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YORK UNIVERSITY
ADMS 4562 CORPORATE TAXATION IN CANADA
MIDTERM EXAM #1 – Sunday February 8, 2015
No. of Questions: 4 plus 11 multiple choice questions
Number of Pages: 13 (please ensure you have all pages)
Time allowed: 2 hours (75 marks)
Course Directors: Joanne Magee Section M Tuesday 7 - 10pm; Jason Fleming
Section N Wednesday 4 – 7pm; Section O Wednesday 7 – 10pm; and Section P
Thursday 4 - 7pm
________________________________________________________________
Instructions (Please read before you start):
1. You may use a non-programmable calculator and the handout which is
provided to you. You CANNOT use your Act, a dictionary, cell-phone or any other
aids.
2. The exam must be done in ink and not in pencil.
3. Time allotments are provided for each question as a guide to ensure that you
spend the appropriate amount of time on each question.
4. You only need to give Income Tax Act references in Question 4. Selected
parts of the Act are provided as part of this question.
5. Only one solution booklet can be used. You can write on both sides of each
page. Questions 1 to 4 are to be answered in your solution booklet. The multiple
choice questions are to be answered on this question paper.
6. If you feel you require more information in a fact situation, outline the exact
nature of the information clearly and specify how it would affect your decision, but
do not contradict facts or assume the abnormal.
7. You must show all your work and all your detailed calculations in order
to get full marks in Questions 1 to 4.
_________________
LAST NAME
_________________
GIVEN NAME
___________________
STUDENT #
DO NOT TAKE THE EXAM BOOKLET APART
YOU MUST HAND IN THE EXAM QUESTION PAPER
___________________
SECTION #
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Question 1: 16 marks (suggested time: 25 minutes)
Your client, Space Inc. is a Canadian controlled private corporation (CCPC) that operates
an active business in Canada and the United States. In its December 31, 2014 year-end
Space Inc. reported the following income statement for financial accounting purposes.
In 2012, the company sold capital property for proceeds of disposition of $65,000. The
adjusted cost base (ACB) of this capital property was $75,000. This loss has been carried
forward for tax purposes.
Required: (a) Compute Space Inc.’s minimum net income for tax purposes. Assume all
expenses are incurred to earn income and are reasonable unless otherwise indicated; and
(b) Compute Space Inc.’s December 31, 2014 capital dividend account (CDA) balance.
Assume that Space Inc. paid a capital dividend of $1,400 on October 1, 2014.
Note: you will lose 1 mark for every incorrect addition/deduction made in parts (a) and
(b) of your answer. You do not need to calculate taxable income or taxes payable.
Space Inc.
Income Statement
For the year ended December 31, 2014
Sales
$3,750,000
Cost of goods sold
1,650,000
Gross profit
2,100,000
Expenses:
Amortization (Note 1)
$140,000
Charitable donations to Canadian registered charities
Rent expense
3,500
250,000
Utilities expense
36,500
Salaries and wages expense
710,000
Accrued bonus expense (Note 2)
250,000
Professional hockey tickets expense (purchased to entertain large clients) 34,000
Golf club membership dues expense
Reserves expense (Note 3)
9,000
85,000
Continued on next page
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Legal & accounting fees (relating to share issuance costs
incurred on September 1, 2014)
Interest expense
50,000
8,000
(1,576,000)
Other income:
Capital dividends received on May 5, 2014 from a private
Canadian corporation
40,000
Gain on January 5, 2014 sale of marketable securities
(P of D was $60,000 and ACB was $23,000)
37,000
Net foreign business income (i.e., after deducting U.S. tax of $10,000) 35,000
112,000
Net income before tax
636,000
Provision for income tax
(180,000)
Net income
$456,000
Note 1
Space Inc. has correctly computed the maximum CCA that it can claim in 2014 is
$90,000
Note 2
The following is included in accrued bonus expense:
Accrued bonus that will be paid on June 10, 2015
Accrued bonus that will be paid on July 1, 2015
Note 3
The following is included in reserves expense:
Allowance for doubtful accounts receivable
Estimated warranty reserve (no warranty expenditures were
incurred in 2014)
$155,000
$95,000
$250,000
$15,000
$70,000
$85,000
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Question 2: 9 marks (suggested time: 15 minutes)
Cyber Ltd. is a public corporation whose head office is located in Ontario. Cyber Ltd.’s
business operations are carried on through permanent establishments in Ontario, Nova
Scotia and outside Canada (in the United States).
Required: Given the following information, compute Cyber Ltd.’s minimum taxable
income and federal income tax payable for 2014. Note: you will lose 1 mark for every
incorrect addition/deduction made when computing taxable income and federal income
tax payable. You do not need to calculate provincial income taxes and you can ignore
income tax treaties.
For Cyber Ltd.’s December 31, 2014 year-end it had the following sales revenue, rent
expense and salaries expense (in thousands):
Ontario
Nova Scotia U.S.
Total
Sales
$6,000
$400
$4,600
$11,000
Rent exp.
$1,000
$900
$100
$2,000
Salaries exp. $2,540
$960
$2,360
$5,860
Cyber Ltd. has already correctly calculated its December 31, 2014 net income for tax
purposes as follows:
Income from Canadian operations
$1,240,000
Gross income from U.S. operations in the U.S. (i.e.,
before deducting $100,000 of U.S. income taxes paid)
$800,000
$2,040,000
Canadian interest income (related to long-term investments)
$12,000
Taxable capital gains
$10,000
Taxable dividends received from Canadian corporations
$15,000
Net income for tax purposes
$2,077,000
 During 2014 Cyber Ltd. made charitable donations of $5,000 to a Canadian
registered charity.
 The company has net-capital losses carried forward from 1996 of $9,000
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Question 3: 17 marks (suggested time: 27 minutes)
It is now late December 2014 and you work for Ed, a CPA in public practice. You and
Ed have just finished meeting with his client, Mary Swanson. Mary is the sole
shareholder of Top Hat Ltd., a CCPC, with a December 31st year-end. Additional
information about Top Hat Ltd. is provided in the Appendix below.
Mary wants Top Hat Ltd. to pay her a taxable dividend in 2014 that will lead to the
company receiving the maximum possible dividend refund for 2014 and Ed has asked
you to compute this amount. Since Mary wants to minimize her personal income tax, she
does not want the dividend to be any more than this minimum amount. Ed tells you to
assume that the board of directors has already signed a resolution authorizing the
dividend and to not to worry about any personal tax calculations as he will deal with this
later.
Appendix
Top Hat Ltd.
Additional Information


Top Hat Ltd. was incorporated in 2002 by Mary. Mary owns all the shares and her
shares have an adjusted cost base of $2,000 and are worth $450,000
Top Hat Ltd. is a retailer that operates in Toronto and in the U.S. and for its
December 31, 2014 year-end it has correctly calculated the following taxable
income:
Canadian active business income (retailing)
Gross foreign business income (retailing)
Investment income (note 1)
Net income for tax purposes
Less: Division C deductions:
Net-capital loss (from 2013)
Non-capital loss (from 2013)
Taxable dividends received from Canadian corporations
Taxable income
Note 1
Specified investment business income consists of:
Gross foreign interest income
Taxable dividends received from Canadian corporations
Taxable capital gains
Continued on next page
$100,000
60,000
80,000
$240,000
(5,000)
(13,000)
(40,000)
$182,000
10,000
40,000*
30,000
80,000
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* The 2014 taxable dividends received consists of:
$20,000 from X Corp. (Top Hat Ltd. owns 2% of X Corp. and X Corp. did not
receive a dividend refund on the payment of the dividend); and
$20,000 from Y Corp. (Top Hat Ltd. owns 20% of Y Corp. and Y Corp. received
a $5,000 dividend refund, in total, on the payment of the $100,000 dividend)

Top Hat Ltd. has already correctly calculated its 2014 Part I tax as $14,683. This
$14,683 amount already includes the additional refundable tax (ART). When
computing Top Hat Ltd.’s Part I tax of $14,683, the following tax credits were
claimed:
Small business deduction
$17,000
General rate reduction
6,110
Non-business foreign tax credit
1,500
Business foreign tax credit
14,000

Top Hat Ltd.’s RDTOH balance at December 31, 2013 was $12,000 and the
company received a dividend refund for 2013 of $4,000
Assume that Top Hat Ltd.’s capital dividend account balance is nil

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Question 4: 11 marks (suggested time: 18 minutes)
Determine which, if any, of the corporations mentioned below are associated. You must
explain clearly your reasoning. You must give specific section, subsection and paragraph
(where applicable) references from the Income Tax Act to support your answer. When
giving references be specific. Don’t just list multiple references! Selected parts of the Act
are provided after the question.
There are no marks for commenting on corporations which are not associated. Note: you
may wish to draw a diagram to help you; however, there will be no marks awarded for
your diagram.
Also note: you will lose 1 mark for every incorrect association that you claim exists.
All information about the percentage of shares owned represents both votes and fair
market value (except where otherwise noted). Assume all unrelated persons deal with
each other and with the parties named below at arm’s length.




Robert owns 40% of the shares of Invest Co., 60% of the shares of Planet Co. and
30% of the shares of Dig Co. Robert’s cousin, Earl, owns 55% of the shares of
Invest Co. and Robert’s mother, Pearl, owns the remaining 5% of the shares of
Invest Co.
Invest Co. owns 50% of the shares of XY Inc. The remaining shares of XY Inc.
are owned by an unrelated person
Unrelated persons own the remaining shares of Planet Co.
Robert’s mother (Pearl) also owns 45% of the shares of Dig Co. Unrelated
persons own the remaining shares of Dig Co.
***
251 (2) Definition of “related persons”
For the purpose of this Act, “related persons”, or persons related to each other, are
(a) individuals connected by blood relationship, marriage or common-law partnership or
adoption;
(b) a corporation and
(i) a person who controls the corporation, if it is controlled by one person…
256 (1) Associated corporations
For the purposes of this Act, one corporation is associated with another in a taxation year
if, at any time in the year,
(a) one of the corporations controlled, directly or indirectly in any manner whatever, the
other;
(b) both of the corporations were controlled, directly or indirectly in any manner
whatever, by the same person or group of persons;
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(c) each of the corporations was controlled, directly or indirectly in any manner whatever,
by a person and the person who so controlled one of the corporations was related to the
person who so controlled the other, and either of those persons owned, in respect of each
corporation, not less than 25% of the issued shares of any class, other than a specified
class, of the capital stock thereof;
(d) one of the corporations was controlled, directly or indirectly in any manner whatever,
by a person and that person was related to each member of a group of persons that so
controlled the other corporation, and that person owned, in respect of the other
corporation, not less than 25% of the issued shares of any class, other than a specified
class, of the capital stock thereof; or
(e) each of the corporations was controlled, directly or indirectly in any manner whatever,
by a related group and each of the members of one of the related groups was related to all
of the members of the other related group, and one or more persons who were members
of both related groups, either alone or together, owned, in respect of each corporation, not
less than 25% of the issued shares of any class, other than a specified class, of the capital
stock thereof.
256 (1.2) Control, etc
For the purposes of this subsection and subsections (1), (1.1) and (1.3) to (5),
(a) a group of persons in respect of a corporation means any two or more persons each of
whom owns shares of the capital stock of the corporation;…
(d) where shares of the capital stock of a corporation are owned, or deemed by this
subsection to be owned, at any time by another corporation (in this paragraph referred to
as the “holding corporation”), those shares shall be deemed to be owned at that time by
any shareholder of the holding corporation in a proportion equal to the proportion of all
those shares that…
(e) where, at any time, shares of the capital stock of a corporation are property of a
partnership, or are deemed by this subsection to be owned by the partnership, those
shares shall be deemed to be owned at that time by each member of the partnership in a
proportion equal to the proportion of all those shares that…
(f) where shares of the capital stock of a corporation are owned, or deemed by this
subsection to be owned, at any time by a trust,…
256 (1.5) Person related to himself, herself or itself
For the purposes of subsections (1) to (1.4) and (1.6) to (5), where a person owns shares
in two or more corporations, the person shall as shareholder of one of the corporations be
deemed to be related to himself, herself or itself as shareholder of each of the other
corporations.
256 (2) Corporations associated through a third corporation
Where two corporations
(a) would, but for this subsection, not be associated with each other at any time, and
(b) are associated, or are deemed by this subsection to be associated, with the same
corporation (in this subsection referred to as the “third corporation”) at that time,
they shall, for the purposes of this Act, be deemed to be associated with each other at
that time, except that, for the purposes of section 125, where the third corporation is not a
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Canadian-controlled private corporation at that time or elects, in prescribed form, for its
taxation year that includes that time not to be associated with either of the other two
corporations, the third corporation shall be deemed not to be associated with either of the
other two corporations in that taxation year and its business limit for that taxation year
shall be deemed to be nil.
***
Multiple Choice: (11 two-mark questions; 22 marks total, suggested time 35
minutes)
Answer the following questions in the chart provided below. Each question is
independent of one another (unless otherwise stated) and is worth 2 marks.
Multiple Choice Answers:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
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Part 1
Your client, A Inc. is a CCPC with a December 31st year-end. A Inc. was incorporated in
2013 and has correctly computed its taxable income as follows:
2013: $500,000
2014: $600,000
A Inc. operates an active business in Canada and has claimed the maximum small
business deduction each year. It is not associated with any other companies and has
taxable capital of less than $10M. All of A Inc.’s income is Canadian business income
except for $15,000 each year of net rental income earned and a $10,000 eligible dividend
received in 2013. What is the balance in A Inc.’s general rate income pool (GRIP)
account as of December 31, 2014?
a) $72,000
b) $82,000
c) $61,200
d) $71,200
Part 2
Mark owns 40% of the shares of Money Co. which is a manufacturer. Money Co. is a
CCPC with an August 31st year-end. Mark received a loan in the amount of $50,000 from
Money Co. on June 15, 2014. The loan charges interest equal to the prescribed interest
rate. Assume that Mark received the loan on account of his shareholdings. What is the
latest date that Mark has to fully repay the loan principal without triggering negative tax
consequences?
a) August 31, 2014
b) August 31, 2015
c) December 31, 2014
d) December 31, 2015
The following information relates to Parts 3 and 4
Your client, G Inc., operates an active business in Ontario and has a December 31st yearend. On December 1, 2014, G Inc. sold a building and received $500,000 in proceeds of
disposition. G Inc. is planning on purchasing a new building for $575,000 (although it has
not yet made the purchase). The new building will go in CCA class 1 (6% CCA rate).
Both the old building and the new building was/will be used in G Inc.’s business. The
following facts relate to the old building: CCA class 1 (4% CCA rate); UCC balance was
$400,000; original cost was $460,000.
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Part 3
If G Inc. elects to use the exchange of property rules found in the Act, then G Inc. will
have to purchase its replacement building by which day?
a) December 1, 2015
b) December 1, 2016
c) December 31, 2015
d) December 31, 2016
Part 4
Assume G Inc. buys a replacement building for $575,000, within the applicable time
limit, and elects to use the exchange of property rules found in the Act. If G Inc. elects to
fully defer the capital gain and recapture on the sale of the old building, then G Inc. can
claim CCA on the following amount of UCC for CCA class 1 (6% CCA rate) related to
this purchase?
a) $575,000
b) $535,000
c) $515,000
d) $475,000
Part 5
Assuming income is below the annual business limit, all of the following types of
Canadian income earned by a CCPC are typically eligible for the small business
deduction, except for?
a) short-term rental income from renting out temporary excess factory space
b) taxable capital gains on the sale of a manufacturing building
c) recapture on the sale of computers used in a business
d) revenue earned by providing bookkeeping services to clients
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Part 6
Door Co. operates a manufacturing and retailing business in several provinces of Canada.
Mr. Door is the president and majority shareholder of Door Co. All of the following
would likely be considered a permanent establishment for Door Co. except for?
a) a home office in Mr. Door’s cottage in Quebec which he uses solely to keep track of
his personally owned investments
b) a warehouse owned by Door Co. in British Columbia
c) an office building rented by Door Co. in Ontario
d) a factory owned by Door Co. in Nova Scotia
Part 7
Your client, Serve Co., is a CCPC incorporated in Ontario with a December 31st yearend. Serve Co. has one employee, Bill, and it earns income by providing management
services. Bill owns all of the shares of Serve Co. Which of the following is true?
a) If Bill could reasonably be considered to be providing the services of a self-employed
independent contractor then Serve Co.’s income will be personal services business (PSB)
income
b) Since Serve Co. is a corporation all its income will be active business income
c) If Bill could reasonably be considered to be providing the services of an employee then
Serve Co.’s income will be personal services business (PSB) income
d) None of the above
Part 8
Your client, Small Time Co. is a CCPC with a November 30, 2014 year-end. Small Time
Co. is associated with one other company and the 2 companies have decided to equally
split the annual business limit in 2014. The taxable capital of Small Time Co. (together
with the associated company) is less than $10M. If Small Time Co. has Canadian active
business income of $230,000 in 2014, then the maximum small business deduction that it
can claim in 2014 is:
a) $39,100
b) $42,500
c) $85,000
d) $0
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The following information relates to Parts 9 and 10
Assume that your client, Joe, has a personal income tax rate of 40% and earns $100,000
of Canadian active business income each year as a sole-proprietorship. Joe is considering
incorporating on January 1, 2014 and if Joe incorporates his business his new company
will pay combined federal and provincial corporate income tax of 16%. The new
company will chose December 31st as its year-end. Assume all after-tax profit will be
paid as a non-eligible dividend to Joe.
Part 9
Given the facts/assumptions above, if Joe incorporates his business and receives a
dividend equal to after-tax profits, Joe’s 2014 federal dividend tax credit will be?
a) $31,920
b) $17,411
c) $15,120
d) $10,920
Part 10
Given the facts/assumptions above, but assuming that Joe would have to pay $25,000 of
personal tax on the dividend (i.e., ignore the actual personal tax on the dividend and
assume it is $25,000), the 2014 income tax savings or cost of incorporating Joe’s business
is?
a) Income tax savings from incorporating of $1,000
b) Income tax cost from incorporating of $1,000
c) Income tax savings from incorporating of $24,000
d) There is no income tax savings or cost
Part 11
When a father transfers shares (capital property) that have appreciated in value to a son,
which of the following is false?
a) If the sale price paid is more than FMV then the son’s ACB will be deemed to equal
FMV
b) If the sale price paid is less than FMV then the father’s proceeds of disposition will be
deemed to equal FMV
c) If the shares are gifted then there are no tax consequences to the father
d) If the shares are gifted then the father’s proceeds of disposition will be deemed to
equal FMV