Canadian Income Taxation 22nd Edition By William Buckwold – Test Bank

Chapter 11

Corporations-An Introduction

Multiple Choice Questions

1. When shares are transferred from one group of shareholders to another and there is a change in control, which of the following applies?
   A.Net-capital losses that arise following the change in control are automatically deemed to have expired.
   B. Non-capital losses arising prior to the change in control are automatically deemed to have expired.
   C. Net-capital losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.
   D. Non-capital business losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.

2. Which of the following statements accurately describes the tax treatment of Canadian corporations?
   A.Public and private Canadian corporations are eligible for the small business deduction.
   B. Public and private Canadian corporations are eligible for the general tax reduction.
   C. Public corporations are granted beneficial tax treatment on the first $500,000 of business income.
   D. Canadian controlled private corporations recognize the general tax reduction on all business income.

3. Coffee Co. began operations in 20×0 and recognized $37,000 in business income and $1,000 in taxable capital gains that year. In 20×1, the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000. Business income for 20×2 was $50,000, taxable capital gains were $4,000, and the company received $10,000 in dividends from a taxable Canadian corporation. Coffee Co. utilizes any unused losses in the earliest years possible, Which of the following taxable incomes are correct after all carry-over adjustments have been made?
A. 20×0: $12,000; 20×1: $0; 20×2: $52,000
B. 20×0: $38,000; 20×1: ($28,000); 20×2: $64,000
C. 20×0: $13,000; 20×1: ($0; 20×2: $61,000
D. 20×0: $37,000; 20×1: $0; 20×2: $27,000

4. Many corporations carry on business in more than one province. Assuming a corporation from Province A wishes to conduct business in Province B, the corporation will not have to pay tax in Province B if
   A.the parent corporation sets up a branch in Province B.
   B. the permanent establishment in Province B has a lower sales to wage ratio than the ratio in Province A.
   C. a branch treaty exists between the two provinces.
   D. business is conducted with the other province by way of direct sales from Province A.

5. Which of the following scenarios is not allowed?
   A.The taxable income of ABC Co. is reduced by the amount of dividends received from other taxable Canadian corporations.
   B. Mr. Blue’s taxable income is reduced by the amount of dividends received from a taxable Canadian corporation.
   C. A donation of $5,000 to a registered charity by XYZ Co. in 20×0 is used to reduce XYZ’s 20×0 $100,000 net income for tax purposes to a taxable income of $95,000.
   D. Little Co. has an $8,000 non-capital loss from a loss that arose in 20×0 and $10,000 of taxable dividends received from a Canadian corporation in 20×1, both of which will be deducted from Little Co.’s 20×1 net income for tax purposes.

7. Using general terms, explain how a change in control of a corporation can affect the net-capital losses and the non-capital losses.
When there is a change in control, net-capital losses are deemed to have expired. Non-capital losses may only be used against the business that originated the losses, or against income from a ‘similar’ business, provided that the original business is not terminated before the losses are used, and the original business must be carried on to earn a profit, or with a reasonable expectation of profit, in the year the loss is deducted.

Blooms: Remember
Topic: 11-03 Tax Impact of Shareholder/Corporate Relationships
Topic: 11-05 Loss Carry-Overs

8. Johnson Co. is a CCPC with active business income of $350,000 in 20xx. The company engages in retail and wholesale activities. Capital gains recognized by the company in 20xx totaled $84,000.
Johnson Co. will utilize a net capital loss carry-over of $28,000 on its 20xx tax return.

Required:

Applying tax rates and amounts for 2019, calculate the following for Johnson Co. for 20xx:

a) Net Income for Tax Purposes
b) Taxable Income
c) Federal Tax
Business income $350,000

Taxable capital gain 42,000
(A) Net Income for Tax Purposes $392,000
Less:
Net-capital loss (28,000)
(B) Taxable Income $364,000
Primary federal tax $364,000 × 38% = $138,320
Less federal abatement $364,000 × 10% = (36,400)
Refundable tax on investment income:
10 2/3 × lessor of:
$14,000 aggregate investment income (taxable capital gain less net-capital loss)
$14,000 (TI $364,000 – SBD amount $350,000) 1,493
Less small business deduction:
19% × the lessor of:
Taxable income $364,000
Active business income $350,000 (66,500)
Small business annual limit $500,000
General tax reduction 13% – ($364,000 – $350,000 – $14,000) 0
(C) Federal tax $36,913