CGA Taxation

Question 1

4 different sources of income

Answer 1

1. Office or employment
2. Business
3. Property
4. Other

Question 2

3 considerations re income sources

Answer 2

1. What are the basic rules attributable to that source?
2. What are the inclusions for that source?
3. What are the deductions for that source?

Question 3

4 key differences in sources of income

Answer 3

1. Employment income versus business income
2. Business income versus capital gain
3. Business income versus property income
4. Business income versus hobby

Question 4

5 criteria to establish if self-employed

Answer 4

1. Control
2. Ownership of tools
3. Financial risk
4. Integration
5. Specific result

Question 5

4 criteria to distinguish between business income and capital gain

Answer 5

1. Period of ownership
2. Intent (primary & secondary)
3. Number/ frequency transactions
4. Relation of transaction to taxpayer’s business/ expertise

Question 6

With a business, 2 reasons losses might be deductible

Answer 6

1. IF proposed amendments to the Income Tax Act that state a loss is only deductible if it is from a source
2. IF there is a reasonable expectation of cumulative profit

Question 7

4 basic adjustments to modify accounting income and arrive at taxable income

Answer 7

1. Depreciation versus capital cost allowance (CCA) and cumulative eligible capital amounts (CECA)
2. Taxable versus non-taxable
3. Restrictions (meals and entertainment)
4. Incentives (cost of issuing shares)

Question 8

6 tests to determine if an item is tax deductible

Answer 8

1. Income-earning purpose
2. Capital
3. Exempt income
4. Accounting reserves
5. Personal expenses
6. Reasonableness

Question 9

5 income from property (passive income) items

Answer 9

1. Interest
2. Dividend
3. Royalty
4. Rental
5. Income attributed to shareholder

Question 10

3 examples of deductions used to calculate taxable income for INDIVIDUALS only

Answer 10

1. Capital gains deduction
2. Stock option benefits deduction
3. Home relocation loan deduction

Question 11

2 examples of deductions used to calculate taxable income for CORPORATIONS only

Answer 11

1. Charitable donations

2. Qualifying dividend income

Question 12

4 types of losses from previous years applicable to both INDIVIDUALS and CORPORATIONS

Answer 12

1. Non-capital losses
2. Net capital losses
3. Farm losses
4. Restricted farm losses

Question 13

4 basic classifications of income for a private corporation

Answer 13

1. Active business income
2. Specified investment business income
3. Personal services business income
4. Aggregate investment income

Question 14

Small business deduction (under Part I - Tax Payable) calculation principle

Answer 14

17% OR the lesser of:

• Active business income
• Taxable income
• Business limit

Question 15

Refundable tax on investment income under Part 1 - Tax Payable calculation principle

Answer 15

6 2/3% OR the lesser of:

• Aggregate investment income
• Taxable income less small business deduction threshold

Question 16

Dividend refund calculation principle under Part IV

Answer 16

The lesser of:

• 1/3 of the taxable dividends paid
• The refundable dividend tax on hand amount

Question 17

4 ways tax planning uses features of the tax system to reduce tax payable

Answer 17

1. Managing the use of deductions, credits, and other rules provided in the Income Tax Act;
2. Shifting income from one time period to another;
3. Transferring income to another entity;
4. Converting the nature of income from one type to another.

Question 18

2 types of acts that constitute tax evasion

Answer 18

1. Making false or deceptive statements

2. Filing false or deceptive documents

Question 19

2 examples of areas of tax planning where the individual has control over options AND that apply primarily to private corporate situations

Answer 19

1. The impacts of paying a salary or a dividend

2. Remuneration planning

Question 20

3 examples of passive income that may be subject to withholding tax under Part XIII of Tax Act for non-residents

Answer 20

1. interest,
2. rents,
3. dividends

Question 21

2 methods of calculating Part IV tax

Answer 21

1. if payor is a non-connected corporation = 1/3 of the dividends received .
2. if the payor is a connected corporation.= portion of the dividend refund received

Question 22

What does corporate aggregate investment income include?

Answer 22

It includes all the corporation’s property income, EXCEPT dividends deducted in arriving at taxable income, PLUS the net taxable capital gains for the year, LESS any net capital losses

Question 23

Corporate federal tax abatement calculation principle

Answer 23

10% of taxable income earned in a province (if not earned in a province, not applicable)

Question 24

2 types of passive income covered under the “kiddie tax” (applicable to people under the age of 18) and rate

Answer 24

29% of:

1. Taxable dividends
2. Other shareholder benefits

Question 25

2 conditions under which eligibility for capital gain exemption might be considered

Answer 25

1. it the capital gain is derived from a qualifying small business share (QSBS) AND 2. if the taxpayer is an individual

Question 26

3 examples of "relationships" in federal tax law and to what/whom they apply

Answer 26

1. "related" can be applied between two or more individuals, two or more corporations, or between an individual and a corporation, TO DETERMINE ARM'S LENGTH. 2. "associated" applies only between two or more corporations, TO CALCULATE SMALL BUSINESS DEDUCTION 3. "connected." applies only between two or more corporations, TO CALCULATE Part IV TAX LIABILITY

Question 27

2 key differences between capital cost allowance (CCA) and depreciation

Answer 27

1. CCA follows a pool concept in which assets of the same class are combined into a pool of assets, and this pool balance = the basis for calculating CCA. 2. Depreciation expense calculates the expense on an asset-by-asset basis.

Question 28

variables affecting tax on dividend income

Answer 28

1. Is dividend taxable or not? A TAXABLE dividend is included in the calculation of income. A NON-TAXABLE dividend is paid from the capital dividend account (CDA) of the payor. The payment is at the payor’s option 2. How much of the dividend is included in income? If an INDIVIDUAL receives a taxable dividend, it must be grossed up, so dividend + gross-up is included property income. If a CORPORATION receives a taxable dividend, there is no gross-up provision; so only the amount of the taxable dividend is included in income.

Question 29

4 examples of items included as employment income

Answer 29

1. wages or salary 2. standby charge for the use of an employer’s automobile, 3. employer-paid life insurance, and 4. stock option benefits.

Question 30

The difference between business income and property income

Answer 30

Business income is income from an active source. | Income from property is a return on equity (passive income).

Question 31

Distinctions in tax treatment is between a capital loss and a loss from business or property

Answer 31

Capital losses can only be used to reduce capital gains. | A loss from business or property can be offset against all other sources of income.

Question 32

4 steps in computing income tax

Answer 32

1. Determine if person is a Canadian resident, 2. Calculate income (including "world income". 3, Compute taxable income (pick up losses and/or capital gains for an individual or dividend income deduction for a corporation. 4. Calculate tax payable.