Page n1 nof n1332
, CHAPTER 1
TAXATION- ITS 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
Page n2 nof n1332
,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.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. ―Tax planning and tax avoidance mean the same thing.‖ Is this statement true? Explain.
2. What distinguishes tax evasion from tax avoidance and tax planning?
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way? Explain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
transactions. What are the general types of tax planning activities? Briefly explain how each of them may
reduce or defer the tax cost.
5. ―It is always better to pay tax later rather than sooner.‖ Is this statement true? Explain.
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for the
individual to transfer their business to a corporation?
7. ―As long as all of the income tax rules are known, a tax plan can be developed with certainty.‖ Is
this statement true? Explain.
8. What basic skills are required to develop a good tax plan?
9. An entrepreneur is developing a new business venture and is planning to raise equity capital from
individual investors. Their adviser indicates that the venture could be structured as a corporation (i.e.,
shares are issued to the investors) or as a limited partnership (i.e., partnership units are sold). Both
Page n3 nof n1332
, structures nprovide nlimited nliability nfor nthe ninvestors. nShould nthe nentrepreneur nconsider nthe ntax npositions
nof nthe nindividual ninvestors? nExplain. nWithout ndealing nwith nspecific ntax nrules, nwhat ngeneral ntax nfactors
nshould nan ninvestor nconsider nbefore nmaking nan ninvestment?
10. What nis na ntax navoidance ntransaction?
11. ―If na ntransaction n(or na nseries nof ntransactions) nthat nresults nin na ntax nbenefit nwas nnot
nundertaken nprimarily nfor nbona nfide nbusiness, ninvestment, nor nfamily npurposes, nthe ngeneral nanti-
navoidance nrule nwill napply nand neliminate nthe ntax nbenefit.‖ nIs nthis nstatement ntrue? nExplain.
Solutions nto nReview nQuestions
R2-1 n There nis na ndistinction nbetween ntax nplanning nand ntax navoidance. nTax nplanning nis nthe nprocess nof
narranging nfinancial ntransactions nin na nmanner nthat nreduces nor ndefers nthe ntax ncost nand nthat narrangement
nis nprovided nfor nin nthe nIncome nTax nAct nor nis nnot nspecifically nprohibited. nIn nother nwords, nthe
narrangement nis nchosen nfrom na nreasonably nclear nset nof noptions nwithin nthe nAct.
In ncontrast, ntax navoidance ninvolves na ntransaction nor nseries nof ntransactions, nthe nmain npurpose nof nwhich nis
nto navoid nor nreduce nthe ntax notherwise npayable. nWhile neach ntransaction nin nthe nprocess nmay nbe nlegal nby
nitself, nthe nseries nof ntransactions ncause na nresult nnot nintended nby nthe ntax nsystem.
R2-2 nBoth ntax nplanning nand ntax navoidance nactivities nclearly npresent nthe nfull nfacts nof neach ntransaction,
nallowing nthem nto nbe nscrutinized nby nCRA. nIn ncomparison, ntax nevasion ninvolves nknowingly nexcluding
nor naltering nthe nfacts nwith nthe nintention nto ndeceive. nFailing nto nreport nan namount nof nrevenue nknown nto
nexist nor ndeducting na nfalse nexpense nare nexamples nof ntax nevasion.
R2-3 nCRA ndoes nnot ndeal nwith nall ntax navoidance ntransactions nin nthe nsame nway. nIn ngeneral, nCRA
nattempts nto ndivide ntax navoidance ntransactions nbetween nthose nthat nare nan nabuse nof nthe ntax nsystem nand
nthose nthat nare nnot. nWhen nan naction nis nabusive, nCRA nwill nattempt nto ndeny nthe nresulting nbenefits nby
napplying none nof nthe nanti- navoidance nrules nin nthe nIncome nTax nAct.
R2-4 There nare nthree ngeneral ntypes nof ntax nplanning nactivities:
• Shifting nincome nfrom none ntime-period nto nanother.
• Transferring nincome nto nanother nentity.
• Converting nthe nnature nof nincome nfrom none ntype nto nanother.
Shifting nincome nto nanother ntime-period ncan nbe na nbenefit nif nit nresults nin na nlower nrate nof ntax napplying nto
nthe nincome. nEven nif na nlower nrate nof ntax nis nnot nachieved, na nbenefit nmay nbe ngained nfrom ndelaying nthe
npayment nof ntax nto na nfuture ntime-period.
Page n4 nof n1332
, CHAPTER 1
TAXATION- ITS 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
Page n2 nof n1332
,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.
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. ―Tax planning and tax avoidance mean the same thing.‖ Is this statement true? Explain.
2. What distinguishes tax evasion from tax avoidance and tax planning?
3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way? Explain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
transactions. What are the general types of tax planning activities? Briefly explain how each of them may
reduce or defer the tax cost.
5. ―It is always better to pay tax later rather than sooner.‖ Is this statement true? Explain.
6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for the
individual to transfer their business to a corporation?
7. ―As long as all of the income tax rules are known, a tax plan can be developed with certainty.‖ Is
this statement true? Explain.
8. What basic skills are required to develop a good tax plan?
9. An entrepreneur is developing a new business venture and is planning to raise equity capital from
individual investors. Their adviser indicates that the venture could be structured as a corporation (i.e.,
shares are issued to the investors) or as a limited partnership (i.e., partnership units are sold). Both
Page n3 nof n1332
, structures nprovide nlimited nliability nfor nthe ninvestors. nShould nthe nentrepreneur nconsider nthe ntax npositions
nof nthe nindividual ninvestors? nExplain. nWithout ndealing nwith nspecific ntax nrules, nwhat ngeneral ntax nfactors
nshould nan ninvestor nconsider nbefore nmaking nan ninvestment?
10. What nis na ntax navoidance ntransaction?
11. ―If na ntransaction n(or na nseries nof ntransactions) nthat nresults nin na ntax nbenefit nwas nnot
nundertaken nprimarily nfor nbona nfide nbusiness, ninvestment, nor nfamily npurposes, nthe ngeneral nanti-
navoidance nrule nwill napply nand neliminate nthe ntax nbenefit.‖ nIs nthis nstatement ntrue? nExplain.
Solutions nto nReview nQuestions
R2-1 n There nis na ndistinction nbetween ntax nplanning nand ntax navoidance. nTax nplanning nis nthe nprocess nof
narranging nfinancial ntransactions nin na nmanner nthat nreduces nor ndefers nthe ntax ncost nand nthat narrangement
nis nprovided nfor nin nthe nIncome nTax nAct nor nis nnot nspecifically nprohibited. nIn nother nwords, nthe
narrangement nis nchosen nfrom na nreasonably nclear nset nof noptions nwithin nthe nAct.
In ncontrast, ntax navoidance ninvolves na ntransaction nor nseries nof ntransactions, nthe nmain npurpose nof nwhich nis
nto navoid nor nreduce nthe ntax notherwise npayable. nWhile neach ntransaction nin nthe nprocess nmay nbe nlegal nby
nitself, nthe nseries nof ntransactions ncause na nresult nnot nintended nby nthe ntax nsystem.
R2-2 nBoth ntax nplanning nand ntax navoidance nactivities nclearly npresent nthe nfull nfacts nof neach ntransaction,
nallowing nthem nto nbe nscrutinized nby nCRA. nIn ncomparison, ntax nevasion ninvolves nknowingly nexcluding
nor naltering nthe nfacts nwith nthe nintention nto ndeceive. nFailing nto nreport nan namount nof nrevenue nknown nto
nexist nor ndeducting na nfalse nexpense nare nexamples nof ntax nevasion.
R2-3 nCRA ndoes nnot ndeal nwith nall ntax navoidance ntransactions nin nthe nsame nway. nIn ngeneral, nCRA
nattempts nto ndivide ntax navoidance ntransactions nbetween nthose nthat nare nan nabuse nof nthe ntax nsystem nand
nthose nthat nare nnot. nWhen nan naction nis nabusive, nCRA nwill nattempt nto ndeny nthe nresulting nbenefits nby
napplying none nof nthe nanti- navoidance nrules nin nthe nIncome nTax nAct.
R2-4 There nare nthree ngeneral ntypes nof ntax nplanning nactivities:
• Shifting nincome nfrom none ntime-period nto nanother.
• Transferring nincome nto nanother nentity.
• Converting nthe nnature nof nincome nfrom none ntype nto nanother.
Shifting nincome nto nanother ntime-period ncan nbe na nbenefit nif nit nresults nin na nlower nrate nof ntax napplying nto
nthe nincome. nEven nif na nlower nrate nof ntax nis nnot nachieved, na nbenefit nmay nbe ngained nfrom ndelaying nthe
npayment nof ntax nto na nfuture ntime-period.
Page n4 nof n1332
