(Test Bank) Byrd & Chen's Canadian Tax Principles, 2022-2023, Volume 1, Volume 2

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Canadian Tax Principles, 2022-2023 (Byrd/Chen) Chapter 1 Introduction to Federal Taxation in Canada 1.1 Online Exercises 1)The major source of federal revenues is the personal income tax. Indicate three other types of taxes that contribute to federal revenues. Answer: The other sources of federal revenues that are shown in Figure 1 -1 of the text are: •Corporate income taxe s. •Non- resident income taxes. •GST. •Customs and import duties. •Other excise taxes. •EI premiums. Type: ES Topic: Federal revenue sources 2) What is the meaning of "person" when the term is used in the ITA? Answer: In the ITA, the term "person" r efers to an individual, a corporation, a trust or an estate. Type: ES Topic: Definition - "Person" ITA 248(1) 3) Briefly describe the procedures used in calculating provincial or territorial income tax for individuals in other than individuals residing in Quebec. Answer: Provincial or territorial income taxes for individuals are calculated by applying a provincial orterritorial income tax rates to taxable income for federal income tax purposes. Provincial or territoria l personal income tax credits are then applied to the resulting gross income tax. The provincial and territorial income tax brackets may differ from the federal income tax brackets. In addition, provincia l and territorial personal tax credits may be different than the federal personal tax credits. Type: ES Topic: Income tax payable - federal income tax 4) The Canadian income tax system is often used to achieve various economic objectives. Give thr ee examples that illustrate this point. Answer: There are many examples that could be cited. The text divides them into resource allocation (e.g., public health care), distribution effects (e.g., federal GST credit), stabilization effects (e.g., defic it reduction), and fiscal federalism (e.g., allocations to various levels of government). Type: ES Topic: Canadian income tax system - objectives 5) Provide an example of how taxation policy can be used to influence resource allocation. Answer: Examples provided in the text are as follows: •Tax revenues are used to provide public goods and services. •Excise taxes are used to discourage the consumption of alcohol and tobacco products. There are, of course, many other examples that could be cited. Type: ES Topic: Canadian income tax system - objectives2 Copyright © 2023 Pearson Canada, Inc. 6) The government pays a Canada Child Benefit to the parents of children who are under 18 years of age. The payments are reduced by a percentage of income above a certain amount. What objectives are achieved by this benefit system? Answer: The Canada Child Benefit system is designed to assist low income families with children. The government is encouraging population growth. In addition the benefits are targeted to those most in need being low income families. Type: ES Topic: Canadian income tax system - objectives 7) Indicate three disadvantages of a tax system that uses progressive rates. Answer: There are a number of possibilities here. They include that progressive rates: • Increase the complexity of the system. • Are unfair to individuals with highly variable income streams. • Are unfair to single income family units. • Lead to pressure for various types of tax concessions. • Discourage high income individuals from making additional efforts. • Encourage tax evasion. Type: ES Topic: Canadian income tax system - objectives 8) A regressive tax is one that taxes high income individuals at lower effective rates. Explain why a sales tax levied at a flat rate of 8% can be regressive. Answer: While the sales tax rate is the same for all individuals without regard to their income level, lower income individuals normally spend a higher percentage of their total income. Since the sales tax is charged on the amounts spent, this means that the sales tax paid by lower income individuals represents a larger percentage of their total income. As a consequence, they are generally considered to be regressive in nature. Type: ES Topic: Canadian income tax system - regressive vs progressive rates 9) Distinguish between horizontal equity and vertical equity as these terms are used in describing tax systems. Answer: Horizontal equity is achieved when taxpayers in similar economic circumstances are subject to similar levels of tax. Vertical equity is achieved when taxpayers in different economic circumstances are subject to taxes in a different manner. Type: ES Topic: Canadian income tax system - objectives 3 Copyright © 2023 Pearson Canada, Inc. 10) What are some of the factors that have led to the entrenched use of tax expenditures as opposed to program spending? Answer: The reasons that are listed in the text are as follows: • It is less costly to administer tax expenditures than it is to administer government funding programs. • More decisions are left to the private sector so that funds may be allocated more efficiently. • Tax expenditures reduce the visibility of certain government actions. This is particularly beneficial if some social stigma is attached to the programs. For example, a child tax benefit system is more acceptable than increasing social assistance (welfare) payments. • Tax expenditures reduce the progressivity of the tax system. As many of the tax expenditures, such as tax shelters, are more available to higher income taxpayers, they serve to reduce effective tax rates in the higher rate brackets. Type: ES Topic: Canadian income tax system - objectives 11) While the Sections of the ITA are numbered 1 through 281, there are actually more than 281 Sections. Explain why this is the case. Answer: This situation reflects the fact that when a new Section is added, it has been more convenient to attach a decimal designation to the new Section, as opposed to renumbering all of the Sections that follow the new Section. As an example, over several years, the Department of Finance has added six new Sections after Section 12. They have been numbered Section 12.1 through Section 12.6. If they had used whole numbers for these new Sections, it would have been necessary to renumber all of the remaining Sections in the Act each time a new Section was added. Type: ES Topic: The ITA & income tax reference materials 12) What purposes are served by Canada's international tax treaties? Answer: The purposes of these treaties are as follows: • They impose measures on countries to avoid double taxation where a person is liable for income tax on the same income in both countries • They tare used to create an exchange of information for the purposes of combatting tax evasion. Type: ES Topic: International - income tax treaties 4 Copyright © 2023 Pearson Canada, Inc. 13) List four non-legislative sources of income tax information. Answer: The required four items can be selected from the following: • CRA Web Site • Interpretation Bulletins • Income Tax Folios • Information Circulars • Income Tax Technical News • CRA News Releases, Tax Tips, and Fact Sheets • CRA Guides • Advance Income Tax Rulings • Technical Interpretations Type: ES Topic: The ITA & income tax reference materials 14) What is the meaning of "taxation year" as the expression is used in the ITA? Answer: For individuals and trusts (except graduated rate estates), the taxation year is the calendar year of January 1 to December 31. In contrast, the taxation year for corporations are defined in terms of a fiscal period which generally relates to a business. A fiscal period can end on any date, with the only constraint being that it cannot exceed 53 weeks. Graduated rate estates are permitted to use a non-calendar taxation year. Type: ES Topic: Definition - "Taxation Year" ITA 249 15) Under what circumstances will a person who is not resident in Canada be liable for Canadian income tax? Answer: • The non-resident person earns employment income in Canada. • The non-resident person carries on a business in Canada. • The non-resident person has a gain on the disposal of taxable Canadian property. Type: ES Topic: Non-resident liability for income tax 16) What is the importance of residence in Canadian income taxation? Answer: As stated in the text, residence is the cornerstone of Canadian income taxation. If a person is considered a resident of Canada in a given year, that person will be subject to Canadian income tax for that year on all sources of income. Alternatively, if the person is a non-resident, Canadian Part I tax will only apply to Canadian employment income, Canadian business income, and gains on the disposition of Taxable Canadian Property. Type: ES Topic: Residency - general concepts 17) When an individual leaves Canada, the CRA may take the position that the individual has retained Canadian residence status. What are the three primary factors that the CRA considers in determining whether an individual has, in fact, ceased to be a resident of Canada? Answer: As stated in S5-F1-C1, the primary factors that will be considered by the CRA are as follows: • Whether the individual is continuing to maintain a dwelling in Canada. • Whether the spouse or common-law partner of the individual remains in Canada. • Whether the individual has dependants who remain in Canada. Type: ES Topic: Residential ties 5 Copyright © 2023 Pearson Canada, Inc. 18) List three factors that would be considered in the determination of whether or not an individual is a resident of Canada. Answer: The main factors here would be: • Does the individual have a dwelling in Canada? • Does the individual's spouse or common-law partner live in Canada? • Do the dependants of the individual live in Canada? Other factors that could be mentioned include: • Owning personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles). • Social ties with Canada (such as memberships in Canadian recreational and religious organizations). • Economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts). • Hospitalization and medical insurance coverage from a province or territory of Canada. • A driver's license from a province or territory of Canada. • A vehicle registered in a province or territory of Canada. • A seasonal dwelling place in Canada or a leased dwelling place. • Holding a Canadian passport. • Membership in Canadian unions or professional organizations. Type: ES Topic: Residential ties 19) If an individual leaves Canada for a temporary absence, this raises the question of whether the individual was a Canadian resident during the period of absence, particularly if some residential ties have been retained. What are the major factors that are considered in determining whether an individual continues to be a Canadian resident during a temporary absence? Answer: As noted in the text, S5-F1-C1 identifies the following factors: Intent - The issue is whether the individual intended to permanently sever residential ties with Canada. If, for example, the individual has a contract for employment, if and when the individual returns to Canada, this could be viewed as evidence that the individual did not intend to permanently depart. Another factor would be whether the individual complied with the rules related to permanent departures (i.e., as noted in Chapter 8, there is a deemed disposition of an individual's property at the time of departure from Canada, resulting in the need to pay income tax on certain gains). Frequency of Visits - If the individual continues to visit Canada on a regular and continuing basis, particularly if other secondary residential ties are present, this would suggest that the individual did not intend to permanently leave Canada. Residential Ties Outside of Canada - A further consideration is whether or not the individual establishes residential ties in another country. If someone leaves Canada and travels for an extensive period of time without settling in any one location, it will be considered as evidence that the individual has not permanently departed from Canada. Type: ES Topic: Residency - general concepts 6 Copyright © 2023 Pearson Canada, Inc. 20) One of your friends is leaving Canada and would like to know when he will no longer be considered a Canadian resident. Briefly explain the general rules related to terminating an individual's status as a Canadian resident. Answer: A Canadian resident normally becomes a non-resident on the latest of the following days: • on leaving Canada, • when a spouse and/or dependants leave Canada, and • on becoming a resident of another country. Type: ES Topic: Residency - general concepts 21) For the current year, Jane Doe, a resident of the U.S., spent 210 days in Canada. Since she was physically present in Canada for 183 days or more (e.g. sojourned in Canada) she is deemed to be a resident of Canada. In addition, Jack Fawn, a long-time resident of Manitoba, was considered a part year resident for the first 210 days, after which he permanently departed from Canada. Explain how these two individuals will be taxed in Canada. Answer: As a sojourner, Jane would, as a deemed resident, be liable for Canadian income tax on her world wide income for the entire year. As she would not be considered a resident of a province, she would be charged an additional federal income tax of 48% based on her federal income tax payable. In contrast, Jack would only be liable for Canadian income tax on his world wide income for the 210 day period prior to his departure from Canada. In addition, he would be liable for provincial income tax in Manitoba for the same 210 day period. Jack would be considered a non-resident of Canada for the remainder of the year. Type: ES Topic: Residency - general concepts 7 Copyright © 2023 Pearson Canada, Inc. 22) It is possible that an individual could be considered resident in more than one country. In such situations, "tie-breaker" rules are used to deem the individual to be resident in one of the two countries. These tie-breaker rules are designed to avoid the individual being subject to taxation in both countries. List and describe three of the tie-breaker rules common to Canada's income tax treaties. Answer: The tie-breakers rules are as follows: Permanent Home - If the individual has a permanent home available in only one country, the individual will be considered a resident of that country. A permanent home means a dwelling, rented or purchased, that is continuously available at all times. For this purpose, a home that would only be used for a temporary period would not be considered a permanent home. Centre of Vital Interests - If the individual has permanent homes in both countries, or in neither, then this test looks to the country in which the individual's personal and economic relations are greatest. Such relations are virtually identical to the ties that are examined when determining factual residence for individuals. Habitual Abode - If the first two tests do not yield a determination, then the country where the individual spends more time will be considered the country of residence. The number of days spent in each country is often used in applying this test. Citizenship - If the tie-breaker rules still fail to resolve the issue, then the individual will be considered a resident of the country where the individual is a citizen. Competent Authority - If none of the preceding tests resolve the question of residency then, as a last resort, the so-called "competent authority procedures" are used. Without describing them in detail, these procedures are aimed at opening a dialogue between the two countries for the purpose of resolving the conflict. Type: ES Topic: Residency - tax treaty tie-breaker rules for individuals 8 Copyright © 2023 Pearson Canada, Inc. 23) Is a corporation incorporated in Canada that carries on a business always considered to be resident in Canada or is the location where the business is carried on relevant? Explain your conclusion. Answer: The carrying on of a business by a corporation is generally irrelevant to the determination of whether the corporation is a resident of Canada. Corporate residency is determined on a factual or deemed basis and a corporation may also be deemed to be a non-resident of Canada if the corporate tie-breaker rule of a tax treaty concludes that the corporation is only a resident of the other country and not Canada. Corporations are factually resident where their Board of Directors regularly meets. Corporations are deemed to be resident in Canada if the corporation was in Canada after April 26, 1965. However, if the company is incorporated in Canada prior to April 27, 1965, it will only be considered resident in Canada in those situations where it either: • it carried on business in Canada at any time after that date; or • was factually resident in Canada at any time after that date. In general the corporate tie-breaker rule in Canada's income tax treaties generally provides that the corporation is resident in the country in which it was incorporated. Type: ES Topic: Residency - tax treaty tie-breaker rules for corporations 24) Limon Inc. was incorporated in the U.S. five years ago. However, all of the members of the Board of Directors meet in Montreal. In which country would Limon Inc. be taxed? Answer: Limon Inc. is a U.S. resident because it was incorporated in the U.S. It is however considered a factual resident of Canada based on where the Board of Directors meet. In such dual residency cases, the corporate tie-breaker rule of the Canada/U.S. tax treaty deem the corporation to be a resident of the country in which it was incorporated. That means that Limon Inc. would be considered a non-resident of Canada and only subject to Canadian income tax under Part I if it carried on a business in Canada or disposed of Taxable Canadian property, both of which are subject to other tax treaty provisions. Type: ES Topic: Residence of corporations 25) What are the components of net income? Answer: The components of net income are employment income or loss, business income or loss, property income or loss, net taxable capital gains (taxable capital gains minus allowable capital losses), other miscellaneous sources of income, subdivisions e deductions and allowable business investment losses. Type: ES Topic: Net income - ITA 3 26) ITA 3(b) reads that a taxpayer should "determine the amount, if any", by which taxable capital gains exceeds allowable capital losses.Does this wording mean that negative amounts are not possible? Answer: ITA 257 adds a rule that says to ignore negative numbers unless the context requires otherwise. The phrase "the amount, if any" is generally used throughout the ITA to indicate that only positive or nil amounts are acceptable. Type: ES Topic: Net income - ITA 3 9 Copyright © 2023 Pearson Canada, Inc. 27) What is the difference between tax avoidance and tax deferral? Answer: Tax avoidance is a form of tax planning in which a taxpayer, through means that are acceptable for income tax purposes, arranges their affairs to avoid the payment of income tax. Tax planning to achieve tax deferral involves either the delayed recognition of income, or the accelerated recognition of deductions. The ultimate payment of tax is delayed, as opposed to permanently avoided. Type: ES Topic: Administration - tax evasion vs tax avoidance 28) What is income splitting? Under what circumstances will it provide tax benefits to an individual? Answer: Income splitting involves efforts to share or split income of an individual with family members or other related persons. It will only benefit an individual who is in a high tax bracket in those circumstances where there are family members or other related persons who are in lower tax brackets. Type: ES Topic: Income tax planning - Income splitting 29) Contributions to a Registered Retirement Savings Plan (RRSP) can be deducted to reduce the income taxes of an individual in the year that they are made. However, these contributions will be subject to income tax when they are withdrawn from the plan. What type of tax planning is involved in this arrangement? Answer: The basic type of tax planning that is involved in RRSPs is tax deferral – a tax savings results from making contributions that will have to be paid back at a later point in time. There may also be an element of avoidance in that, after retirement, an individual may be in a lower tax bracket than he was during his working years. If this is the case, there will be an absolute reduction in taxes. Type: ES Topic: Income tax savings & deferral - general concepts 30) Your client, a government employee, would like to reduce their income tax. The client is trying to decide whether to contribute $5,000 to an RRSP this year. The client has an RRSP as does their spouse, a part time employee at a day care centre. Briefly describe the basic goals of tax planning. What advice would you give your client regarding his RRSP contribution? Explain your conclusion. Answer: The basic goals of tax planning can be summarized as follows: • Tax avoidance - To permanently avoid the payment of some amount of tax. • Tax deferral - To delay the recognition of certain types of income or accelerate the timing of certain deductions. • Income splitting - To have a family aggregate taxable income allocated as evenly as possible among family members. The client should contribute the $5,000 to a spousal RRSP. By contributing to a spousal RRSP income tax will be deferred. By contributing to a spousal RRSP income splitting is achieved and there may be possible tax avoidance if the spouse is taxed at a lower rate when the funds are eventually withdrawn. Type: ES Topic: Income tax savings & deferral - general concepts 10 Copyright © 2023 Pearson Canada, Inc. 31) A partnership is a taxable entity for income tax purposes. Answer: FALSE Explanation: A taxpayer must be a person. Partnerships are not persons. In general only individuals, corporations, trusts and estates are taxable entities for income tax purposes. Type: TF Topic: Definition - "Person" ITA 248(1) 32) A partnership is a taxable entity for GST purposes. Answer: TRUE Explanation: Partnerships engaged in commercial activity are specifically included as taxable entities for GST purposes. Type: TF Topic: GST/HST - liability for GST/HST 33) In general, provincial income taxes for individuals are based on a specified percentage of federal income tax payable. Answer: FALSE Explanation: In general, provincial income taxes are based on a specified percentage of federal taxable income. Type: TF Topic: Residency - provincial or territorial residence of individuals 34) The federal government does not collect personal or corporate income taxes for Ontario or Quebec. Answer: FALSE Explanation: The federal government collects personal and corporate income taxes for Ontario. Type: TF Topic: Income tax payable - federal income tax 35) A sales tax is a regressive tax even when it is applied at a single rate on all transactions. Answer: TRUE Explanation: Even if the rate is the same on all transactions, it will be a higher rate on the taxable income of lower income individuals because they spend a larger percentage of their income. Type: TF Topic: Canadian income tax system - regressive vs progressive rates 36) A major advantage of progressive tax rates is that their use encourages economic growth. Answer: FALSE Explanation: Progressive rates discourage both employment and investment, thereby limiting economic growth. Type: TF Topic: Canadian income tax system - regressive vs progressive rates 37) Tax expenditures are less costly to administer than direct funding programs. Answer: TRUE Explanation: Tax expenditures are less costly to administer than direct funding programs. Type: TF Topic: Canadian income tax system - objectives 11 Copyright © 2023 Pearson Canada, Inc. 38) Part I of the ITA is the largest and most important part. Answer: TRUE Explanation: Part I of the ITA is the largest and the most important part. Type: TF Topic: The ITA & income tax reference materials 39) The citation ITA 61(4)(b)(ii) would be read Paragraph 61, Subparagraph 4, Section b, Subsection ii. Answer: FALSE Explanation: The citation ITA 61(4)(b)(ii) would be read Section 61, Subsection 4, Paragraph b, Subparagraph ii. This is often shortened by referring to the last description such as subparagraph 61(4)(b)(ii). Type: TF Topic: The ITA & income tax reference materials 40) Any taxpayer can choose the calendar year as their taxation year. Answer: TRUE Explanation: While individuals and inter vivos and testamentary trusts (with the exception of Graduated Rate Estates (GRE)) must use a calendar taxation year, other taxpayers, corporations and GREs, can choose to use the calendar year as their taxation year. Type: TF Topic: Definition - "Taxation Year" ITA 249 41) If there is a conflict between an income tax treaty and the ITA, the ITA overrides the tax treaty. Answer: FALSE Explanation: The provisions of an income tax treaty override the ITA. Type: TF Topic: International - income tax treaties 42) An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. Answer: TRUE Explanation: An income tax is payable for each taxation year on the taxable income of every person resident in Canada at any time in the year. ITA 2(1) Type: TF Topic: Liability for income tax 43) Canadian citizens are required to file a Canadian income tax return, without regard to where they reside. Answer: FALSE Explanation: Canadian income taxes under Part I are assessed on residents of Canada. Type: TF Topic: Liability for income tax 12 Copyright © 2023 Pearson Canada, Inc. 44) When an individual is absent from Canada for some period of time, the length of their absence is an important factor in determining whether they continued to be a Canadian resident during the period of their absence. Answer: FALSE Explanation: S5-F1-C1 makes it clear that the length of the period of time during which the individual is absent from Canada is not a determining factor with respect to residency. Type: TF Topic: Residency - general concepts 45) If an individual moves to Canada and is here less than 183 days prior to the end of the year, that individual will be subject to Part I tax on their worldwide income for the entire year. Answer: FALSE Explanation: Such part year residents will only be taxed on their worldwide income for the portion of the year subsequent to their moving to Canada. Type: TF Topic: Residency - general concepts 46) The residency of a trust depends on the country in which the central management and control of the trust takes place, not where the beneficiaries reside. Answer: TRUE Type: TF Topic: Residence of a Trust 47) If an individual leaves Canada, the three most significant factors in determining whether the individual has ceased to be a resident are: • Whether he continues to own a dwelling in Canada. • Whether he is accompanied by his spouse or common-law partner. • Whether he maintains social ties in Canada. Answer: FALSE Explanation: Whether the individual continues to maintain social ties is not one of the three most significant factors. the three factors are (1) having a dwelling in Canada, (2) having a spouse or common-law partner in Canada and (3) having other dependants in Canada. Type: TF Topic: Residence of individuals 48) If an individual returns to Canada after an absence of less than two years the individual will be considered to have retained Canadian residency during his absence. Answer: FALSE Explanation: The length of the period of absence from Canada is not considered a factor in determining whether an individual has remained a resident. Type: TF Topic: Residency - general concepts 13 Copyright © 2023 Pearson Canada, Inc. 49) A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. Answer: TRUE Explanation: A part year resident for the current year is an individual who either establishes residency in Canada during the current year or, alternatively, terminates residency in Canada during the current year. In other words the individual is not resident for all 365 days of the year (366 for leap years). Type: TF Topic: Residency - general concepts 50) A sojourner is any individual who has been present in Canada for 183 consecutive days in one year. Answer: FALSE Explanation: The 183 days do not have to be consecutive. Type: TF Topic: Residency - general concepts 51) Canadian citizens are automatically subject to income tax on their worldwide income. Answer: FALSE Explanation: Canadian Citizens are only taxable on their world wide income if they are residents of Canada Type: TF Topic: Residency - general concepts 52) U.S. Citizens are never subject to Canadian income tax. Answer: FALSE Explanation: U.S. citizens are taxable in Canada if they are either (1) resident in Canada or (2) earn income in Canada. Type: TF Topic: Residency - general concepts 53) Partnerships are required to file an annual T4 income tax return. Answer: FALSE Explanation: Partnerships are not a taxable entity and therefore an annual income tax return is not required. However a partnership may be required to file an information return which is different than an income tax return. A T4 is an information slip provided to individuals earning employment income. It is not an income tax return. Type: TF Topic: Liability for income tax 54) Sole proprietorships are taxable entities that must file an annual income tax return. Answer: FALSE Explanation: The individual sole proprietor is the taxable entity that must include the profits or losses of a business carried on as a sole proprietorship in that individual's annual T1 income tax return. Type: TF Topic: Liability for income tax 14 Copyright © 2023 Pearson Canada, Inc. 55) Which of the following types of taxes is not currently in use by the federal government of Canada? A) Excise Taxes B) Custom Duties C) Head Tax D) Transfer Tax Answer: C Explanation: C) Head Tax Type: MC Topic: Canadian income tax system 56) Which of the following is NOT a taxable entity for Canadian income tax purposes? A) Darklyn Ltd., a Canadian resident corporation. B) Ms. Sarah Bright, a Canadian resident. C) Walters and Walters, a CPA partnership. D) The Martin family trust. Answer: C Explanation: C) Walters and Walters, a group of CPAs operating as a partnership. Type: MC Topic: Liability for income tax 57) Which of the following could be required to file a GST return? A) Chan's Clothing Store (a business carried on as a sole proprietorship) B) The Chan Foundation (a registered charity) C) Min Chan (an individual) D) All of the above could be required to file a GST return. Answer: D Explanation: D) All of the above could be required to file a GST return. Type: MC Topic: GST/HST - liability for GST/HST 58) Which of the following forms of taxation provides the largest component of federal government taxation revenues? A) Personal income tax B) Corporate income tax C) GST D) Employment insurance premiums Answer: A Explanation: A) Personal income tax Type: MC Topic: Canadian income tax system