Questions and Answers of Canadian Income Taxation

Investco Ltd., a private corporation, received dividend income from taxable Canadian corporations at its year-end, December 31, 2022, as follows:Investco Ltd. owns 80% of the issued shares of
John Basler is employed in the transportation industry and earns a substantial salary. He also owns 100% of the shares of Truck Ltd. The corporation is a 20% partner in a small trucking business. In
On March 1, 2022, Martin Torres received an interest-free loan from his employer, X Ltd., a private corporation, owned by his spouse. Martin used the loan to purchase the condominium in which he
Quality Quo is a Canadian-controlled private corporation carrying on business in Canada. For its year ended December 31, 2022, Quality Quo earned income from the following sources: • Active
Duncan Bostock is a sole proprietor in his first year of operations. The following table summarizes his taxable supplies for the current year: (a) When is Duncan required to register for
A new business venture requires $600,000 of equity capital from passive investors in addition to the $400,000 of capital that is being provided by the initiator of the project. The $600,000 will be
Hallie Wolf owns 2% of the shares of Y Ltd. She is also employed by Y in a middle management position. On August 1, 2022, Hallie received a loan from Y that she used to repay personal debts. Hallie
Pembroke Realtors Ltd. is a closely held Canadian-controlled private corporation. At the end of 2022, during which it earned an unusually high profit, the corporation paid additional salaries of
In addition to its active business income of $300,000, P Ltd, a CCPC, received dividends of $30,000 from a public corporation and had a taxable capital gain of $90,000 on the sale of passive
Holding Ltd., a Canadian-controlled private corporation, acquired 100% of the shares of Operating Ltd. on incorporation in 2022 for $100,000. The shares of Operating Ltd. have appreciated in value
What is a holding corporation?
A Ltd. and B Ltd. are partners in the Triple M partnership. A Ltd. and B Ltd. share equally in the income or loss of the partnership annually. The partnership earns business income of $100,000 and
If a corporation is subject to a 27% tax rate, why may it be advantageous for it to issue debt as opposed to preferred shares?
What is a small supplier and what are the implications of losing small supplier status?
Lisa Beil began carrying on her business in a GST province on July 1, 2020 and has a calendar fiscal year end. Lisa registered for annual GST filing on May 1, 2021. Today is April 30, 2022, and Lisa
Linda Hernandez filed her GST return for the January 1–December 31, 2021 period, claiming a refund of $1,000 since her ITCs exceeded the GST collected. She was selected for a pre-assessment review
What is the relationship between a capitalization rate and an earnings multiple?
An individual made charitable donations of $10,000 during 2022. Determine the maximum donation credit available under the following assumptions: (a) The individual’s taxable income is
Elle Klein received old-age security (OAS) payments during 2022 totalling $8,000. Her net income for the year is $85,000. No amount was withheld from the OAS payments as her income was lower in
What is an “after-tax” approach to decision making?
Samuel Tamm is the sole shareholder of MET, a Canadian-controlled private corporation carrying on an active business, with a December 31 fiscal year-end. Samuel met with you on January 6, 2023, about
Mateo Lopez is not a resident of Canada. For the current year, Mateo has worldwide income of $120,000, including $15,000 of employment income earned in Canada and $2,000 of interest received from
Jennifer Garcia’s employer provides her with the following gifts and awards in 2022: Briefly describe the tax consequences to Jennifer from the above gifts and awards. Golf shirt with the
What is the filing due date for each of the following income tax returns for the 2022 taxation year? (a) A corporation for its year ending November 30.(b) An individual who carried on a business
For each of the following individuals, determine when their income tax return for 2022 is due and when any balance of tax owing is due. (a) Bob Wu is single. He has two sources of income:
Richard Ahmed earns a salary of $70,000 in 2022 as an employee of B Ltd. He pays the following expenses to earn his income: (a) Determine the maximum deduction for employment expenses that
A taxpayer’s tax liability was $1,200 for 2020 and $12,000 for 2021, and is expected to be $36,000 for 2022. Is the taxpayer required to make tax instalments for 2022? If so, What are the
The date issued on the Notice of Reassessment for a taxpayer’s 2017 tax return was July 10, 2022. The date issued on the original Notice of Assessment for the taxpayer’s 2017 tax return was June
A Canadian-controlled private corporation filed its tax return for its year ended December 31, 2021 on June 30, 2022. The Notice of Assessment was received August 31, 2022. The date issued on the
Jane Quinn owned an apple orchard for 20 years. During that time, she had cultivated a unique brand of apple that was popular with health food fans. Toward the end of the 2022 growing season, Jane
Darius Watkins is a Chartered Professional Accountant. He has carried on a professional business as a tax consultant for 12 years. By the end of 2021, the practice had grown very large. Darius was
Julie Sami is required to use her own automobile and pay for all her travelling expenses in carrying out her duties of employment. She purchased a new car on January 2, 2022, for $45,000 (plus HST @
Carole Patel receives a salary of $60,000 during the current year. In addition, she earns commission income of $25,000, of which she receives $15,000 in the current year. She receives the remaining
Mike Bernard’s employer has a generous benefit program. During 2022, his employer provides him with the following benefits: • A contribution to the company RPP of $6,000 • Group term
Yuen Li was terminated from his employment with Exit Ltd. in July 2022. In November, he began work as a commission salesperson for Kolex Ltd., a Canadian public corporation. Yuen has asked you
Malia Garcia is a professional engineer. In 2022, she sold her consulting business in Hamilton, Ontario, and moved to Vancouver, British Columbia, where she was employed by an equipment-manufacturing
The controller of Mead Pipes Ltd. is preparing the corporation’s 2022 tax return but is uncertain about the tax treatment of the following eight expense items: Required: Determine the
An individual begins employment on December 16, 2022. Their employer pays salaries monthly on the 15th day of each month. The individual receives their first salary payment of $3,000 on January 15,
On September 1 of the current year, Teresa Chang will have worked for A Ltd. for three years and will be entitled to a company car as of that date. A Ltd will have to pay $48,000, including tax, to
Carl Fenson of Winnipeg owns three taxicabs that operate for 24 hours a day (two shifts of 12 hours). Carl works one shift himself and hires drivers for the other shifts. In addition to the normal
Bass Ltd., a Canadian-controlled private corporation, sold two parcels of land during its 2022 taxation year. Details of each transaction are as follows:1. Bass sold a one-hectare site in Ottawa for
Canadian Enterprises carries on a tax consulting business in Toronto, Ontario. The income statement for 2022 includes a cost of $4,600 for the owner/operator attending three conventions during the
In the current year, Eddie Enterprises Ltd., a public corporation, purchased new office equipment costing $40,000. The vendor gave Eddie Enterprises $3,500 for the old office equipment, which was
On May 1, 2022, Kayla Tsuji purchased a Frosty Frozen Foods franchise and began carrying on business immediately as a sole proprietor. She paid $60,000 for the franchise. The franchise agreement has
Harley Krane purchased a side-by-side duplex in 2020 for $120,000 (land $20,000, building $100,000). The units were designed and previously used for residential use but Harley used them for his
Harvey Case man died on July 15, 2022. At the time of his death, he owned the following assets:Over the years, Harvey had claimed capital cost allowance on the building. Its undepreciated capital
On October 1, 2021, Neo Enterprises Ltd. signed a lease for new office space. The contract gives Neo Enterprises the use of the space for four years with the option of renewing the lease for two
Noluck Enterprises Inc. has a December 31 year-end. On March 20, 2022, the company’s warehouse was destroyed by fire. The original cost of the warehouse was $120,000. At the time of the fire, the
On October 24, 2022, Anika Agarwal moved to a rural area in India from Ottawa, Ontario. She became a non-resident of Canada for tax purposes on that date. At the time of the move, she owned the
The following information relates to Perry Somer’s financial affairs in 2022:1. Perry is employed as a salesperson and is remunerated by commissions. He must pay all of his own expenses. During the
Takeover Corp. purchased another business in 2020. The purchase price included $100,000 for goodwill. In 2022, the acquired business was sold. The sale price included $140,000 for the
Steve Bishop purchased a computer for $2,000 last year for his personal use. In February of the current year, Steve started a home-security business and began to use the computer exclusively for
On April 1, 2022, a corporation with a December 31 taxation year purchased a three-year investment certificate for $20,000. The certificate pays interest only at the end of the three-year term, but
An individual invests in a bank term deposit on July 1, 2022. When does the individual recognize the interest income for tax purposes if the investment has a term of three years, with interest
Colin Fitzgerald sold capital property in 2022 for $600,000 and incurred $24,000 in selling costs. The property had an adjusted cost base of $176,000. Colin received $150,000 at the time of the sale
In 2019, Ross Delacruz loaned $10,000 to a small business corporation. The loan bears interest at 6% per annum and is due on demand. Ross did not receive his interest in 2021 although he reported it
Fred Dunn contributed $12,000 to his RRSP in November 2022 and $10,000 to a spousal RRSP in February 2023. Fred earned income of $80,000 in 2021 and $100,000 in 2022. Fred’s notice of assessment
Tom Mendez retired from X Corp. on June 30, 2022, after turning 65 in December 2021. He plans to travel with his spouse, who is 45 years of age. On retirement, Tom received a retiring allowance of
Brody Gill has a lawn care business, which he incorporated in 2022. On incorporation, Brody and a trust for his 15-year-old son each subscribed for one common share at $100 per share. Brody paid the
Irene Salomon died in 2022. At the time of her death, she owned the following assets:• Antique furniture: fair market value (FMV) – $30,000; cost – $10,000 • Rental property—land: FMV
Kendra Thompson disposed of shares of A Ltd.—a qualified small business corporation (QSBC)—in 2022, realizing a taxable capital gain of $350,000. She has net capital losses from last year of
In 2022, William Barker, who is single, earned the following income and incurred the following losses: employment income – $16,000; business loss – $4,000; taxable capital gains – $7,000;
At the end of 2021, Ryan Ali had a balance in his cumulative net investment loss (CNIL) account of $14,500. In 2022, Ryan earned net rental income of $5,000 and received eligible dividends from
In 2016, Jackson Garza loaned $10,000 to a small business corporation. By the end of 2022, it was established that the loan was bad and that Jackson would not be receiving the $10,000 principal.
Angelina Tobin has employment income of $130,000 for 2022. She is single and lives alone. Angelina’s employer withheld EI and CPP contributions of $4,453 (includes CPP enhanced contributions of
Brent Wells is single and lives alone. During 2022 he earned employment income of $140,000. His employer withheld EI ($953) and CPP ($3,500) contributions of $4,453 (including CPP enhanced
In 2022, Jon Patel, who is single, earned rental income of $30,000, capital gains of $100,000, and Canadian non-eligible dividends of $20,000. He is exempt from CPP and EI. In addition, Jon is a
A Canadian corporation with a December year-end incurs the following losses:Determine the expiry date for each of the above losses. Non-capital loss Non-capital loss Net capital
George King’s date of death is October 24, 2022. In his final tax return for 2022, taxable capital gains of $200,000 on his stock portfolio were reported. In 2023, the value of his stock portfolio
What is a buy-back of corporate shares?
What benefits can be achieved by using the contingent business value method? What problems may occur when it is chosen?
What is the contingent business value or “earn-out” method of valuing a business?
Often, certain assets that a business uses have the potential for an alternative use by the owner. What impact may this have on the capitalization of earnings method for valuing the business
Why is it that the value of a specific business may vary from purchaser to purchaser, even though all prospective purchasers have the same degree of certainty with respect to the earnings potential
How is the capitalization of earnings method affected when the entity being valued has profits from business operations and, in addition, income from passive investments (for example, interest
Given that reported past profits reflect future expectations, why may it be necessary to revise those past profits for such items as owner’s compensation, occupancy costs (rent), interest costs,
“Because a purchaser is acquiring a business that will earn future profits, the amount of profits earned in the past is not relevant to the valuation of the business.” Is this statement true?
How is the capitalization rate of a particular business determined?
Explain how the capitalization of earnings method takes into account the relative risk of the particular business being valued.
What is the capitalization of earnings method of valuing a business? Why is it that the value determined by this method may vary considerably between the purchaser and the vendor?
Blakey’s Enterprises Ltd. is a Canadian-controlled private corporation that has operated a small retail men’s clothing store in rural Ontario for 70 years. Like his father before him, Charlie
Distinguish between the earnings approach and the asset approach to business valuations. When is it appropriate to use each?
Little Boy Ltd. is a Canadian public corporation whose shares are traded on the Alberta Stock Exchange. The company operates a chain of grocery stores in western Canada. Little Boy began as a small
What is the key factor influencing the value of a going-concern business?
Describe two instances where a person would be required to self-assess GST/HST.
Describe two instances where a person would be required to self-assess GST/HST.
Briefly summarize the GST/HST implications for each of the following independent scenarios involving real property:(a) Peter is a first-time homebuyer who purchased a detached house to use as his
“Employers carry on commercial activity while employees do not. Therefore, there are no GST/HST implications to an employee with respect to their employment income.” Is this statement true?
Dan uses a popular ridesharing app to earn some extra income on evenings and weekends by driving others around downtown Toronto. Dan began ride-sharing on July 1, 20X8 and voluntarily registered for
An employer in New Brunswick leased an automobile on March 1, 20X7, for $1,200 per month plus 15% HST. The automobile is used by an employee for employment and personal purposes. In 20X7, the
Explain what a registrant should consider when deciding whether or not to adopt the quick method of accounting for GST/HST. How can a business “profit” by using the quick method?
Jill is a registrant and performed some consulting work for a US company from her home office in Fredericton, New Brunswick. She is not sure whether she needs to charge HST or if she can claim input
Fine Furnishings Canada Inc. (FFC) is a manufacturer of hand-crafted wood furniture. The company has decided to discontinue its line of outdoor patio furniture and picnic tables. FFC is planning to
What are the similarities and differences between zero-rated supplies and exempt supplies? List some examples for each of these.
You are an Examiner for the Refund Integrity Program in the GST/HST Audit Division of the Canada Revenue Agency (CRA). Using sophisticated analytical tools, you are able to identify GST/HST returns
Determine whether each of the following is a taxable supply, zero-rated supply, or exempt supply.(a) A clothing store sells a pair of jeans to a customer.(b) Jessica provides consulting services to a
What are input tax credits and what are some of the limitations placed upon them? Why is it important to keep proper documentation to support input tax credits claimed?
Bob is a hobbyist photographer who has shot many weddings and engagement photos for friends and family over the years at no charge. He has been praised for his talents, but never seriously considered
Lisa began carrying on her business in a GST province on July 1, 20X5 and has a calendar fiscal year end. Lisa registered for GST on May 1, 20X6. Today is April 30, 20X7, and Lisa just realized she
Explain the flow-through nature of the GST/HST system.

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