STUDENT NAME:________________________
STUDENT NUMBER:______________________
McGill University
Desautels Faculty of Management
ACCT 486 - FALL 2015
QUIZ – Version A
SOLUTION
INSTRUCTIONS:
1. WRITE THE APPROPRIATE ANSWER IN THE SPACE PROVIDED
BELOW IN CAPITAL
LETTER ONLY.
2. THE QUIZ MUST BE RETURNED IN FULL. FAILURE TO DO SO WILL
RESULT IN A MARK OF ZERO.
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2.
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D
D
E
B
B
B
C
A
B
A
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B
C
B
A
D
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C
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1. When dividends are paid by one taxable Canadian corporation to another
taxable Canadian corporation, the recipient corporation will include the
dividends in:
A. Both Taxable Income and Net Income For Tax Purposes, but with an
offsetting credit against Tax Payable.
B. Both Taxable Income and Net Income For Tax Purposes, with no
offsetting credit against Tax Payable.
C. Neither Taxable Income nor Net Income For Tax Purposes.
D. Net Income For Tax Purposes, but not Taxable Income.
E. Taxable Income, but not Net Income For Tax Purposes.
2. With respect to the determination of Tax Payable for a corporation, which of
the following statements is NOT correct?
A. The federal tax abatement percentage is reduced when less than 100
percent of the corporation’s income is allocated to a province.
B. The basic tax rate applicable to corporations is 38 percent.
C. Provincial corporate taxes are based on a flat rate applied to a taxable
income figure.
D. Full rate taxable income includes any income that is not eligible for
the small business deduction.
3. The 17 percent small business deduction is only available on:
A. Income earned in Canada by a resident corporation.
B. The first $500,000 in manufacturing and processing income earned by a
Canadian controlled private corporation.
C. The active business income of a private corporation with no more than five
full-time employees devoted to the production of property income.
D. All of the income earned in Canada by a Canadian controlled private
corporation.
E. None of the above.
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4. In which of the following situations is a corporation earning incidental property
income?
A. Regina Corporation has built up its cash reserves over several years, and
its staff invests this surplus cash in a variety of publicly traded
corporations, earning dividend income. This income is approximately 10
percent of corporate income on an annual basis.
B. A branch of Moose Jaw Corporation invests surplus cash for 2-3
months every year earning interest income which is less than 1
percent of corporate income.
C. Saskatoon Corporation has one rental property which is leased to a retail
outlet. The net rental income from this property is 5 percent of corporate
income.
D. Lethbridge Limited sells its factory building resulting in a capital gain which
is about 10 percent of corporate income.
5. Which of the following types of dividends would not be subject to a gross up
and would not generate a dividend tax credit to the individual shareholder
who receives it?
A.
B.
C.
D.
A stock dividend.
A capital dividend.
A deemed dividend.
A dividend in kind.
6. Aggregate investment income, as defined in ITA 129(4), includes the
following:
A. Dividends from any source.
B. Net taxable capital gains for the year, less net capital loss carry
overs deducted.
C. Interest and rents, but not foreign source property income.
D. Interest, rents, and dividends.
7. During the current year, Norton Tools Ltd. has net taxable capital gains of
$45,000, receives dividends from taxable Canadian corporations of $34,000,
and earns interest income of $21,000. Taxable Income for the year equals
$280,000, of which $210,000 is eligible for the small business deduction. The
Company’s additional tax on its investment income is:
A.
B.
C.
D.
$4,667.
$6,667.
$4,400. [(6 2/3%)(45,000 + 21,000)]
$5,267.
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8. The refundable Part IV tax on dividends received is required in order to:
A. Prevent tax deferral in situations where there are multiple levels of
corporations in a corporate group.
B. Avoid double taxation of dividends paid to corporate shareholders.
C. Ensure proper integration on investment income at the corporate level.
D. Ensure that public companies pay out some dividends in every year they
are profitable.
9. Which of the following is NOT a consequence of an acquisition of control?
A. A deemed year end.
B. The inability to deduct existing non-capital losses subsequent to the
acquisition of control.
C. The inability to deduct existing net capital losses subsequent to the
acquisition of control.
D. A requirement to write down non-depreciable assets to their fair market
value.
10. Which of the following is NOT an implication of a deemed year end which
creates a short fiscal period?
A.
B.
C.
D.
The corporate tax rate must be prorated for the shortened year.
CCA calculations must be based on a fraction of a year.
The annual business limit must be prorated.
The period during which time-limited losses can be used is shortened.
11. Which of the following carry forward amounts would be lost and could not be
carried forward when an acquisition of control takes place?
1)
2)
3)
4)
An allowable business investment loss.
A non-capital loss.
Charitable donations.
A net capital loss.
A.
B.
C.
D.
All of the items would be lost in an acquisition of control.
Items 1, 3 and 4.
Items 3 and 4.
Items 2, 3 and 4.
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12. Solis Enterprises Inc. operates two separate lines of business – a fashion
design business and an investment firm. During the year ended December
31, 2015, the company lost $3 million from the fashion design business and
earned a profit of $1 million from the investment firm. The $2 million noncapital loss could not be carried back, and as a result it was carried forward.
On January 1, 2016, Solis Enterprises Inc. is acquired by another company.
During the 2016 year, the fashion design business lost another $1.5 million
while the investment firm earned $4 million. What is the minimum taxable
income for 2016?
A.
B.
C.
D.
$0
$500,000
$2,500,000 (4.0M – 1.5M)
$4,000,000
13. Mira Glow Ltd. is a CCPC throughout the 2015 taxation year. During the
2014 taxation year, the company had taxable income of $467,000. Also for
2014, the company had Taxable Capital Employed in Canada of $14,000,000,
while it was $15,000,000 for 2015. What is the annual SR&ED expenditure
limit for Mira Glow Ltd. for 2015?
A.
B.
C.
D.
$ 2,625,000
$ 2,700,000 (8M – (10)(500K) x ((40M – (14M – 10M))/40M]
$ 2,997,000
$ 3,000,000
14. Soap Tech Inc. is a CCPC with 2015 SR&ED expenditures of $450,000. The
company has had no taxable income for the current or any of the three
preceding years. The company had Taxable Capital Employed in Canada of
$8,000,000 for 2014. Determine the total investment tax credit for the year
and the refundable portion.
A. Total investment tax credit: $157,500; Refundable portion: $157,500.
(35% x 450,000 = 157,500); (100% x 35% x 450,000 = 157,500)
B. Total investment tax credit: $157,500; Refundable portion: $63,000.
C. Total investment tax credit: $67,500; Refundable portion: $67,500.
D. Total investment tax credit: $67,500; Refundable portion: $27,000.
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15. Torin Inc. has 500,000 shares issued and outstanding. These shares were
issued for total consideration of $1,125,000. At a later point in time, Jane
Dow acquired 1,000 of these shares at a total cost of $3,500. With respect to
Ms. Dow’s holding of Torin shares, which of the following statements is NOT
correct?
A. The PUC of Ms. Dow’s shares is $2,250.
B. The adjusted cost base of Ms. Dow’s shares is $3,500.
C. If she were to sell the Torin shares for $4,000, she would have a taxable
capital gain of $250.
D. If she were to sell the Torin shares for $4,000, she would have a
deemed dividend of $500.
16. Delfino Ltd. has one class of shares. The company issued 5,000 shares on
January 1, 2014 at a price of $4.40 each. On December 15, 2014, the
company issued an additional 10,000 shares at a price of $6.00 per share.
On March 31, 2015, the company issued another 10,000 shares at a price of
$8.00 per share. Bian Ying purchased 600 shares from the first share
offering, and another 900 from the latest issue. The total PUC of her shares
is equal to:
A.
B.
C.
D.
$ 9,720. [(5,000 x $4.40) + 10,000 x $6)]/25,000 = $6.48; 1,500 x $6.48 = $9,720
$ 9,840.
$ 10,200.
$ 12,000.
17. Taxpayers decide to incorporate for many reasons. In which of the following
situations would there be an advantage to a taxpayer in incorporating a
business?
A. The taxpayer has significant personal losses and is looking for a way to
utilize them.
B. The taxpayer has significant personal assets and investment income,
and does not need all of the cash from her business in order to pay
day to day living expenses.
C. The taxpayer has significant personal assets and investment income, and
needs all of the cash from her business in order to pay day to day living
expenses.
D. The taxpayer makes significant charitable donations each year and wants
to use a corporation to maximize the tax savings from these donations.
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18. Lynn Baily paid $150,000 for 3,000 shares in Baily Inc., a company for which
she is the managing director. She also personally guaranteed a bank loan to
Baily Inc. in the amount of $75,000. If Baily Inc. goes bankrupt, which of the
following statements is correct?
A.
B.
C.
D.
Lynn’s financial risk is unlimited.
Lynn’s financial risk is limited to $75,000.
Lynn’s financial risk is limited to $150,000.
Lynn’s financial risk is limited to $225,000.
19. Which of the following describes a situation in which a private corporation
could be utilized to effectively implement income splitting?
A. Adult children could be sold shares in the corporation in order to
receive dividend income.
B. Minor children could be given shares in the corporation in order to receive
dividend income.
C. A spouse with no income could be given shares in the corporation in order
to receive dividend income.
D. The attribution rules have made any sort of income splitting impossible.
Using a corporation is not an effective income splitting technique.
20. Paul is one of six shareholders, but not an employee, of a Canadian
controlled private corporation that manufactures doors. The corporation has
a large amount of cash on hand and the other shareholders have agreed that
the corporation can lend him $200,000 for a few years. To avoid having the
principal included in his Taxable Income, the loan must meet which of the
following conditions?
A. Interest must be made at the rate prescribed by the Regulations to the
Income Tax Act.
B. It must be for the purchase of the company’s shares.
C. It must be repaid within one year of the end of the fiscal year in
which it was made.
D. It must have a specific repayment date.
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