Questions and Answers of Introduction To Federal Income Taxation

When computing tax on $60,000 of taxable income using the four tax rate schedules, the greatest tax liability will result when tax is computed using the tax rate schedule for Single taxpayers.
When computing tax liability, taxpayers use the tax table or the tax rate schedule, depending on which produces the least amount of tax.
A joint tax return cannot be filed by:a. a couple who are still legally married, but recently filed for divorce.b. an individual whose spouse has died during the tax year, and who has not
Ralph’s wife, Trixie, moved out of their home in early April and never returned. Ralph, who is still married to Trixie, became the sole source of support of their 10-year-old son. If Ralph and
Colleen is not married. She maintains a household where she and her 22-year-old cousin, Nell, live the entire year. Nell is a full-time college student. She earned $5,000 during the year working in
Jason, who is single, maintains a home where he and his unmarried, 28-year-old nephew, Alan, live for the entire year. Alan has no income, and Jason provides all of Alan's support.Jason’s filing
Freda lives with her daughter and is fully supported by the following persons: Freda’s best friend, 30%; her daughter, 10%; her mother, 25%; and her sister, 35%. Assuming that a multiple support
When determining whether a dependent meets the support test, all of the following items are taken into account for total support except:a. the fair market value of lodging.b. payment of college
Which of the following is one of the rules that must be met in order to claim someone as a dependent under the qualifying relative rules?a. The person cannot provide over half of his or her own
A father claims his 18-year-old son as a dependent. The son works part-time and earned$5,000 during the year. This is the son’s only source of income. The son has good eyesight.The son’s total
Alison (age 36 and single) provided all of the support for her father (age 73), who lives in another state. Her father has no gross income. Alison’s 2014 total standard deduction is:a. $10,650b.
Which of the following is a deduction from AGI?a. State income taxes paidb. Contributions to an Individual Retirement Account (IRA)c. Interest paid on student loansd. Moving expenses
The AGI threshold at which dependents are required to file a tax return takes into consideration the additional standard deduction for age, but not blindness.
Qualifying widow(er) filing status is not available to a widow who remarries.
Rachel maintains a household where she and her two dependent children live. If Rachel’s divorce is finalized on December 26, 2014, her filing status for 2014 is single.
Miranda’s mother qualified as her dependent until she passed away during the year. Miranda is allowed a full exemption deduction for her mother in the year of her death.
In order for a child over the age of 18 to have $5,000 of gross income and continue to be claimed as a dependent on his parent’s tax return, the child must be a full-time student for more than
The Stantons provide over half of the support of their 22-year-old daughter, Jenna, who is a full-time college student. However, because Jenna earns $6,500 during the year from a parttime job, she
The standard deduction for married persons who file separately from their spouses is $0 if their spouse chooses to take itemized deductions instead of the allowed standard deduction amount.
The standard deduction for a person claimed as a dependent on another’s tax return is $0.
A tax credit of $100 is always better than a tax deduction of $100.
Itemized deductions are a concept unique to individual taxpayers.
Ava Ltd. owns an apartment building in downtown St. John’s. The only employees of Ava are the two shareholders. Ava earns income from rents and has some interest income.REQUIRED(1) Is Ava a
During its first taxation year (of 365 days) which ended December 31, 2016, Logic Ltd., a Canadian-controlled private corporation, reported the following incomes:The corporation carries on business
Mr. A owns all the common shares of ABC Limited, a Canadian-controlled private corporation. ABC Limited incurred certain costs in the development of a new process that qualifies for SR&ED
Murphy Corporation Limited, a Canadian-controlled private corporation with a December 31, 2016 year end, has made the following calculation of its taxable income.REQUIREDCompute the refundable
Reconsider the facts of the previous example problem. Assume that the problem raised by the marketable securities has been resolved by removing the marketable securities from the corporation. Also,
Lenny disposed of some shares of Underground Airways Limited, a QSBC, in January 2016 and realized a taxable capital gain of $305,000. In addition, he received $13,750 in interest and incurred a net
Abigail Ltd. is a small CCPC eligible to make quarterly instalments of its corporate income taxes. The corporation has a December 31 year-end. Ava, the owner-manager, has estimated that the
No Flab Enterprises Limited is an incorporated company involved in the sale of muscle building and physical fitness equipment. For the fiscal year ended March 31, 2013, the company generated taxes
Mr. Don Godfather filed a personal tax return on April 30, 2016 declaring income of $2,500 for the year ended December 31, 2015. As a result of an investigation, the CRA determined that, at December
Ms. T incorporated a company with an initial capitalization of 10 common shares @ $10 per share.In the third year of operations, Ms. T acquired an additional 10 common shares @ $20 per share of
Robert Baker owns a controlling interest in Six Sixty-One Ltd. and, therefore, is not at arm s length with the corporation. His present common shares have a PUC and adjusted cost base of $2,500 and a
Ms. Oasis owns some of the common shares of Capital Structure Ltd. with an adjusted cost base and paid-up capital of $1,200 and a fair market value of $3,700. In the course of a capital
Refer to the previous example problem concerning Alpha Beta Partnership. Mrs. Alpha and Mrs. Beta share income equally.REQUIREDCompute Mrs. Alpha’s taxable income for 2016, assuming she has no
Adam owns all of the Class A common shares of BJay Ltd. His son, Stieb, owns all of the Class B common shares and is active in the management of the corporation. Adam is now prepared to pass all of
Jack Lajoha is a resident of Spain, but has a rental property in Canada. The gross rents are $1,500 monthly, and are collected by Jack’s agent, Tom Kelly. From the rental income, Tom pays his
Up until the end of 2015, Fred Murphy held stock and mutual fund investments in an investment account with a Canadian bank. In 2015, he earned $32,000 in interest and dividends on the investments.
Harold Chui is the sole shareholder of CCPC Ltd. and of USCO Inc. CCPC Ltd. has advanced USCO Inc. $100,000 to assist in financing its relatively new operations in Port Huron, Michigan. USCO Inc.
When Aaron Levy immigrated to Canada, he owned 5,000 shares of a public company listed on the New York Stock Exchange. His original purchase price was US$18 a share, and the fair market value of the
Carol Ann Thomas emigrated from Canada this year. At the time she left, she owned 500 shares of XYZ Ltd., a listed company on a designated Canadian stock exchange. The fair market value of the shares
A Canadian importer (Canco) purchases goods from an arm’s length U.S. supplier at a price of C$30/unit. The Canadian company’s gross annual revenue is $6 million. The Canadian importer
A U.S. corporation, Tellco Inc., employs three sales employees who live and work in Canada. The sales employees work from home offices. Tellco Inc. does not have an office or other facility in
International Links Inc. is a telecommunications company incorporated in the United States with a December 31 year end. It began operating one small pilot project office in Toronto in fiscal 2015 in
Joe Solder is a resident of the United States and owns 25% of the shares of a Canadian-controlled private corporation with operations in Waterloo. The value of the shares is $150,000. He was issued
Janet Smith is about to emigrate from Canada. She has $50,000 in her RRSP.REQUIREDWhat are her alternatives in connection with this RRSP?
Aaron Levy immigrated to Canada during 2016, arriving on August 15. Aaron had earned a salary in Israel of C$65,000 before coming to Canada. On arriving in Canada, he went to work for the City of
Canada Corp. is owned 100% by specified non-residents. The existing equity in the corporation (beginning retained earnings, the monthly average of beginning contributed surplus by specified
Canco, a Canadian subsidiary of a U.S. parent company (USCo.) loans $300,000 of excess cash to USCo. in its December 31, 2016 taxation year end and does not charge interest.REQUIRED(1) Will Canco
CCPC Ltd., per Example Problem 19-12, attempts to circumvent the income inclusion under the deemed interest rules by investing the $100,000 in share capital of another corporation, Bermuda Inc.,
Jane Snow received $20,000 in dividend income in 2016 from a 5% investment she owns in her boyfriend’s company in Tanzania. Withholding tax of 25% applied to the dividend. Jane also earned Canadian
Canco, a Canadian resident corporation, holds a 50% common share interest in two foreign subsidiaries. Both subsidiaries were incorporated in 2003. Canco was issued the shares at the time of
Assume that this year John Smith makes a non-interest bearing loan of $1,000 to a trust. The trust acquires a $1,000 bond. The trust has four equal beneficiaries: Betty Smith, John’s wife, and
The income of a trust for the year is $6,000 of dividends from resident Canadian public corporations. The sole beneficiary of the trust is the spouse of the deceased settlor. The trustee paid $5,000
Mr. Black and Mr. Red operate accounting practices as sole practitioners. They wish to form a partnership in which Mr. Black will hold a 60% share and Mr. Red a 40% share. The relevant financial data
The partners of ABC Partnership wish to incorporate the partnership’s asset. The partnership’s asset is land which was purchased about 11 years ago for $12,000. The fair market value of the land
The following income statement was prepared for the Alpha Beta Partnership, a partnership comprising two individuals that carries on an active business:The partners drew a total of $67,000 in
Nat owns common shares in Nat’s Trading Corporation Limited with the following values:Elaine’s Pubco Ltd., a widely-held Canadian public company, has acquired all of the common shares of Nat’s
Reconsider Example Problem 16-1 in ¶ 16,060.REQUIREDCompute the paid-up capital for tax purposes of the preferred and common shares received from the corporation.Data in Example Problem 16-1 in ¶
Reconsider the Example Problem 16-1 in ¶ 16,060.REQUIREDCompute the cost of the consideration taken from the corporation for the net assets transferred.Data in Example Problem 16-1 in ¶ 16,060Mr.
Mr. Sam Moyer owns the following assets in a business that he wants to incorporate:1Cost values for tax purposes used to describe the lowest limit of the elected transfer price range in Exhibit
Surplus Accumulation Ltd. provides you with the following information:Dispositions during the fiscal year ended December 31, 2016.In 2006, the corporation purchased goodwill for $6,000 and has
Hum Along Records Ltd., a Canadian-controlled private corporation, has 5,000 outstanding preferred shares with a redemption and current fair market value of $6,000 and a paid-up capital value of
Windemere Limited is a Canadian-controlled private corporation founded 12 years ago by Mr. White who holds all of the shares which he purchased at that time from the company for $1,000. As of
The Toronto Gazette employs a number of foreign correspondents who are often required to report from war zones. On September 30, 2016, “Ace” Johnson, a veteran reporter, is killed while reporting
Mr. Shinh, the new controller of Secret Ltd., a CCPC, is in the process of preparing the company’s current-year T2 return. He notices a section of the return asking for information about the
Mom owns 100% of the common shares of Momco Ltd. Her adult daughters. No. 1 and No. 2, each own 35% of the common shares of Sibco Ltd. Mom owns the remaining 30% of the outstanding common shares of
Smart Manufacturing Ltd. built a 21-room house for its principal shareholder-officer on a country property owned by him. The company expensed the costs as promotion expenses on the basis that he
Mr. Edwards owns all of the outstanding shares of Edwards Inc., a large property management company, which manages over 20 large apartment buildings. One spring Mr. Edwards had the repair crew spend
Sally owns all the outstanding shares of Sally Inc. On July 15, 2015, Sally Inc. loans Bob, Sally’s brother, $10,000 to buy a sailboat. Sally Inc. has a December 31 year end. On January 1, 2017,
Ms. Alpha owns 100% of the shares of Xenon Ltd., which carries on a retailing business and has a December 31 year end. At the beginning of January 2016, Xenon Ltd. loaned Ms. Alpha $200,000 for
Mr, Potter owns all the outstanding shares of Run for Your Life Limited, a health and fitness club. He is the company president. On July 1, 2016 the company made a loan to Mr. Potter of $19,500 which
Ethan Corporation Limited, a Canadian-controlled private corporation carrying on business in a province with a 4% corporate tax rate on its income (i.e., a total corporate tax rate of 14.5%), has
Bryan Hill owns all of the issued shares of Hill & Associates Inc., a consulting firm he started five years ago. Bryan’s only source of income is from the corporation and he has federal
Maya lives in Toronto and owns 100% of Maya’s Ltd. The corporation was incorporated 10 years ago, in Ontario, to operate a retail clothing establishment in Toronto. The following is the recent
Zeto, a resident of Canada, has owned 100% of the shares of Zeto’s Manufacturing Limited (ZML), a Canadian-controlled private corporation, since its incorporation 20 years ago. The corporation
Fresser and Klutz are spouses. Fresser operates a construction company, Fresser Inc., which uses all of its assets (fair market value of $1.2 million) in its active business carried on in Calgary.
Lennox Inc., a Canadian-controlled private corporation, has a fiscal year-end of December 31. Little-Big Inc. is not associated with any other corporation and all of its income is earned in Canada.
Consider the following two groups, each of which controls a corporation with a 50/50 ownership of the shares:Group One Ltd. Mom and DadGroup Two Ltd. Child of Mom and Dad and Mom’s
Dad and Son (age 25) both own 100% of the common shares of their respective corporations: Dadco Ltd. and Sonco Ltd. Dad owns 100% of the preferred shares of Sonco Ltd. The preferred shares are
Alpha and Beta, who are married, each own 50% of the common shares of AB Ltd. Their son. Alpha Jr., age 30, and his wife own 40% and 30%, respectively, of the common shares of Junior Ltd. Beta owns
H and W, a married couple, have incorporated their separate businesses, H Ltd. and W Ltd., both of which are CCPCs. In order to avoid duplication of administrative costs, H and W incorporated a
Small Limited, a CCPC with a December 31 year-end, spent $4 million in current qualifying SR&ED expenditures in 2016. Small Limited is not associated with any other corporation and may be
Mr. and Ms. Cheng hold common shares in two private corporations resident in Canada, as shown in the chart below. These corporations in turn hold common shares in another private corporation, Opco
VTL Limited is a Canadian-controlled private corporation with its first fiscal year ended December 31, 2016. The following data resulted in the indicated computation of taxable income and Part I tax
James Fish Distributors Inc. (JFDI) is a Canadian-controlled private corporation located in Burnaby, British Columbia. The company’s income for tax purposes for its December 31, 2016 taxation year
On May 1, 2016, an unrelated person acquired 60% of the voting shares of Novell Inc. The values of the assets owned by Novell Inc. at May 1, 2016, were as follows:In determining the value of the
The following list of income inclusions, deductions, losses, and tax credits has been determined correctly by a junior staff accountant prior to the preparation of the tax return for Ms. Samara
The following information has been provided by your client, Karl Kraft:Additional Information(1) Karl had a $10,000 net capital loss which arose in 1998, and has not been deducted previously.(2) Karl
Donalda was employed in the year for six months and attended school the other six months (i.e., 26 weeks). She requires the full-time care of an attendant. Her income for the year consisted of
Mr. Talbot is in the process of retiring and moving to another city. He decides to sell his two residences and provides you with the following information as at September 30, 2016, the date of
The operations of Balloons Ltd. generated the following data for its December 31, 2016 taxation year:In its 2015 taxation year, its first profitable year in several. Balloons Ltd. had taxable income
The operations of Blyth Limited generated the following data for the year ended December 31, 2016:REQUIREDCompute the taxable income of the corporation for 2016 and indicate the loss carryovers
The following data summarize the operations of Parliamentary Fertilizers Limited, a Canadian-controlled private corporation, for the years 2013 to 2016 ended December 31.The corporation has a net
Wonder Inc.’s tax return for its year ended December 31, 2015, showed the following balances in its loss accounts:During the period January to December 2016, Wonder Inc. earned business income of
Universal Ltd.’s tax return for its year ended December 31, 2016, showed the following balances in its loss accounts:On June 1, 2016, an unrelated person acquired 75% of the voting shares of
The following information has been taken from the financial records of the FT Limited:In 2015, capital cost allowance of $10,278 had been taken on a brick building purchased in 2012 (Class 1
Barry and the Wild Bunch Limited, with its head office in Ottawa, Ontario and other permanent establishments in the provinces of New Brunswick and Quebec, and in the United States, has taxable income
You have audited the books of International Money Limited, a public corporation, and have determined that the income for tax purposes of $472,000 for the year ended December 31, 2016, has been
In 2016, Investit Limited has acquired $100,000 of Class 8 (20%) assets eligible as “qualified property” for the 10% investment tax credit in the Gaspe area. The corporation’s federal income

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