA 3 requires that subdivision e deductions be subtracted prior to deducting business or property losses. Explain why this rule is usually beneficial to a taxpayer. Answer: Most subdivision e deductions such as child care expenses cannot be carried forward to other years. This means that, if they are not deducted in the current year, they are lost forever. In contrast, business and property losses can be both carried back to other years. In contrast to subdivision e deductions, business and property losses are not lost if they are not fully deducted during the current year. ITA 4(2) acts to prevent subdivision e deductions from being expensed as part of a source of income. Type: ES Topic: Net income - ITA 3 15) What types of current year losses are included in the definition of a non-capital loss? What types of losses are not included? Answer: Non-capital losses would include current year employment losses, most business losses, property losses, and allowable business investment losses. The definition excludes farm losses (a type of business loss) and current year capital losses, but does make an adjustment for net capital losses deducted in the current year. Type: ES Topic: Losses - non-capital loss 16) Describe the conditions under which the tax on split income (TOSI) applies. Answer: The TOSI may apply when a Specified Individual receives income from a related business. In general, a business is related when a person related to a Specified Individual is connected to the business. This latter individual is referred to as a Source Individual. This connection occurs when the Source Individual: • carries on the business as a sole proprietor, or • owns shares in a private corporation that carries on the business. Note that such income is only subject to the TOSI if it is not an Excluded Amount. Where the business is a partnership, the Source Individual must have a direct or indirect interest in the partnership. If the business is carried on by a corporation, the business will be a related business if the Source Individual owns shares that represent 10% or more of the FMV of all of the corporation's issued voting shares. As was the case with the definition of a Specified Individual, the definition of a Source Individual requires the individual to be a Canadian resident. Type: ES Topic: Tax on split income (TOSI) 17) List two types of income that would not be subject to the tax on split income (TOSI). Answer: The two items that are specifically mentioned in the text are employment income and compound income resulting from the re-investment of split income amounts. Other items (e.g., dividends from publicly traded shares), could also be mentioned if they do not fall within the definition of split income. Type: ES Topic: Tax on split income (TOSI) 18) Under the TOSI legislation, what is the meaning of the term Excluded Business? Answer: Amounts received from an Excluded Business are not considered to be Split Income and are not subject to the TOSI. An Excluded Business is one in which the individual taxpayer is actively engaged on a regular, continuous, and substantial basis. This active engagement must be in the current year or in at least 5 prior taxation years. Note, however, the years do not have to be current or consecutive. That is, any 5 years of active engagement will satisfy this condition. The TOSI rules add what is referred to as a "bright line test" that considers an individual to have met the level of involvement in the business if they work in the business at least 20 hours a week during the period in the year in which the business is carried on. Type: ES Topic: Tax on split income (TOSI) 19) Under the TOSI legislation, what is the meaning of the term Excluded Shares? Answer: For shares to be classified as Excluded Shares, the individual must be 25 years of age or older and must own, in terms of both FMV and voting rights, at least 10% of the outstanding shares of the corporation. In addition, the corporation must meet the following conditions: • It must not be a professional corporation. • Less than 90% of its income in the previous year was from providing services. • Less than 10% of its income in the previous year was from a related business. Type: ES Topic: Tax on split income (TOSI) 20) Under the TOSI legislation, in determining whether an amount of income represents a reasonable return, the test for individuals age 25 or over is different than the test for individuals between 18 and 24. Describe this difference. Answer: For individuals 25 years of age or older, the measurement of a Reasonable Return requires consideration of labour contributions, capital contributions, as well as the assumption of business risk. For individuals between the age of 18 and 24, the reasonableness test is more restrictive. It does not take into consideration either active engagement in the business or business related risk assumed. It is based solely on capital contributions to the business. Type: ES Topic: Tax on split income (TOSI) 21) Under what circumstances can dividends be transferred from a spouse or common-law partner to the other spouse or common-law partner? Answer: Dividends can be transferred from a spouse or common-law partner if the result is to create or increase the amount of the spousal tax credit. Type: ES Topic: Transfer of dividends to a spouse - ITA 82(3) 22) Briefly describe the four major categories of charitable donations. Answer: As presented in the text, the descriptions are as follows: 1. Total Charitable Gifts is defined to include all eligible amounts donated by an individual to a registered charity, a registered Canadian amateur athletic association, a Canadian municipality, the United Nations or an agency thereof, a university outside of Canada which normally enrolls Canadian students, and a charitable organization outside of Canada to which Her Majesty in right of Canada has made a gift in the year or in the immediately preceding year. 2. Total Crown Gifts is defined as the aggregate of eligible amounts donated to Her Majesty in right of Canada (the Federal government) or to a province or territory. 3. Total Cultural Gifts is defined as the aggregate of all eligible gifts of objects that the Canadian Cultural Property Export Review Board has determined meet the criteria of the Cultural Property and Import Act. 4. Total Ecological Gifts is defined as all eligible gifts of land certified by the Minister of the Environment to be ecologically sensitive land, the conservation and protection of which is important to the preservation of Canada's environmental heritage. The beneficiary of the gift must be a Canadian municipality or a registered charity, the primary purpose of which is the conservation and protection of Canada's environmental heritage. Type: ES Topic: Charitable donations - general rules 23) If a taxpayer is donating non-depreciable capital property with a FMV that exceeds its ACB, a taxpayer can elect any amount between the FMV and ACB amount of the donation. Why is it generally appropriate to elect the higher FMV amount? Answer: Donations in excess of $200 provide the donor with a federal tax credit equal to either 29% or 33% of the amount of the donation (the rate depends on the taxable income of the individual). If the donation involves a non-depreciable capital property, electing the higher FMV will result in a capital gain, only onehalf of which will be included in income. This means that the effective income tax rate for an individual in the highest federal income tax bracket on the excess amount elected is only 16.5% [(1/2)(33%)]. This assures the individual that the value of the federal credit resulting from the extra amount elected will usually be double the increase in federal income tax on the resulting capital gain. Type: ES Topic: Charitable donations - general rules 24) Capital gains resulting from donations of publicly listed shares are, in general, deemed to be nil. Why is an additional rule required to avoid taxing income resulting from gifts of publicly listed shares that have been acquired through stock options? Answer: When there is a disposition of publicly listed shares that have been acquired through stock options, the difference between the FMV at the time the shares were exercised and the option price at which they were acquired is treated as employment income, not as a capital gain.While the general rule under ITA 38(a.1) deems capital gains on such donations to be nil, a special rule is required to exempt the employment income which may arise on such dispositions. The solution takes the form of an additional one-half deduction under ITA 110(1)(d.01) which completely offsets the remaining employment stock option benefit amount. Type: ES Topic: Charitable donations - general rules 25) Compare the income tax treatment of foreign tax credits on foreign non-business income with the income tax treatment of tax credits on foreign business income for individuals. Answer: Both credits are based on the lesser of the amount withheld and an amount determined by the following formula: [Foreign Non-Business Income ÷ Adjusted Division B Income][Tax Otherwise Payable] The differences are as follows: • For individuals, the figure used for the amount withheld for the non-business foreign credit is limited to 15% of the foreign non-business income. Any amount of withholding in excess of 15% becomes a deduction in the determination of net income (ITA 20(11). There is no such limit on the actual amount for the foreign business income credit. • When the amount withheld on foreign business income exceeds the amount that can be deducted, the excess foreign tax credit can be carried back 3 years and forward 10 years to apply against tax payable in those years. The taxpayer may decide instead to claim any excess as a net income deduction (ITA 20(12)). • The foreign business income credit is further limited by the amount of tax otherwise payable, reduced by any foreign non-business tax credit taken in the year. In effect, the credit is the least of the actual amount withheld, the amount determined by the formula, and tax otherwise payable reduced by any foreign non-business tax credit. Type: ES Topic: Foreign tax credits - general rules 26) The alternative minimum tax (AMT) is an attempt to deal with an income tax policy issue. What is this issue and, in general terms, how does the AMT deal with this issue? Answer: The income tax policy issue is the fact that some individuals, through the use of tax privileges and preferences (e.g., capital gains deduction, the non-taxable component of capital gains, or employee stock option deductions) can wind up paying little or no tax, despite having significant income. The AMT deals with this by requiring an alternative calculation of income in which these tax privileges and preferences are neutralized by adding them back to income. After the deduction of a basic $40,000 exemption, the minimum income tax rate of 15% is applied to the balance. If the result is an income tax payable amount that exceeds the regular income tax calculation, then the AMT must be paid. Any excess of the AMT over the regular federal income tax payable can be carried forward for up to seven years to be applied against any future excess of regular federal income tax payable over the AMT for that carryover year. Type: ES Topic: Alternative minimum tax - general concepts 27) If an individual has no loss carry overs from other years, the current year net income will be equal to taxable income. Answer: FALSE Explanation: There are other deductions that can create a difference between net income and taxable income. Type: TF Topic: Taxable income 28) An individual has a non-capital loss. It can be carried back three years and forward indefinitely. Answer: FALSE Explanation: It can be carried back 3 years and forward 20 years. Type: TF Topic: Losses - non-capital loss 29) An individual sells shares in a Canadian controlled private corporation that qualifies as a small business corporation to an arm's length person. The ACB of the shares is $50,000 and they are sold for $30,000. The $20,000 loss is an Allowable Business Investment Loss. Answer: FALSE Explanation: The Allowable Business Investment Loss is $10,000 [(1/2)($20,000)]. Type: TF Topic: Allowable business investment losses 30) A corporation sold a long-term investment in common shares with an ACB of $25,000, for $10,000 in the current year. It also sold land that is considered capital property with an ACB of $8,000, for $12,000. Its net capital loss for the current year is $11,000. Answer: FALSE Explanation: Its net allowable capital loss for the year is $5,500 [(1/2)($11,000)]. Type: TF Topic: Losses - net capital loss 31) Net capital losses can be carried forward or back, but can only be deducted to the extent of net taxable capital gains in the carry back or carry forward year. Answer: TRUE Explanation: Net capital losses can only be carried forward or back to be deducted against net taxable capital gains. Type: TF Topic: Losses - net capital loss 32) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. In the current year, she can deduct a maximum of $2,500 of the farm loss against other income. Answer: FALSE Explanation: In the current year, she can deduct a maximum of $10,250 [$2,500 + (1/2)($18,000 - $2,500)] of the farm loss against other income. Type: TF Topic: Losses - restricted farm losses ITA 31 33) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. In the current year, she can deduct $10,250 of the farm loss against other income but the remaining loss of $7,750 [$18,000 - $10,250] can only be carried forward for 7 years. Answer: FALSE Explanation: Any loss that is not deductible in the current year can be carried forward for a maximum of 20 years. Type: TF Topic: Losses - restricted farm losses ITA 31 34) Jennifer Nash is a plumber in Waterloo, Ontario, who spends all of her weekends and holidays operating a farm she purchased this year. She is confident that within two years her farm will be making a profit. In the current year, the farm had a loss of $18,000. Any loss that is not deductible in the current year can only be applied to the extent of farm income in the carry over year. Answer: TRUE Explanation: A restricted farm loss can only be used to the extent of farm income in the carry over period. Type: TF Topic: Losses - restricted farm losses ITA 31 35) In 2022, an individual, who has never claimed the capital gains deduction, has taxable capital gains on the disposition of shares in a qualified small business corporation (QSBC shares). The capital gains deduction can be used to eliminate up to $456,815 of the taxable capital gains on the disposition. Answer: TRUE Explanation: The $456,815 deduction can be used towards taxable capital gains arising on the disposition. Type: TF Topic: Capital gains deduction - general rules 36) If a 10 year old child receives dividends from a private company all of the shares of which are owned by the mother, it will always be subject to the tax on split income (TOSI). Answer: TRUE Explanation: There are no Excluded Amounts in this type of situation. Type: TF Topic: Tax on split income (TOSI) 37) If a 22 year old Specified Individual receives dividends from a private company in which the individual owns 20% of the FMV of the company shares and 20% of its voting shares, the dividends will not be subject to the Tax On Split Income (TOSI). Answer: FALSE Explanation: For the shares to be Excluded Shares, the Specified Individual must be 25 years of age or older. Type: TF Topic: Tax on split income (TOSI) 38) Dividends received by the spouse of an individual can be transferred to that individual and included in net income and excluded from the income of the spouse. Answer: TRUE Explanation: ITA 82(3) only allows such transfers when the spousal credit is either created or increased for the other spouse or common-law partner. Type: TF Topic: Transfer of dividends to a spouse - ITA 82(3) 39) When an individual makes a gift of publicly listed shares to a registered charity, any capital gain that results from the disposition is deemed to be nil. Answer: TRUE Explanation: Any gain would be deemed to be nil. Type: TF Topic: Charitable donations - general rules 40) The base for the charitable donations tax credit is always limited to 75% of an individual's net income. Answer: FALSE Explanation: The limit also includes 25% of any capital gains resulting from the donation and 25% of any recapture that results from the donation. Type: TF Topic: Charitable donations - general rules 41) An individual owns bonds issued in a foreign country. Tax of $2,000 is withheld in that country from the gross interest of $10,000. The foreign tax credit cannot exceed $1,500. Answer: TRUE Explanation: For individuals, the foreign tax credit cannot exceed 15% of the foreign investment income. In this case it is $1,500. The remaining $500 would be a net income deduction under ITA 20(11). Type: TF Topic: Foreign tax credits - general rules 42) Individuals with taxable income in excess of $300,000 will always pay some amount of AMT. Answer: FALSE Explanation: Regardless of their income level, individuals will only pay the AMT if they have some amount of what the legislation refers to as preference items (e.g., losses on tax shelters, capital gains deduction etc). Type: TF Topic: Alternative minimum tax - general concepts 43) An excess of AMT over regular federal income tax payable can be carried forward for up to 7 years to be applied against any future excess of regular federal income tax payable over the AMT in the carryover year. Answer: TRUE Type: TF Topic: Alternative minimum tax - general concepts 44) Martin is worried about how much income tax he will have to pay this year and he is looking for anything that he might have missed that will generate a taxable income deduction. All of the following could decrease his taxable income, with the exception of: A) the capital gains deduction. B) the deduction of a net capital loss. C) the deduction of a non-capital loss. D) a credit for a charitable donation. Answer: D Explanation: D) A credit for a charitable donation. Type: MC Topic: Taxable income