Taxation Fundamentals Quiz

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Questions and Answers

What is the first step in calculating net income for taxation?

Determine net capital gains

Add all sources of income together

Calculate total deductions allowed

Compute income or loss from each source separately (correct)

The GAAR is intended to promote tax benefits for individuals.

False

What does the Carter Commission analyze?

The Canadian income tax system and general tax policy from the 1960s.

The term 'GAAR' stands for ______.

general anti-avoidance rule Signup and view all the answers

Match the phrases with their meanings in the Income Tax Act:

the total of [A] and [B] = indicating addition the amount by which [A] exceeds [B] = indicating subtraction the lesser of [A] and [B] = indicating a maximum limit the greater of [A] and [B] = indicating a minimum Signup and view all the answers

Which tax credit is specifically designed for first-time home buyers?

First-time Home Buyers' Tax Credit Signup and view all the answers

The Alternative Minimum Tax (AMT) applies only to low-income individuals.

False Signup and view all the answers

What does TOSI stand for?

Tax on Split Income Signup and view all the answers

The __________ Credit is available for individuals who have paid interest on student loans.

Credit for Interest on Student Loans Signup and view all the answers

Match the types of corporations with their descriptions:

Public Corporations = Corporations with stock being publicly traded Multinational Corporations = Businesses operating in multiple countries Private Corporations = Not public and not controlled by public corporations Canadian-Controlled Private Corporations = Private corporations controlled primarily by Canadian residents Signup and view all the answers

Which of the following items is excluded from split income under TOSI?

Income from property inherited by an individual under the age of 24 Signup and view all the answers

Canadian-Controlled Private Corporations (CCPCs) benefit from a lower corporate tax rate.

True Signup and view all the answers

How often does deemed disposition occur for trusts other than spousal trusts?

Every 21 years Signup and view all the answers

The general corporate tax rate is currently __________.

15% Signup and view all the answers

What is the special corporate tax rate for Canadian-Controlled Private Corporations on their first $500,000 of Canadian active business income?

9% Signup and view all the answers

What is generally considered employment income for a taxpayer in a taxation year?

Salary, wages, and other remuneration, including gratuities Signup and view all the answers

All benefits received by an employee are considered taxable income.

False Signup and view all the answers

What is the term for a right given to an employee to purchase company shares at a fixed price?

Employee stock option Signup and view all the answers

The value of a benefit used by an employee must be quantified by its fair market value or _____.

market cost of a service Signup and view all the answers

Match the following sections with their respective topics:

s.5(1) = Definition of taxable income from employment s.6 = Types of taxable benefits s.8 = Deductions from Employment/Office Income s.38 = Taxable capital gains definition Signup and view all the answers

Which of the following is a requirement for reduced standby charges of an automobile?

The employee uses the automobile more than 50% of the distance for business purposes. Signup and view all the answers

Taxable capital gains are only assessed on 25% of the total gain realized from the sale of property.

False Signup and view all the answers

What determines whether a benefit is unreasonable or reasonable for tax purposes?

Reasonable test Signup and view all the answers

An employee may claim ____% of meal expenses as part of travel costs if they consume the meal while away for at least 12 hours.

50 Signup and view all the answers

Match the activity with its classification:

Buying and selling properties regularly = Trader Holding property for rental income = Investor Speculating on property resale = Speculator Rarely engaging in property transactions = Isolated transaction Signup and view all the answers

What happens to the proceeds of disposition (POD) and adjusted cost base (ACB) for personal-use property under the $1,000 de minimus rule?

They are both set at a minimum of $1,000. Signup and view all the answers

An investment made with the intention of holding property for a regular income would be taxed as business profit.

False Signup and view all the answers

According to S. 150(1) of the ITA, who must file a tax return for the taxation year?

Only individuals liable to pay tax Signup and view all the answers

The burden of proof lies on the Minister in cases involving the general anti-avoidance rule (GAAR).

False Signup and view all the answers

What does the term 'sojourn' mean in the context of residency?

A transient presence in Canada. Signup and view all the answers

Under S. 153, the employer must deduct tax from each payment of __________.

remuneration Signup and view all the answers

Match the following sections with their descriptions:

S. 150(1) = Requirement to file a tax return S. 250(1) = Deemed resident if present for 183 days or more S. 245 = General anti-avoidance rule S. 250(4) = Corporation residency based on incorporation date Signup and view all the answers

What is the minimum total tax liability that triggers quarterly installments for individuals?

$3,000 Signup and view all the answers

A taxpayer's intention is the sole determinant of their tax residency.

False Signup and view all the answers

What principle did the SCC adopt in Trustco Mortgage Co. v. Canada?

Textual, contextual and purposive analysis. Signup and view all the answers

Under S. 250(3), a person who is ordinarily resident in Canada is considered __________ in Canada.

resident Signup and view all the answers

In the case of Johnston v. M.N.R. (1948), who is responsible for providing the burden of proof?

The taxpayer Signup and view all the answers

The CRA does not consider a spouse or dependents' location when determining a taxpayer's residency.

False Signup and view all the answers

What type of payments made after 1997 cannot be deducted by the payer?

Child support payments Signup and view all the answers

What defines a corporation's place of residency according to common law?

Where central management and control abides. Signup and view all the answers

In order to sever ties with Canada for residency purposes, an individual must leave behind their __________ and dependents.

spouse Signup and view all the answers

Childcare expenses can be deducted for any child regardless of eligibility.

False Signup and view all the answers

Match the court case with the principle it established:

Alchin v. Canada = Taxpayer's employment abroad does not sever ties Hauser v. R. = Failed to sufficiently sever residency ties Thompson case = Length of time in Canada isn't crucial for residency Ferguson v. Minister = Ties to property can signal Canadian residency Signup and view all the answers

In computing taxable income, moving expenses incurred by taxpayers can be deducted under section ______.

62 Signup and view all the answers

Which of the following is NOT a category of deductions applicable to individuals?

Sales tax deduction Signup and view all the answers

What is the formula to calculate Gain or Loss on disposition?

Proceeds of disposition - (adjusted cost base + selling expenses) Signup and view all the answers

Medical expenses can provide eligible tax relief if they exceed 3% of an individual's net income.

True Signup and view all the answers

Payments for spousal support are considered taxable income.

False Signup and view all the answers

According to s. 104(2) of the ITA, how is a trust classified for tax purposes?

As an individual Signup and view all the answers

What is the maximum period for carrying back a capital loss?

3 years Signup and view all the answers

A non-resident trust cannot receive contributions from a Canadian resident.

False Signup and view all the answers

The Canada child benefit is designed to support ______ families with children.

low-income Signup and view all the answers

What is an annuity?

A contract to receive periodic payments, usually purchased from a life insurance company. Signup and view all the answers

Which section outlines the personal credits for taxpayers?

s. 118 Signup and view all the answers

What is the primary test used to determine the residency of a corporation incorporated in Canada?

Central management and control Signup and view all the answers

Transfers from an RRSP to an RPP, RRSP, or _____ trigger a deemed disposition.

RRIF Signup and view all the answers

Match the following tax credits with their relevant details:

Credit for donations up to $200 = 15% credit Credit for income over $200 = 33% credit Eligible Dependent Credit = Minor child or infirm dependant Spouse Credit = Supportive taxpayer Signup and view all the answers

Match the income types with their definitions:

Tax-deferred income = Includes pension and RRSP income Retiring allowance = Severance pay for long service Non-compete payment = Income for a restrictive covenant Scholarship = Financial aid for education Signup and view all the answers

An individual who is a part-year resident may exclude foreign income earned during the _____ of the year when they were not resident in Canada.

part Signup and view all the answers

Match the sections of the Income Tax Act with their respective descriptions:

s. 104(2) = Trusts are deemed individuals for tax purposes s. 128.1 = Deems disposition of property upon ceasing residency s. 248 = Defines taxable Canadian property s. 115 = Applies to non-residents who are not resident in Canada Signup and view all the answers

Income splitting allows shifting income to higher-income family members or entities.

False Signup and view all the answers

Which of the following statements is correct about TFSA contributions?

Growth and withdrawals are tax-free Signup and view all the answers

Payments received from employment insurance are considered tax-deferred income.

True Signup and view all the answers

What is the allowable business investment loss typically expressed as?

One-half of the business investment loss Signup and view all the answers

Under what circumstance does s. 128.1 deem a person to have disposed of property?

When the person ceases to be a resident Signup and view all the answers

Employed individuals are not allowed to hold office according to s. 248(1).

False Signup and view all the answers

Capital losses can be carried forward to future tax years ______.

indefinitely Signup and view all the answers

What happens to an RRSP when a taxpayer turns 71 years old?

The total value of the RRSP is included in the taxpayer's income for that year. Signup and view all the answers

Contributions to a Registered Pension Plan (RPP) by employers are eligible for _____ under the Income Tax Act.

tax deductions Signup and view all the answers

Which of the following is NOT considered a moving expense for deduction?

Home purchase costs Signup and view all the answers

What is the withholding rate applied to fees paid to a non-resident for services rendered in Canada?

15% Signup and view all the answers

Which payment is NOT taxable under section 81?

Death benefits up to $10,000 Signup and view all the answers

Under ____, benefits received by an employee from their employer are presumed to be derived from the employment relationship.

Savage case Signup and view all the answers

Which of the following is true about employment income according to s. 5(1)?

It includes fringe benefits Signup and view all the answers

Scholarships, bursaries, and prizes for achievement are always taxable.

False Signup and view all the answers

What is the basic personal amount (BPA)?

A non-refundable tax credit every Canadian resident is entitled to claim Signup and view all the answers

Match the following terms with their definitions:

Contract of Service = Creates an employment relationship Contract for Services = Creates an independent contractor relationship Deemed Disposition = Like selling property without a sale Taxable Canadian Property = Includes Canadian real or immovable property Signup and view all the answers

What is the purpose of a Registered Education Savings Plan (RESP)?

To save for a child's post-secondary education. Signup and view all the answers

Corporations generally pay a flat tax rate of 20%.

False Signup and view all the answers

A death benefit received by an employee's spouse is tax-free up to a maximum of _____ dollars.

10,000 Signup and view all the answers

What distinguishes capital gains from other sources of income?

Capital gains are derived from selling something that was itself a source of income. Signup and view all the answers

A corporate tax year ends when a corporation ceases to be a resident in Canada.

True Signup and view all the answers

The general tax liability under section 2(1) applies to every person resident in Canada who has __________ income.

taxable Signup and view all the answers

What is the maximum Canada employment credit for employee expenses in 2024?

$215 Signup and view all the answers

Which of the following is a tax-deferred income source?

Payments from workers' compensation Signup and view all the answers

Match each type of taxpayer to its description:

Individual = Taxed as a single unit Corporation = Separate entity from owners Trust = Separate tax paying entity Partnership = Agreement between parties to carry on business Signup and view all the answers

A non-resident becomes resident in Canada if they are continued in Canada or are a predecessor corporation of an amalgamated ____ that is resident in Canada.

corporation Signup and view all the answers

Which of the following statements is correct regarding non-refundable tax credits?

They directly reduce the tax owed but do not result in a refund. Signup and view all the answers

All forms of damages received by a taxpayer are taxable as income.

False Signup and view all the answers

What is the small business tax rate applicable only on the first $0.5M income?

9% Signup and view all the answers

The Income Tax Act applies to persons who are classified as __________, corporations, or trusts for tax purposes.

individuals Signup and view all the answers

Match the types of income with their categories:

Office = Elected positions or board roles Employment = Salary or wages Business = Income from a business venture Property = Rental income or dividends Signup and view all the answers

Which of the following is exempt from income tax according to Section 81(1)(a)?

Income declared exempt by other acts Signup and view all the answers

Imputed income represents benefits derived from services provided by others.

False Signup and view all the answers

What is the maximum federal income tax rate for trusts?

33% Signup and view all the answers

Part I Federal Tax plus Provincial Tax equals __________.

Total Income Tax Signup and view all the answers

What is categorized as 'other sources of income'?

Non-compete agreements Signup and view all the answers

What happens to profits from the sale of residential properties held for less than 12 months?

They are considered business income. Signup and view all the answers

A taxpayer is deemed to have disposed of all capital property for proceeds equal to book value upon death.

False Signup and view all the answers

What does s. 39(1)(a) state about capital gains?

Capital gains arise from the disposition of property unless specified otherwise. Signup and view all the answers

A superficial loss is deemed to be _ under s. 40(2)(g)(i).

nil Signup and view all the answers

What is the purpose of s. 45(1)?

To deal with changes in property use. Signup and view all the answers

The courts have established specific criteria for identifying trading versus investment.

False Signup and view all the answers

What does a capital gain arise from?

Disposition of capital property. Signup and view all the answers

The inclusion rate for losses mirrors s. 38(b), which is currently _ percent.

50 Signup and view all the answers

Match the court cases with their findings:

Honeyman v.M.N.R. = Purchased acid for resale M.N.R.v.Taylor = Bought lead for business inventory Scott v.M.N.R. = Trader with 149 transactions Wood v.M.N.R. = Investor with 13 transactions Signup and view all the answers

Which of these is NOT considered a capital property under s. 39(1)?

Inventory held for sale Signup and view all the answers

Timing of gains is determined when a taxpayer becomes legally entitled to the proceeds of disposition.

True Signup and view all the answers

What is a key factor in determining whether a transaction is trading or investment?

Circumstances of the transaction, including the frequency and nature of the property. Signup and view all the answers

The time at which proceeds of disposition become receivable can depend on several factors including _ or tribunal determination.

court Signup and view all the answers

Which life circumstances provide exemptions from the business income tax on property sales?

Both A and B Signup and view all the answers

Study Notes

Income Calculation Steps

Calculate income/loss separately for employment, business, and property.
Sum up all income sources (including "other" sources).
Subtract allowed deductions from the sum of income.
This results in Division B Net Income.
Subtract Division C Deductions from Division B Net Income.
The result is Taxable Income.
Calculate tax by multiplying taxable income by the applicable progressive rate.
Subtract tax credits from the calculated tax to Determine Federal Tax.
Add federal and provincial taxes to get Total Income Tax.

Key ITA Concepts

Division B Net Income: Sum of income from various sources less deductions.
Division C Deductions: Certain deductions from Net Income.
Taxable Income: Result of calculations, including deductions.
Tax: Calculated based on taxable income and progressive tax rates.
Tax Credits: Directly reduce tax payable.
Non-refundable Tax Credits: Don't result in a tax refund if they reduce tax to a negative amount.
Refundable Tax Credits: Can receive a cash refund if tax payable is reduced below zero.
GAAR (General Anti-Avoidance Rule): A failsafe in the ITA preventing tax abuse.
Carter Commission/Report: Analysis of Canadian income tax systems.
Taxpayer: Individuals, corporations, and trusts (partnerships are not).

Taxpayer Types

Individuals: Persons other than corporations. Taxed as individuals, not families.
Corporations: Separate entities from owners/shareholders. Subtypes: Public (listed on stock exchange) and Private (flat 15% tax rate, 9% for small business income below $0.5M).
Trusts: Separate tax entities with a top federal income tax rate of 33%.
Partnerships: Agreements between parties to carry on business together. Subtypes: Limited (limited liability) and General (unlimited liability). Limited Liability Partnerships (LLPs) limit partner liability

Taxable Income Sources

Office/Employment Income: Includes salary, wages, gratuities.
Business Income: Profit from a business; expenses are deductible.
Property Income: Rental income, dividends, etc.; expenses are deductible.
Other Income Sources: Specified items like non-compete clauses, spousal support. Capital Gains (Subd. D).

Capital Gains vs. Income

Income: Fruit from a source; never the source itself.
Capital: Sale of things generating income in general.
Gifts: Taxable to donor but free to receiver.
Damages / Settlements: Treatment dependent on nature of loss. Compensation for lost income is taxed.
Non-compete payments: Previously non-taxable, now taxable.

Income Timing Rules

Employment income is taxable when received or deemed received (e.g., cheque mailing).
Business revenue is taxable when receivable.

Residency for Tax Purposes

Residence: Based on Canadian residence or Canadian source of income for non-residents.
Factors determining residence: Duration of physical presence in Canada, ties to other countries, social/economic ties to Canada, intention to return to Canada, failure to pay taxes in other countries.
Canada considers individuals as having a residence at all times during a year.
Corporations are resident if incorporated in Canada, or under common law principles.
Trusts treated in Canada as residents under common law; if deemed resident in Canada will be subject to provisions under s. 104 during taxation year.

Tax Credits and Deductions

Tax Credits: Directly reduce tax payable.
Deductions: Reduce taxable income.
Examples: Basic personal amount (BPA), Childcare expenses.
Non-capital losses: Can offset other income (from business and property).
Capital Losses: Can offset capital gains.

Interpretation of the Income Tax Act

Learn common word patterns (addition, subtraction, fractions, lesser/greater of).
Be familiar with defined terms (GAAR, Carter Commission).
Understand the overall purpose of the ITA and its provisions.

Taxable Events

Employment payments: Taxed when received (by default).
Business income: Taxed when income is receivable.

Other Key Tax Concepts

Imputed Income: Value of benefits from one's own services/property use.
Tax Administration: Emphasis on compliance and audits.
Liability: Residents are taxable on worldwide income. Non-residents are taxed on Canadian source income.
Withholding at Source: Relevant for employment income.

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Test your knowledge on taxation essentials including the net income calculation, tax credits, and corporate tax rates. This quiz covers key concepts such as GAAR, TOSI, and different types of corporations. Perfect for students and professionals looking to refresh their understanding of Canadian taxation.

Taxation Fundamentals Quiz

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Questions and Answers

What is the first step in calculating net income for taxation?

The GAAR is intended to promote tax benefits for individuals.

What does the Carter Commission analyze?

The term 'GAAR' stands for ______.

Match the phrases with their meanings in the Income Tax Act:

Which tax credit is specifically designed for first-time home buyers?

The Alternative Minimum Tax (AMT) applies only to low-income individuals.

What does TOSI stand for?

The __________ Credit is available for individuals who have paid interest on student loans.

Match the types of corporations with their descriptions:

Which of the following items is excluded from split income under TOSI?

Canadian-Controlled Private Corporations (CCPCs) benefit from a lower corporate tax rate.

How often does deemed disposition occur for trusts other than spousal trusts?

The general corporate tax rate is currently __________.

What is the special corporate tax rate for Canadian-Controlled Private Corporations on their first $500,000 of Canadian active business income?

What is generally considered employment income for a taxpayer in a taxation year?

All benefits received by an employee are considered taxable income.

What is the term for a right given to an employee to purchase company shares at a fixed price?

The value of a benefit used by an employee must be quantified by its fair market value or _____.

Match the following sections with their respective topics:

Which of the following is a requirement for reduced standby charges of an automobile?

Taxable capital gains are only assessed on 25% of the total gain realized from the sale of property.

What determines whether a benefit is unreasonable or reasonable for tax purposes?

An employee may claim ____% of meal expenses as part of travel costs if they consume the meal while away for at least 12 hours.

Match the activity with its classification:

What happens to the proceeds of disposition (POD) and adjusted cost base (ACB) for personal-use property under the $1,000 de minimus rule?

An investment made with the intention of holding property for a regular income would be taxed as business profit.

According to S. 150(1) of the ITA, who must file a tax return for the taxation year?

The burden of proof lies on the Minister in cases involving the general anti-avoidance rule (GAAR).

What does the term 'sojourn' mean in the context of residency?

Under S. 153, the employer must deduct tax from each payment of __________.

Match the following sections with their descriptions:

What is the minimum total tax liability that triggers quarterly installments for individuals?

A taxpayer's intention is the sole determinant of their tax residency.

What principle did the SCC adopt in Trustco Mortgage Co. v. Canada?

Under S. 250(3), a person who is ordinarily resident in Canada is considered __________ in Canada.

In the case of Johnston v. M.N.R. (1948), who is responsible for providing the burden of proof?

The CRA does not consider a spouse or dependents' location when determining a taxpayer's residency.

What type of payments made after 1997 cannot be deducted by the payer?

What defines a corporation's place of residency according to common law?

In order to sever ties with Canada for residency purposes, an individual must leave behind their __________ and dependents.

Childcare expenses can be deducted for any child regardless of eligibility.

Match the court case with the principle it established:

In computing taxable income, moving expenses incurred by taxpayers can be deducted under section ______.

Which of the following is NOT a category of deductions applicable to individuals?

What is the formula to calculate Gain or Loss on disposition?

Medical expenses can provide eligible tax relief if they exceed 3% of an individual's net income.

Payments for spousal support are considered taxable income.

According to s. 104(2) of the ITA, how is a trust classified for tax purposes?

What is the maximum period for carrying back a capital loss?

A non-resident trust cannot receive contributions from a Canadian resident.

The Canada child benefit is designed to support ______ families with children.

What is an annuity?

Which section outlines the personal credits for taxpayers?

What is the primary test used to determine the residency of a corporation incorporated in Canada?

Transfers from an RRSP to an RPP, RRSP, or _____ trigger a deemed disposition.

Match the following tax credits with their relevant details:

Match the income types with their definitions:

An individual who is a part-year resident may exclude foreign income earned during the _____ of the year when they were not resident in Canada.

Match the sections of the Income Tax Act with their respective descriptions:

Income splitting allows shifting income to higher-income family members or entities.

Which of the following statements is correct about TFSA contributions?

Payments received from employment insurance are considered tax-deferred income.

What is the allowable business investment loss typically expressed as?

Under what circumstance does s. 128.1 deem a person to have disposed of property?

Employed individuals are not allowed to hold office according to s. 248(1).

Capital losses can be carried forward to future tax years ______.

What happens to an RRSP when a taxpayer turns 71 years old?

Contributions to a Registered Pension Plan (RPP) by employers are eligible for _____ under the Income Tax Act.

Which of the following is NOT considered a moving expense for deduction?

What is the withholding rate applied to fees paid to a non-resident for services rendered in Canada?

Which payment is NOT taxable under section 81?

Under ____, benefits received by an employee from their employer are presumed to be derived from the employment relationship.

Which of the following is true about employment income according to s. 5(1)?

Scholarships, bursaries, and prizes for achievement are always taxable.

What is the basic personal amount (BPA)?