Tax Quiz 1 Questions PDF

Taxation quiz 1 Past and potential questions What does the Undepreciated Capital Cost (UCC) of an asset represent (do not tell me how to calculate the UCC)? cost of asset/property left over after previous years expensing for use (depreciation) what is the difference between a resident and a soj...

Taxation quiz 1 Past and potential questions What does the Undepreciated Capital Cost (UCC) of an asset represent (do not tell me how to calculate the UCC)? cost of asset/property left over after previous years expensing for use (depreciation) what is the difference between a resident and a sojourner? Why does it matter Resident - full-time living in Canada\ Sojourner -- is a subcategory of a non-resident, we have to look at the intent, if permanent then we treat as resident, if temporary in Canada than we have to do the 183 days test, if more treat as resident if less treat as NR. When determining a gain or loss on the disposition of property, the taxpayer deducts the adjusted cost basis (ACB) of the property from the proceeds of the disposition (sale price) on the property. We have said that the government needs a tax system to raise revenue. The government would raise more revenue if the tax was imposed on the total proceeds of disposition without the deduction for adjusted cost basis. Why is this deduction permitted? What does ACB represent? it is the after-tax carrying value of an item. It ensures taxpayers are taxed only on their actual economic gain, not on the total proceeds of disposition. The ACB represents the taxpayer\'s investment in the property, including the purchase price, transaction costs, and capital improvements. This deduction ensures fairness by preventing taxation on the return of the taxpayer's original investment and promotes economic activity by encouraging investment. It can be said that the actual cost of an expenditure that is deductible for tax purposes is less than the cash outflow for the expenditure. Explain. Be specific regarding how the actual cost of a deductible expenditure should be determine tax deduction reduces taxable income, resulting in tax savings. To figure out the actual cost, you calculate how much the deduction saves you in taxes. For example, if a business incurs a \$1,000 deductible expense and the marginal tax rate is 30%, the tax savings are \$300, making the actual cost \$700. Prof said you have to show the calc which is (1-tax rate) A taxpayer is interested in acquiring land and a building to use as a warehouse. The taxpayer can lease the land and building or can purchase the land and building. Compare the tax treatment of these two alternatives. Refer to both the amount and timing of any related tax deductions Under what conditions will a taxpayer recognize a "terminal loss"? What does a terminal loss represent? Is it possible to have a terminal loss for class 10.1? Explain if all assets in a class are sold but a UCC balance remains, the balance can be written off against business or property income (ALL CLASS ASSETS MUST BE SOLD) unless sold to affiliated party then no terminal loss. No, not when a vehicle is sold. It can be said that the taxpayer and the government are essentially partners. Explain the taxpayer pays money in order for the government to provide benefits to the taxpayer such as roads and other services, in partnership with government for all economic activity as after-tax funds are used to purchase items In class she said its cause they both pay portions, they each pay a portion of tax related to eligible revenues and expenses. Deduction is (1 -- tax rate) for the taxpayer and (1+tax rate) for the government Your client is interested in obtaining long-term disability insurance for the employees. What do you recommend to your client regarding obtaining and paying for such insurance? Explain your answer including the appropriate references in ITA Section 6. 6(1)(f) if I get insurance benefits which are paid periodically I would include them in income. If the employer paid any premium the periodic benefits are included in income 61e.1 if the benefit is paid periodically and the employer has paid any part of the premium the amount the employer paid of the premium will not be included in income but the benefit will because its included in 6.1.f if the benefit is a lump sum the benefit is not included in income. That means the amount of the premium is included in income. (this is if you lose a leg) tax exempt if employee pays premiums but if employer pays then only the premiums are exempt and any benefit received is taxable for employees An individual who moves (permanently) to Canada on October 12 of the year will be considered non-resident in Canada throughout the year since he or she was present in Canada for less than 183 days. Is this true? Explain. How will this individual be taxed in Canada during the year of the move A part-year resident, since permanent move, only pays tax on worldwide income that is earned during their residency and not the full year, the rest of the year when they were not resident they are taxed as a non-resident paying tax on only Canadian source income We have suggested that the primary purpose of a tax system is to raise revenue for the government. However, we also have suggested that the system should be equitable (fair) and as neutral as possible in raising the revenue. a.What do we mean by "neutrality"? neutrality means decisions and we don't want tax to matter in those decisions. AKA doesn't mess up the economy. Specifically said neutrality means there is no difference or bias and everything should be taxed the same. b.How do we determine whether the tax system is "fair" ability to pay - everyone pays tax proportionate to what they are able to pay\ benefit theory - those who pay tax should benefit from it, and those who benefit should pay An individual who moves (permanently) to Canada on March 31 of the year will be considered resident in Canada throughout the year since he or she was present in Canada for more than 183 days. Is this true? Explain. How will this individual be taxed in Canada during the year of the move A part-year resident, since permanent move, only pays tax on worldwide income that is earned during their residency and not the full year, the rest of the year when they were not resident they are taxed as a non-resident paying tax on only Canadian source income - Taxed on cdn source income form 1/1-5/16 but worldwide income in canada - You here are making a clean break and fresh start - IF you are a deemed resident on NR, you would be taxed on the worldwide income from the full year Jenny Atkinson is reviewing employment offers. She plans to obtain private health insurance to supplement the provincial health plan. She has investigated various health plans and has determined that to obtain the coverage she wants, the premium will cost her \$1,500 (if she purchases the health insurance herself). Johnson, Inc. has offered to provide this private health insurance to Jenny. The premium to Johnson, Inc. will be \$380. Abigale Inc. does not provide health insurance benefits, but has offered to provide Jenny with adequate salary so that she can purchase the health insurance. Jenny is in a 34% tax bracket. Both Johnson Inc. and Abigale Inc. are in a 27.5% tax bracket. a. What is the cost to Johnson, Inc. to provide the health insurance for Jenny? 380\*(1-0.275) = 275.5 b. What is the cost to Abigale Inc. to provide the necessary salary for Jenny? 1500/(1-0.34) = 2272.72 is how much salary Jenny needs 2272.72 x (1-0.275) =1,647.722 cost to employer. 2272.72\*(.6)= 1363-275.5 = 1087.5 difference from what she would pay with Johnson You own 100% of the stock of a private corporation. The corporation is very profitable. You have the corporation buy a house for your use. a. Should the corporation receive a deduction for the costs related to this purchase, including the cost of the house, property taxes on the house, utility expenses and so forth? Explain. b. Using the information from above, do you think you should have any taxable income related to your use of this house? Explain - NOT APPLICABLE FOR QUIZ ONE Sally Ann is in a 27% marginal tax bracket. Her current employer pays \$2,900 per year for a private group health insurance plan. If she were to buy the same insurance herself, she would have to pay \$6,100 for an equivalent plan. Sally Ann is considering a job offer from a new employer who does not provide health insurance. How much additional salary should Sally Ann request to ensure she can maintain the same health insurance at no additional cost to her? Be sure to show your calculations 6100/(1-0.27) =8,356.16 At a recent executive meeting of HYZ Company, the president complained, "Our compensation program is unimaginative because we pay our employees by salary only. Surely there are other forms of compensation that would make our company more attractive to employees." As the personnel manager of HYZ Company, prepare a list of compensation alternatives. For each, briefly describe the tax consequences to both the employee and the employer. Looks at after tax benefit for both the employee and employer I assumed she wouldnt ask business side since we didnt go over that Stock options = only taxed on capital gains once sold Health insurance = employee not taxed on premiums Car/meal reimbursement = not taxed on reimbursement Allowances = employees taxed on it Can property, such as land, that has a potential to provide long-term benefit to the owner create ordinary income or loss (rather than capital gain or loss) when it is sold? Explain.. its sale generates **business income or loss** based on the difference between the sale proceeds and its adjusted cost base (ACB) plus selling expenses. However, if the land is held as a capital asset for long-term investment, its sale would generally result in a **capital gain or loss**, which is taxed differently. The distinction depends on the intent of ownership (business vs. investment) and the frequency of transactions. Property income would be business income if greater than 5 employees or if property is bought to sell What is the purpose of ITA Section 78? To prevent taxpayers from indefinitely deferring the deduction of unpaid amounts owing to related parties or employees. It requires taxpayers to include unpaid deductible expenses that remain unpaid for more than 2 years. What is a "charging provision" in a tax statute? Why is it important? a charging provision specifies who is liable to pay a particular tax, it is important for maintaining fairness, and making sure the proper party pays the tax A corporation is considering expansion through the acquisition of a business. The management is reviewing the pros and cons of three possible acquisition options. What factors, both tax and non-tax, should they consider in analyzing the alternatives? Why does it matter if you are a resident or sojourner? if you are resident, taxed on worldwide income from all sources for the year, broader base for tax\ sojourner - taxed on Canadian source of income unless more than 183 days then taxed like a resident Why is the ACB deduction permitted? the funds used to purchase the property were after-tax, so tax was already paid on the cost so to avoid double taxation it is deducted employee vs independent contractor and why does it matter look at section 5 section 12 -- employees cash basis, business -- accrual deductions section 8 employees -- businesses section 18/20 As an independent contractor you are not getting all the legal protections CPP EI for being a legal employee. 4 Marks (Maximum 100 words) Briefly compare/contrast the general treatment for tax purposes of employment income and business income Just blc you're an independent contractor doesn't mean you can start deducting all your meals costs and etc As an independent contractor you are not getting all the legal protections CPP EI for being a legal employee. Employment income is taxed through payroll withholding, with taxes deducted by the employer. It is subject to progressive tax rates and limited deductions. Business income, earned by self-employed individuals, allows for deductions of business expenses and is taxed on net income. Business owners may also face self-employment taxes and more complex reporting requirements. What is the Purpose of tax law To raise revenue- the government wants your money \*\* if asked about integration talk about how it ensures we don't have double taxation talk about how it ensures fairness and neutrality It is always better to pay tax later rather than sooner." Is this statement true? Explain. This is false since there is a penalty by the CRA for late taxes. It is 5% once late plus 1%per month after for a total of 12 months. Ie max of 17% Often, an enterprise conducting an active business will separate its business operations from its appreciating assets (such as real estate) by establishing a separate corporation for each. a. Why would an enterprise want to do this? An enterprise may separate its business operations from appreciating assets to limit liability, protect assets, and optimize tax benefits. b. How may this type of structure impair future expansion activities This structure can impair future expansion if it complicates financing or requires complex transactions between the separate entities, leading to higher administrative costs and reduced flexibility for raising capital. (TRANSFER PRICING) Is there any integration available for Canadian active business income generated through a Canadian public company? Explain active business income is taxed at the corporate level, and dividends paid to shareholders are subject to personal tax without full integration. Public company dividends do qualify for the **eligible dividend tax credit**, which partially reduces the personal tax burden, but it does not fully eliminate double taxation Susan Gilmore works for Salesforce Ltd in New York City in the United States. She has been transferred to Toronto, Ontario, Canada, for a temporary assignment. She arrives in Toronto on July 27, 2023, and leaves Toronto on May 10, 2025. Her family and social ties remain in the United States. She rented and lived in a condo in Toronto every day from July 27, 2023 until she left Canada on May 10, 2025. How will Susan be taxed (on what income) in Canada in 2023? In 2024? In 2025 2023 jan 1 -- dec 31 NR blc less than 183 days and not permanent 2024- full time resident taxed on WW income 2025 -- part time resident from jan1 -- may 9 resident, from may 10-dec 31 NR Max Underwood is an employee of Abbott Ltd. He receives a salary of \$8,000 per month. In July of 2023 he was in an automobile accident and was unable to work for four months. He is a member of his employer-provided group accident and disability insurance program. Max has paid premiums for this insurance in the amount of \$780 since he started work at Abbott Ltd. Max has never received benefits under the plan in the past. Abbot Ltd has paid total premiums for the insurance in the amount of \$1,800. In 2023, Max received a total of \$32,000 (\$8,000 per month) in benefits under this plan as a salary replacement. You may assume that all premiums paid under the plan relate to ITA Section 6(1) (f). What is the impact of the above information on Max's employment income in 2023? Be sure your answer is complete and discusses both taxable and non-taxable amounts In 2023, Max Underwood will include the \$32,000 in salary replacement benefits from his employer-provided disability insurance as taxable income. Max paid \$780 in premiums, which are not taxable to him. Abbott Ltd. paid \$1,800 in premiums, are also taxable as they were paid by the employer. Therefore, Max\'s taxable income will include the \$32,000 in benefits and the \$1,800 in employer-paid premiums. Under 6(1)(f) Other potential topics Tax treaties \- determine who has the right to tax and avoid double taxation\ -facilitates trade\ - if there were adverse tax consequences people would never conduct business outside their own countries What is transfer pricing? Why are transfer price rules important? \- price you charge among different parts of a corporate group\ - it is important from a tax standpoint because it impacts how much is taxed where (ex. Canada, US, provinces) GAAR -- main reason for this is tax planning Allowance vs remuneration