Taxation Fundamentals Quiz

A legal rule designed to prevent tax avoidance strategies that exploit loopholes in the Income Tax Act (ITA).

An analysis of the Canadian income tax system and general tax policy conducted in the 1960s, which aimed to simplify the system and make it more equitable.

The total amount of income an individual earns from all sources, including employment, business, and property, after subtracting allowable deductions.

A specific type of income that results from the sale of capital assets, such as stocks or real estate, after subtracting the cost of the asset and allowable expenses.

A process of calculating one individual's income for tax purposes that involves adding together all income from all sources, then subtracting permitted deductions.

Rules that helped transition from the old income tax act to the new one.

The value of benefits received from one's own services or property, like cooking at home or living in your own house.

A person, other than a corporation, who is subject to income tax laws.

A legal entity separate from its owners, subject to its own tax obligations.

A separate legal entity that can hold assets and generate income. They are subject to income tax.

An agreement between two or more parties to carry out a business together.

A partner in a partnership whose liability is limited to the amount of their investment.

A partner in a partnership who has unlimited personal liability for the debts and obligations of the partnership.

A form of partnership where the liability of partners is restricted to their own actions, protecting them from the debts of other partners.

A direct reduction of taxes owed. Some credits are refundable, allowing for a cash refund if the credit exceeds the taxes owed.

An amount that reduces taxable income, lowering the overall tax burden.

A non-refundable tax credit available to all Canadian residents, designed to provide a basic level of tax relief.

The value of income received from sources like salaries, wages, business operations, and property rentals.

The transfer of property between individuals, where the recipient does not pay tax on the value of the gift, but the giver might be liable for capital gains tax.

A legal rule designed to prevent taxpayers from using deliberate strategies to avoid paying taxes, like exploiting loopholes in the law.

In cases involving GAAR, the burden of proof lies on the Minister of Revenue to prove that abusive tax avoidance occurred.

In situations where a taxpayer has a tax obligation, they must file a tax return for that year.

The CRA can demand a tax return even from individuals who are not normally obligated to pay taxes.

Taxpayers must actively prove their own factual circumstances to support their tax claims.

Determining if a person is a resident in Canada for taxation purposes.

This theory suggests that the right to impose tax is tied to the benefits the individual receives from living in Canada.

An individual's residence for tax purposes can be assumed to be in Canada unless they completely sever their significant residential ties.

The Canadian Revenue Agency (CRA) generally considers an individual to be a Canadian resident unless they sever all significant residential ties upon leaving the country.

An individual spending a long period in Canada can be considered a resident, even if not a citizen.

A period involving physical presence in Canada but on a more temporary basis than a full resident

The dominant place of management and control determines a corporation's residency.

The CRA considers both location and decision-making powers when assessing a trust's residency.

The CRA assesses residency using multiple factors, including dwelling place, spouse's location, dependants' location, driver's license, passport, property, social ties, and health insurance.

All corporations incorporated in Canada after April 26, 1965, are considered resident in Canada.

Corporations incorporated before April 26, 1965, are deemed resident in Canada if they later meet residency requirements at common law or carry on business in Canada.

The common law test for determining residency of a corporation or trust is based on where its central management and control is located.

The ITA deems a trust to be an individual for tax purposes. This means trusts are subject to individual income tax rules.

The residency of a trust is determined by the location where its real business is carried on.

Section 94 of the ITA applies to non-resident trusts receiving contributions from Canadian residents, or former residents with Canadian beneficiary.

An individual's taxation year ends immediately before they cease to be resident in Canada.

A deemed disposition occurs when a person leaves Canada and is considered to have sold certain taxable property at market value, triggering capital gains tax.

A corporation is deemed to be a resident of Canada if it is incorporated here.

A Canadian corporation that is continued into another jurisdiction is deemed to be incorporated in that jurisdiction, and not in Canada.

A corporation continued into Canada, or a predecessor of an amalgamated corporation resident in Canada, becomes a resident of Canada.

The province where an individual resided on the last day of the tax year is entitled to tax their entire income for the year.

Division D of Part 1 of the ITA applies to non-resident individuals or corporations who have no residency in Canada during the year.

Section 115 of the ITA applies to both employed and self-employed individuals who are not resident in Canada and earn income in Canada.

Regulation 105 deals with fees paid to non-residents for services rendered in Canada. A 15% withholding rate applies.

Carrying on business in Canada involves two tests: whether a person is carrying on business, and whether they are doing so in Canada.

Section 253 defines 'Extended Meaning of Carrying on Business in Canada' for non-resident individuals and trusts, including producing, soliciting orders, or disposing of certain property in Canada.

A situation where a property's use changes from income-earning to non-income-earning or vice versa. This triggers a deemed disposition for tax purposes.

A gain from the sale of a capital asset, such as stocks or real estate, after subtracting the cost of the asset and allowable expenses.

Property held for investment or personal use, not for resale or business purposes.

The process of calculating whether a gain or loss is on account of a disposition of "capital property".

A special type of capital loss that is deemed to be nil for tax purposes. This usually applies to certain types of losses on properties.

A transaction where a taxpayer buys a property with the intention of quickly reselling for a profit, suggesting a business-like motive rather than an investment.

The time when a taxpayer becomes legally entitled to the proceeds of disposition, determining when capital gains are taxable.

A series of transactions that, taken together, suggest trading activity, indicating business income rather than capital gains.

The two-step process for calculating capital gains and losses:

The amount of capital gain or loss is calculated using a specific formula outlined in the Income Tax Act.

When a taxpayer dies, they are deemed to have disposed of all their capital property immediately before death for proceeds of disposition equal to their fair market value.

The inclusion rate for calculating capital gains is 50% (1/2), meaning only half of the capital gain is taxed.

The specific provisions in the Income Tax Act that govern the calculation and reporting of capital gains and losses.

A tax that applies to taxpayers who receive income from private corporations, partnerships, or trusts, and doesn't qualify for exemptions.

A specific type of trust designed for married couples, where one spouse can transfer assets without immediately paying taxes on the transfer.

A type of trust where the beneficiary is also the settlor, effectively creating a separate entity to hold their own assets.

A tax credit designed to reduce the tax burden of first-time home buyers.

The rate at which the Canadian government imposes the Alternative Minimum Tax (AMT).

A tax that targets high-income individuals with complex tax structures, ensuring they pay a certain minimum level of taxes.

A private corporation, often owned by one or few individuals, that is not publicly traded on a stock exchange.

A private corporation that is at least 50% controlled by Canadian residents and meets certain criteria regarding control and share ownership.

A lower tax rate available to CCPCs, encouraging business growth and economic activity.

The general principle for taxing employment income is that all payments received from an employer are taxed as employment income unless specifically excluded by law. This is stated in section 5(1) of the Income Tax Act.

Section 6(1)(a) of the Income Tax Act states that all "benefits" received by an employee are included in their employment income. This broad wording is intended to capture any advantage received by an employee connected to their employment.

An economic advantage must be both personal to the employee and have a quantifiable value in order to be considered taxable. Personal means it is not a business expense of the employer. For example, free parking for a car is a personal benefit, as opposed to, say, an office copier for an employee to use.

The value of a taxable benefit is calculated using the fair market value (FMV) of the benefit. This means determining the price at which the benefit would sell in an open market or the market cost of a similar service.

When a benefit has both reasonable (untaxable) and unreasonable (taxable) aspects, the value of the benefit is apportioned between the two. For example, if an employee uses a company car for both personal and business purposes, the benefit is divided between personal and business usage.

Section 6(1)(b) of the Income Tax Act lists exceptions to the default treatment of all benefits as taxable. Most of these exceptions are related to travel or being away from home for work.

Reduced standby charges apply to employees who use a company car for both personal and business use and meet specific criteria: 1) the employer requires the use of the car, 2) more than 50% of driving is for work, 3) personal use is not excessive. This can reduce the employee's taxable benefit.

Specific sections of the Income Tax Act deal with housing benefits, including housing losses upon relocation (sections 6(19) to 6(22)), housing subsidies (section 6(23)), and other housing benefits.

Employee stock options (ESOs) are rights granted to employees to purchase shares of their company at a fixed price within a set time period. The Income Tax Act has specific rules governing the taxation of ESOs, as found in section 7(1).

Section 8 of the Income Tax Act outlines allowed deductions for employment income. These are limited to what is stated in the section and must be reasonable in the circumstances.

Salespeople can deduct expenses related to their profession (e.g., travel) up to the amount of their commission income. This is subject to specific conditions outlined in section 8(1)(f) and 8(9) of the Income Tax Act.

Employees can deduct capital cost allowance (CCA) for vehicles used in their work. This means they can deduct a portion of the vehicle's cost each year, reflecting its depreciation.

Employees can deduct travel expenses that are not reimbursed by their employer. This includes transportation, accommodation, and meals. For meals, they can deduct 50% of the cost if they are away from their municipality for at least 12 hours.

Capital gains are profits made from the sale of assets, such as stocks or real estate. Section 38 of the ITA defines taxable capital gains and allowable capital losses. Only half of capital gains are taxable.

The 'adventure or concern in the nature of trade' rule applies to isolated transactions that are speculative in nature. This rule determines if a profit from an isolated transaction is taxed as business income or a capital gain.

A special type of loss that is fully deductible against income of the taxpayer, it does not have to be 'matched' against taxable capital gains to be deductible.

Shifting income to low-income family members or entities taxed at lower rates such as corporations. The ITA allows certain individuals to split income, especially spouses.

The difference between the proceeds of disposition (sale price) and the adjusted cost base (original cost plus improvements) of an asset, minus any selling expenses.

Income earned from various sources beyond regular employment or business income, including pensions, social benefits, and support payments.

Income earned from sources like pensions, RRSPs, and other deferred income plans. This income is taxed when it's withdrawn, not when it's earned.

Payments from government programs like workers' compensation and employment insurance, which are based on contributions made during employment.

Payments made by one spouse or former spouse to the other for support, which are deductible by the payer and taxable for the recipient.

Payments received from an employer related to retirement or death, often exceeding $10,000. These are generally taxable.

Regular payments received from a contract, usually purchased from a life insurance company, that provides income for a certain period or lifetime.

Payments made to an individual to refrain from competing with a former employer or business. These are considered taxable income.

Financial aid granted to students, such as scholarships, bursaries, and prizes, which are generally taxable after subtracting any applicable exemptions.

Contributions made by employers or employees to a Registered Pension Plan (RPP). These contributions are tax-deductible for both parties.

Contributions made by employers to a Deferred Profit Sharing Plan (DPSP) are tax-deductible for the employer and are not included in the employee's taxable income.

Private, individual retirement savings plans with tax-deductible contributions. Investments and income within the plan are not taxed until withdrawn.

Tax-free savings accounts where contributions are not tax-deductible, but investment growth and withdrawals are tax-free.

Accounts designed for saving for education costs, where contributions are not tax-deductible, but withdrawals for education are also not taxed.

Savings plans specifically for individuals with disabilities, where contributions are not tax-deductible, but investment income within the plan is only taxed upon withdrawal.

A payment received upon retirement from an office or employment, often in recognition of long service or loss of employment. These are generally taxable.

Payments received by the spouse or other beneficiary upon the death of an employee, which are tax-free up to $10,000.