CFE Technical review - master set Flashcards
1
Q
What are prime costs?
A
Direct materials and labour
2
Q
What are conversion costs?
A
Direct labour and manufacturing overhead
3
Q
Why is direct labour both a prime and conversion cost?
A
Because labour is directly attributed to a product, and is also incurred to convert a raw material into a finished product.
4
Q
What is a period cost?
A
Any non-manufacturing costs.
5
Q
What is a “relevant range”?
A
Range of units that a company can produce without changing their fixed cost levels.
6
Q
What are the three ways to estimate the cost function for manufacturing?
A
- High-low method
- Account Analysis
- Regression Analysis
7
Q
What are the advantages and disadvantages to using the high-low method to estimate costs?
A
A. Quick and easy to implement
D. Only serves as a “rough estimate” of costs due to the low volume of data. Assumes costs are indicative of “normal” activity
8
Q
How does the account analysis method work for estimating costs?
A
Requires a knowledge of the cost behaviours of each account. In some cases, can break out the cost analysis by separate inputs if there isnt enough correlation.
9
Q
How would you select a cost driver in calculating the rate to apply manufacturing overhead?
A
You would pick the activity that correlates most to the overhead costs. If the chosen driver increases in activity, the overhead costs would increase at a similar rate.
10
Q
What is variable costing?
A
Only variable manufacturing costs are included in inventory. Fixed costs are expensed along with other period costs.
Expensing fixed costs impacts the IS immediately as it doesnt go to inventory and then cost of goods sold.
IFRS/ASPE requires the use of absorption costing.
11
Q
What is absorption costing?
A
Inventoriable costs that include both fixed and variable costs.
12
Q
What is the difference between how normal and abnormal spoilage are recorded?
A
Normal spoilage is charged to manufacturing overhead, and abnormal is charged as a period cost.
13
Q
What methods are used to allocate joint costs in process costing?
A
- Physical output (lbs/meters/# of items produced)
- Sales value at split-off method (proportion of sales value of each product)
- Net Realizable value method (same as #2, but reduced by separate related costs)
- Constant gross margin% of NRV method (allocated so gross margin is the same across all joint products)
14
Q
What methods are used to allocate service department costs?
A
- Direct allocation method (allocated to operating departments based on the quantity of an allocation base)
- Step-down allocation method (to both op & service departments)
- Reciprocal allocation method (allocated simultaneously from all service departments to both operating and service depts)
15
Q
What is an equivalent unit?
A
A way to determine the fully completed units based on the inputs so far into partial units.
16
Q
What are the two methods of costing equivalent units/
A
Weighted average and FIFO
17
Q
How is spoilage treated in a process costing system?
A
Normal spoilage: Include in costs transferred out of WIP
Abnormal spoilage: Charge to the period - gets own loss account
18
Q
What is the difference between traditional and activity-based costing?
A
Traditional - allocated overhead using a single cost driver.
ABC - allocated costs by defining different cost pools and assigning a driver to each.
19
Q
What are some pros and cons to using Activity-based costing?
A
Pro
-improved accuracy
-identifies the activities to impact costs - can reduce unnecessary costs
Cons:
-Entensive and costly to implement
-may not align with GAAP, therefore another system would have to be used.
20
Q
What are joint products?
A
Products that share one or more production processes
21
Q
What is the physical output method?
A
Allocates joint costs by the volume of product converted into a particular joint product.
22
Q
What is the customer focus principle in total quality management
A
Organizations need to be focused on customer expectations and preferences when it comes to quality, price, and dependability.
23
Q
What is the executive leadership principle in total quality management
A
Executive leadership should provide a clear direction and an internal culture that drives product quality foremost.
24
Q
What is the people involvement principle in total quality management
A
Empower and involve employees in the quality initiative. Clear lines of responsibility and accountability over TQM should be established.
25
What is the process approach principle in total quality management needs to be fixed
Needs to be fixed
26
What is the systems approach principle in total quality management
Structure the systems to enhance quality initiatives, identify process interdependencies, and ensure correct measurement and evaluation of systems supporting TQM.
27
What is the continuous improvement principle in total quality management
Ensure that the TQM process is constantly evolving to meet the needs of the organization and its customers.
28
What is the factual approach in decision-making principle in total quality management
Facts and analysis should be relied upon to make TQM decisions
29
What is the supplier relationships principle in total quality management
Ensure that supplier relationships support the TQM process by procuring high-quality raw materials to help make the process smoother.
30
What is a static budget variance?
actual result (actual quantity*actual price) - static budget amount (standard quantity*standard price)
31
What does a flex budget variance tell us? (AP-SP)*AQ
Tells us of any variance in the cost to produce/sell an item in the form of the incremental amount saved/incurred
32
What does a sales volume variance tell us? (AQ-SQ)*SP
Tells us the incremental income gained or lost based on the extra units of output (or lower units than budgeted)
33
What is a mix variance?
Analyzes the variance associated with products that use a mix of different materials rather than just one.
34
What is the difference between a static and flexible budget?
A static budget sets revenue/expense goals based on a set volume of sales/production.
A flexible budget sets revenue/expense goals based on the actual volume of sales/production and multiplies by the set price.
35
What is JRP's mission?
We are committed to meeting all the needs of pet owners and pets by providing superior products that will keep pets healthy and happy throughout their lives. We want to give our customers the most captivating shopping experience that will ensure life-long relationships and loyalty. We want to be relevant not only to pets and pet parents, but also to our communities by supporting local animal-related charities.
36
What is JRP's vision?
To create a better everyday life for pet owners and their pets by providing the highest quality of healthy, innovative, fun, and safe products for cats and dogs in stores that are staffed by pet-loving and knowledgeable people.
37
What are JRP's core values?
1. Have a positive impact on our pet parents and create lasting relationships.
2. Sell only the highest-quality products that will foster healthy and happy pets.
3. Provide pet parents with knowledgeable advice on products to help them make the right decision for their pets.
4. Value, develop, and reward contributions, service, and skills of our employees.
5. Act always with the highest ethical standards, integrity, and honesty.
6. Care about, be involved in, and give back to our local communities.
38
What is operating leverage?
The effect that fixed costs have on operating income.
Low leverage means that fixed costs are low in reference to variable costs, meaning that profit is not as sensitive to changes in sales. High leverage means high fixed costs, low variable, and profit sensitivity to change in sales.
39
What are the three steps to recording foreign currency transactions?
1. Determine the functional currency
2. Translate to functional currency using the spot rate on the date of the transaction (avg rate allowed if transactions even over time period)
3. Translate at closing rate as of the SFP period.
40
What are the relevant GAAP references for foreign currency transactions?
IAS 21 & ASPE 1651
41
What are the disclosure requirements relating to foreign currency transactions?
1. Entity's functional currency
2. amount of foreign exchange gain or loss on the SCI
3. If there was a change to the functional currency, what the change was and the rationale.
42
What is the difference between IFRS and ASPE with respect to foreign currency transactions.
Per ASPE 1651, the fair value of non-monetary transactions is translated using the spot rate on the balance sheet date.
43
What are the steps to recognize revenue under IFRS?
1. Identify the contract
2. Identify the performance obligation(s)
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation.
5. Recognize revenue when each obligation is satisfied
44
What are the required attributes of a contract under IFRS?
1. Has been approved by all parties
2. Rights regarding goods and services to be transferred have been identified.
3. Payment terms can be identified.
4. Contract has commercial substance.
5. Probable that consideration will be collected.
45
What is commercial substance?
When the risk, timing, and amount of an entity's future cash flows is expected to change as a result of a transaction.
46
Other than the customer's financial situation, what is another reason why the full transaction price may not be collected from the customer?
If the seller offers a discount.
47
What criteria must be met for a contract modification to be recorded as a separate contract from the original?
1. Addition of distinct goods or services
2. Price of the contract is increased by the seller's stand-alone selling price of the product/service
48
What is the role of the board of directors?
Provide strategic direction to the organization and oversight of senior management's activities.
49
What is the "principle-agent" problem?
When executive management has a seat on the board of directors as they are directly involved in day-to-day operations.
50
Why would a board elect a committee?
When they don't have the skillset to make decisions on certain topics/technical areas.
51
What is the required composition of an audit committee?
1. Must have three members
2. Must be financially literate
3. Must be independent of the organization
52
When does the National Policy 58-201 — Corporate Governance Guidelines in Canada apply?
It is only applicable to Canadian Public Companies
53
What are the two considerations in determining whether goods and services are distinct?
1. Whether the customer can benefit from the goods/services on its own
2. Whether the promise to transfer to good or service is separately identifiable from other promises in the contract.
54
Under what situations can consideration in a transaction vary from a transaction price?
1. Volume discounts
2. Rebates
3. Performance bonuses
4. Returns
55
What are the three criteria under ASPE to recognize revenue?
1. Performance has been achieved
2. Revenue can be measured reliably
3. Collection is reasonably assured
56
What are the two ways to measure performance on service contracts under both IFRS and ASPE?
1. Percentage of completion method
2. Completed contract method
57
Under ASPE, how is revenue from interest, royalties, and dividends typically recognized?
Recognized when the amount to be received can be measured and is determined to be collectable.
58
What are two methods to estimate the stand-alone selling prices of deliverables in a contract under ASPE 3400?
1. Adjusted market assessment approach (Price customers willing to pay)
2. Expected cost plus a margin approach.
59
What are the main tests to determine the existence of an employee or contractor relationship?
1. Intent of the relationship
2. Control
3. Ownership of tools
4. Subcontract the work or hire assistants (by the worker)
5. Financial risk (by the worker)
6. Responsibility for investment and management
7. Opportunity for profit
60
Why would a company prefer to hire a contractor over an employee?
1. Short-term commitment
2. No requirement to withhold source deductions or benefits
61
What is the impact on the employer if an employee was incorrectly treated as a contractor?
The company could be liable for both the employer and employee portion of CPP and EI, as well as income taxes not withheld. Penalties may also apply.
62
When would an employee include a bonus with employment income in the year declared rather than paid?
When the bonus is paid more than three years after the year end of the employer in which it is declared. (Salary deferral arrangement)
63
Explain the situations when counselling services paid by the employer are taxable benefits, and when they aren't.
Taxable: Financial counselling and Tax return prep
Non-taxable: mental/physical health, and re-employment or retirement of an employee.
64
Explain when employee discounts are, and are not taxable benefits.
Taxable: Price paid is less than fair value of merchandise, and only received because of their employment. Difference between fair value and price paid is the benefit.
Non-taxable: Price paid is less than fair value of merchandise BUT similar discounts are available to the general public.
65
Explain when loyalty reward points are and are not taxable benefits.
Taxable: Points are earned on the company credit card. OR employee permitted to use own credit card to pay for expenses of other employees to earn personal points.
Non-taxable: All of the following - points converted to cash, plan is not alternative form of compensation, and not for tax avoidance purposes.
66
Explain when gifts and awards are, and are not taxable benefits.
Taxable: 1) non-cash in excess of $500 in a year; 2) cash or near cash; 3) Given related to performance; 4) to non-arm's length employees; 5) FMV of each gift is used to calculate the total value of gifts and awards given in the year.
Non-taxable: 1) non-cash up to an aggregate of $500 per year; 2) immaterial such as coffee, tea, mugs; 3) length of service award when it's for at least 5 years of service, non-cash up to $500, and paid to arm's length employee
67
Explain when health care premiums are, and are not taxable benefits.
Taxable: Paid for public health-care plan and payment is not mandated to be paid by the employer.
Non-taxable: premiums on private health-care plans.
68
Explain when life insurance premiums are, and are not taxable benefits.
Taxable: If the employee is the beneficiary of the plan.
Non-taxable: Employer is the beneficiary.
69
Explain when meals are, and are not taxable benefits
Taxable: Subsidized meals offered to an employee at less than cost to the employer (diff between cost and price by employee)
Non-Taxable: Price paid by employee is equal to employer cost.
70
What are the taxable benefit implications when an employer pays 100% of the premium for accident and sickness insurance plans?
Premiums are only taxable for non-group plans. Benefits for any claims are only taxable under group plans.
71
What are the taxable benefit implications when only part of the premium for accident and sickness insurance plans are paid by the employer?
Same as when 100% of premiums are paid by employer, but on benefits received under group plans, employees can deduct the premiums they paid for the period since the last time benefits were received until the end of the year the current benefit was received.
72
Explain when motor vehicle allowances from an employer are, and are not considered taxable benefits.
Taxable: 1) allowance is not based solely on kilometers travelled in conducting the employer's business; 2) employee received both allowance and reimbursement for motor vehicle expenses; 3) reimbursement is greater than CRA limits ($0.61 for 2022)
Non-Taxable 2) Allowance is less than or equal to CRA's per kilometer limit. Entire allowance taxable if in excess.
73
Explain when travel allowances (other than motor vehicle), are, and are not taxable benefits
Depends on reasonability. Compares how close the allowance received was to the amount spent.
74
How are taxable benefits calculated for use of an employer-owned motor vehicle?
Standby charge + operating cost benefit - reimbursement by employee
75
How is a standby charge calculated for an automobile owned by the employer that is not used more than 50% of the time for employment purposes?
2% x (Full cost of auto x (total available days when employer owned the vehicle/30))
76
How is a standby charge calculated for an automobile leased by the employer that is not used more than 50% of the time for employment purposes?
2/3 x (lease payments for the year including GST - portion of payments made for auto insurance)
77
When would a standby charge be reduced?
All of the following:
1) employee required to use auto for employment purposes
2) used more than 50% for employment
3) personal-use kms for the year are less than 20,004 (OR 1,667/month if not available for the whole year)
78
How do you calculate a standby-charge reduction?
personal-use kms / (1,667 * gross standby charge)
79
How is an operating cost benefit calculated for an employer-owned auto?
If not used more than 50% for employment purposes: personal kms * prescribed rate
If used more than 50% for employment: lesser of
1) personal kms * pres rate and 2) one half of standby charge
80
How is an operating cost benefit calculated for an employee owned/leased automobile?
(personal km/total) * actual operating costs paid by employer
81
How long do employees have to reimburse auto expenses to their employer to reduce their taxable benefit?
By December 31st for the standby charge and within 45 days of Dec 31st for operating cost benefit.
82
How do you calculate the imputed interest benefit under ITA 80.5 that is not for a home purchase or relocation loan?
(prescribed rate for quarter - rate paid by employee) x (days loan o/s in quarter/365) x (amount of loan outstanding)
83
How do you calculate the imputed interest benefit under ITA 80.5 that IS for a home purchase or relocation loan?
((Lesser or prescribed rate for quarter at time of loan and current rate)-rate paid by employee) x (# of days loan outstanding in quarter/365) x loan amt outstanding
84
When is the employment benefit determined for an employee of a public company? (stock options)
On the exercise date (FMV - exercise price) x shares acquired
85
When is the employment benefit determined for an employee of a CCPC? (Stock Options)
On the selling date. Calculated the same as for public corp employees.
86
When is a division C deduction available for stock options?
FMV of share on exercise date equal to or less than exercise price
87
What is the additional condition that could be met for a Div C deduction on stock options for an employee of a CCPC?
FMV of share on grant date is greater than exercise price, but shares held for at least two years after option is exercised.
88
When may a Div C deduction be claimed on stock options
Public corp employee: Year option is exercised
CCPC employee: year shares are sold
89
When can legal expenses be deducted from employment income?
The amount incurred to collect remuneration owed to the employee by a current or past employer.
90
What conditions must be present to deducted salesperson expenses from employment income?
1. The individual is employed to sell property or
negotiate contracts.
2. The individual is required by his or her
employment contract to pay his or her own
expenses.
3. The individual is required to work away from
his or her employer’s place of business.
4. The individual was paid fully or in part by
commissions.
5. The individual was not in receipt of a nontaxable
travelling allowance.
6. Deductible expenses cannot exceed
commissions received by the employee in
the year.
91
What are the conditions that must be met to claim travel expenses against employment income?
1. The individual is ordinarily required to carry
out his or her duties of employment away
from his or her employer’s place of business.
2. The payment of the travelling expenses
by the employee is required under the
individual’s employment contract. Normally,
this requirement is met if the T2200 is
completed by the employer.
3. The employee did not claim a deduction
for the year as a commissioned salesperson
under ITA 8(1)(f).
4. The employee is not in receipt of a taxexempt
allowance for travel expenses.
92
What are the conditions that must be met to claim motor vehicle expenses against employment income?
1. The employee is required under the contract
of employment to pay motor vehicle
expenses.
2. The employee is ordinarily required to carry
on the duties away from the employer’s place
of business or in different places. Normally,
this requirement is met if the T2200 is
completed by the employer.
3. The employee did not claim a deduction
for the year as a commissioned salesperson
under ITA 8(1)(f).
4. The employee did not receive a non-taxable
allowance for motor vehicle expenses.
93
What are the conditions for an employee to deduct home office expenses?
1. Individual performs more than 50% of employment duties at home.
OR
2. Both 1) space is used exclusively to earn employment income AND 2) used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing employment duties.
94
What home office expenses are deductible provided the employee meets the main criteria?
Utilities & repairs/maintenance
95
What are the extra home office expenses that can be claimed by a commissioned sales person?
Insurance on home
Property taxes on home
96
What factors are considered in determining the benefit under a defined benefit pension plan?
A predetermined percentage of the employee's salary over a specified number of years; and the number of years of service provided by the employee
97
What is the benefit under a defined contribution plan based on?
The amounts contributed and plan earnings
98
What is a deferred profit-sharing plan?
Savings plan with contributions made by employer only, based on the profitability of the corporation. Contributions must vest with the employee after two years of employment.
99
What is the penalty for over-contributions to an RRSP?
1% per month on the excess contributions for each month that the limit was exceeded by $2,000 in the year.
100
What is the criteria to withdraw from an RRSP under the Home Buyers' Plan?
1) Withdrawal is for a home that will be the residence of the taxpayer
2)Taxpayer or spouse have not owned a home in the prior four full calendar years
3) Withdrawal is $35,000 or less (after March 19 2019, 25k before)
101
When must the RRSP withdrawal be repaid under the Home Buyers' Plan?
equal annual instalments over 15 years starting in the second tax year, following the year the withdrawal was made.
102
describe the Lifelong Learning Plan
Allows for withdrawal from RRSPs to finance personal, or spouse's education without including withdrawal in income.
Limited to four calendar years for $10,000 per year up to $20,000 overall.
Must be enrolled in a designated institution in full-time or higher requiring not less than 10 hours per week for at least three consecutive months in the year.
Repayment must be made in equal annual instalments over a 10-year period, starting no later than the fifth year after the first withdrawal under the plan.
103
When must an RRSP be terminated?
When the annuitant turns 71
104
Describe RESPs
Allows to save for children's education, defers tax, and taxed int he beneficiary's hand in the future year when post-secondary is pursued.
105
How long can contributions can be made to an RESP?
35 years. 40 if beneficiary is disabled.
106
What is the Canada Education Savings Grant?
Government makes contributions to an RESP in addition to an individual's contributions.
107
What is the cost recovery method?
It is a method to recognize revenue under IFRS where an entity recognizes revenue to the extent that costs are incurred until it can reasonably measure the outcome of a performance obligation.
108
How are onerous contracts treated under IAS 37?
Any expected losses should be charged immediately to cost of goods sold. Credit would be to Revenue for the amount earned and the excess cost credited to the related asset (to reduce it)
109
What is a bill and hold arrangement?
When an entity bills a customer for a product but retains physical possession of the product until transferred to the customer at a point in time in the future.
110
What criteria must be met per IFRS 15 to recognize revenue from a bill-and-hold arrangment?
1. Control must have changed hands
2. Reason for arrangement is substantive (customer-initiated)
3. Goods identified separately as belonging to the customer
4. Goods ready for physical transfer
5. Entity cannot use the goods or direct to another customer
111
What is a "principal-agent" relationship?
Where one party, the "agent" arranges for the provision of goods or services to a customer for a third party, the "principal"
112
What are the additional criteria that must be met under ASPE to recognize revenue from a "bill-and-hold" arrangement?
1. Customer has made a fixed commitment to purchase the goods
2. Arrangement requested by the buyer.
3. reasonable delivery schedule consistent with the buyer's business purpose.
113
What period is the accelerated investment incentive applicable?
November 21, 2018 to December 31, 2023.
Modified AII applicable from 2023 to 2027 to phase it out.
114
Which assets are included in CCA class 8?
Furniture and fixtures; office equipment, including fax machines, copiers, and any equipment not included in another CCA class
115
What is the difference between the assets included in CCA class 10 vs 10.1
Class 10: Auto equipment, passenger vehicles up to $30k before tax.
Class 10.1: Passenger vehicles costing more than $34,000 before tax. Placed in separate classes and recapture/terminal loss does not apply.
116
What is included in CCA class 13?
Leasehold improvements
117
What is included in CCA class 14?
Patents, franchises, concessions, or licences that have a limited legal life (patents with a limited legal life may be included in either Class 14 or Class 44).
In the year of acquisition, the CCA claim is pro-rated for the number of days owned in the year and the CCA that may be claimed is 1 1/2 of that amount.
118
What is the reference that explains each CCA class?
Section 1100 of the Income Tax Regulations
119
What was the rule implemented in Budget 2021 with respect to CCA claims?
Allows for immediate expensing of the cost of eligible properties acquired by a CCPC on or after April 19, 2021, and by a sole proprietorship, or certain partnerships, on or after January 1, 2022, and which are available for use before 2024.
Max that may be expensed in a year is $1,500,000 and is shared amongst associated CCPCs.
120
How is CCA calculated on class 13?
Lesser of:
1. 1/5 * cost
2. 1/(# of 12-month periods from beg of tax year costs incurred to end of lease term (capped at 40 years)) * Cost
121
How is CCA calculated on class 14?
Year of acquisition: (cost of asset/legal life) * (days rem in tax year from acq/total days in tax year) * 1.5 (AII)
122
What separate class rules are available for CCA?
Class 8: On properties costing more than $1,000
Class 1:
Rentals - $50,000 or more, cannot avoid recap/term loss
Non-res buildings: non-manufacturing used >90% business gets 6% rate; manufacturing gets 10%. TP must elect separate class to get these rates.
123
When is the earliest that CCA may be claimed?
Earlier of the time that the depreciable capital assets are put into use and the second taxation year following the year of acquisition.
124
Why is equity income/losses not included in determining net income for tax purposes?
Because any gains/losses on the investment are not realized.
125
When can life insurance premiums be deductible with the corporation as the beneficiary?
1. It is required by a lender as collateral for a loan
2. Interest payable on the loan is deductible
126
What are the rules on claiming expenses relating to conventions?
-limited to two conventions per year
-held by a business or professional organization
-in connection with the TP's business
-reasonable location given organization's territorial scope (nothing in Hawaii)
127
What is the difference between a mission and vision statement?
A vision statement described where an organization is going, and the mission described how they are going to achieve their vision.
128
What is a key success factor?
A factor that is uniquely important to achieving an entity's strategic goals.
129
What is a key performance indicator?
Measures how an organization is doing against its objectives.
130
What are strategies that can be used by someone purchasing shares in a company to reduce risk?
1. Increase due diligence, such as searching for unrecorded liabilities;
2. negotiate a right to set off contingent/unknown liabilities from the purchase price;
3. negotiate a holdback of the purchase price to cover unknown liabilities.
131
What are the tax implications to the vendor when accounts receivable are sold through an asset sale?
-Any reserve previously claimed is added back and classified as active business income.
-Difference between that fair value and face value of the receivables considered a capital loss (IF no ITA 22 election)
132
What are the tax implications to the vendor when non-depreciable capital property is sold through an asset sale?
Results in a capital gain or loss. 50% goes to aggregate investment income and the other 50% goes to the CDA balance.
133
How are recapture and terminal losses treated by a corporation in an asset sale?
Classified as active business income
134
How do you calculate the after-tax cash kept on the sale of corporate assets?
1. Determine the tax impact to the corporation on the sale of each asset.
2. Determine corporate tax payable on income generated from the sale of assets and on any income generated in the corporation up to the date that the assets are sold.
3. Determine the after-tax cash in the corporation available to redeem the shares.
4. Determine the seemed dividend and capital gain or loss on redemption of the shares.
5. Determine personal tax payable as a result of the redemption of shares and any bonus paid to the shareholder prior to winding up the company.
6. Determine after-tax cash retained as the difference between cash used to redeem the shares and the personal taxes payable.
135
What is the difference between the weighted average and FIFO methods in process costing?
Weighted average doesn't separate the cost of the work done in the previous period from the work done in the current period. FIFO separates the costs and units of each period.
136
What are the asset-based approaches to performing valuations?
Liquidation, adjusted net asset, and replacement cost
137
What are the income-based approaches to performing valuations?
Capitalized cash flow, Discounted cash flow, capitalized earnings, and discounted earnings
138
What are the market-based approaches to performing valuations?
Assets with an active market, and comparable transaction.
139
When would a liquidation approach be used for a valuation?
When an entity is not considered a going concern.
140
When would an adjusted net asset approach be used for a valuation?
Entity that IS a going concern, but does not maintain active operations (like a HoldCo)
141
When would a capitalized cash flow approach be used for a valuation?
If an entity has consistent cash flows that are a reflection of future operations.
142
When would a discounted cash flow approach be used for a valuation?
If past cash flows are not representative of future cash flows of a company, but management can prepare reliable projections of future cash flow.
143
When would a capitalized earnings approach be used for a valuation?
If an entity has consistent earnings that are a reflection of future operations.
144
When would a discounted earnings approach be used for a valuation?
When future earnings are expected to be volatile before levelling out.
145
When would a market-based valuation approach be used?
When a company is a going concern, and information required to determine a valuation multiple is both publicly available and reasonably comparable.
146
What are the steps to perform a liquidation valuation?
1. Balance sheet asset values adjusted to NRV at valuation date.
2. Amounts required to settle liabilities deducted
3. Corp IT calculated based on tax consequences from the sale of assets. Resulting in proceeds available for distribution
4. Personal IT calculated to determine the value to the shareholders of the company
147
What are the steps to perform an adjusted net asset valuation?
1. Balance sheet asset values adjusted to FMV at valuation date.
2. Foregone tax shield deducted
3. Latent taxes and selling costs deducted.
148
When would a foregone tax shield arise?
If the FMV of assets is greater than their UCC, the purchaser of the assets gets a bump-up to the FMV. Calculated as the net present value of the additional CCA deductions not available to a purchaser of shares.
149
How do you calculate the foregone tax shield on the sale of assets?
[(FMV * CCA rate * tax rate)/(Discount + CCA rate)]
* [(1+(Discount rate *1.5))/(1+Discount rate)]
- [(UCC*CCA rate*tax rate)/(Discount rate + CCA rate)]
Calculate the present value of total CCA deductions based on FMV, multiplied by the PV of the accelerated investment incentive, subtract the PV of CCA deductions based on the UCC.
150
What conditions must be met for shares to be considered from a Qualified Small Business Corporation?
1. Corp is a CCPC
2. All, or substantially all (90%) of the FMV of assets used mainly in an active business carried on primarily in Canada
3. Shared owned by TP or spouse
4. Shares owned by TP, spouse, or partnership related to TP for 24 months
5. More than 50% of FMV of assets of corp used principally in active bus in Canada throughout 14 months.
151
What are the implications that arise in an acquisition of control?
1. Deemed year end
2. Loss expiry
3. Non-capital Losses
4. Recognition of accrued losses/election to recognize gains
5. Small Business Deduction
6. CCA immediate expensing (1.5 mil)
152
What are the events that cause a deemed disposition of capital property?
Change in use, death of taxpayer, ceasing to be a resident, gifting of property
153
What are the tax rules relating to property tax and interest incurred on vacant land?
Only deductible to the extent of income earned on the land. Excess added to ACB.
154
What is the difference between a call and put option?
For a call option, the grantee pays the grantor for the right to purchase a property from them, for a put option, the grantee pays the grantor for the right to sell a property to them.
155
What are the three conditions for a loss to be considered superficial?
1. Taxpayer, spouse, or corp controlled by one of them sells a property;
2. Any of these parties acquire the same or identical property the 30-day period before or after the sale of the property in question;
3. Any of these parties still own the property in question after 30 days following the sale of the property.
156
What are the tax rules for an allowable business investment loss?
One half of the loss can be deducted from any source of income.
Can be carried back three years and forward 10.
Converts to capital loss if expires.
157
What are the criteria for a property to be considered a principal residence?
1. Any housing unit
2. Must have been ordinarily inhabited during the year by taxpayer, their spouse, child, CLP, or former spouse/CLP
158
What is the difference in tax treatment of PUP and LPP gains/losses
Only losses from LPP can be deducted at 50% against gains on LPP to be carried back 3 years and forward 7.
159
When do change-in-use rules apply for tax purposes?
When a property changes purpose from income producing to non-income producing and vice versa.
160
How do you calculate the capital cost of a property changed from personal use to income producing?
Cost + 50% of gain
161
What election is available on properties used for income-producing purposes that were changed to a principal residence?
If no CCA claimed, TP may elect to not have a deemed disposition and allows to claim PRE up to four years prior to the year of the change in use.
Reduces overall tax as gain that would have arisen on deemed disposition can be reduced by applying the PRE when ultimately sold.
162
What type of share qualifies for the treatment of a business investment loss?
A share in a small business corporation
163
What is the carryback/forward period for ABILs?
Back 3, forward 10
164
When can capital gains be deferred on the sale of SBC shares?
1. Shares are of an eligible SBC for 185 days prior to the sale
2. Replacement shares in one or more SBCs were acquired within 120 days of the END OF THE YEAR in which the original shares were sold.
165
How does taxpayer elect to defer a capital gain on when a replacement property is purchased?
Claim capital gain as per normal in year of sale, then in the tax year following when the replacement property is purchased, file an election to defer the capital gain on the original property by filing an amended tax return.
166
What is the gain that can be deferred under replacement property rules?
lesser of:
1) gain calculated normally
2) Cost of replacement property less cost of disposed property (determines the amount of the gain on the original property that was reinvested)
167
What are the tax implications of a deferred capital gain and recapture
Deducted from the ACB of replacement property which will increase potential future gains.
168
List Division C deductions from an individual's net income for tax purposes?
1. Employee stock options
2. Guaranteed income supplement
3. Social assistance
4. Worker's compensation
5. Tax treaty exempt amounts
6. Loss carryovers
7. LIfetime capital gains
8. Northern residents
169
Where can you find the rules related to association in the Income Tax Act?
Section 256
170
What are the association rules in the ITA
a) One corporation controls the other;
b) Both corporations controlled directly/indirectly by the same group of persons
c) The person who controls Corp A, is related to the person who controls Corp B, and either of those persons owns at least 25% of the shares in the other corporation.
d) a person owns corp A, and is related to each person in the group that controls corp B, and owns at least 25% of shares in Corp B.
e) Corp A and B were each controlled by a related group, and each member of one of the related groups is related to each member of the other, and at least one member in a particular group owned at least 25% in the other corporation.
