CPA CFE Taxation Canada 2 — Questions and Answers
Question 1: Under the Income Tax Act, what is the general rule for the tax treatment of capital cost allowance (CCA) on depreciable property?
- CCA must equal the accounting depreciation expense
- CCA is a discretionary deduction up to the maximum rate prescribed for each class, calculated on the undepreciated capital cost (UCC) of the class using the declining balance method (Correct answer)
- CCA is mandatory and must be claimed at the maximum rate
- CCA is calculated on a straight-line basis only
Correct answer: CCA is a discretionary deduction up to the maximum rate prescribed for each class, calculated on the undepreciated capital cost (UCC) of the class using the declining balance method
CCA is a discretionary deduction; taxpayers may claim any amount from zero to the maximum. It is calculated on the UCC of the class using prescribed rates (usually declining balance). The half-year rule generally limits the CCA claim to half the normal amount in the year of acquisition.
Question 2: When a taxpayer disposes of depreciable property and the proceeds exceed the UCC of the class but are less than the original cost, what tax consequence arises?
- A capital gain
- Recapture of CCA, included in business or property income (Correct answer)
- A terminal loss
- No tax consequence
Correct answer: Recapture of CCA, included in business or property income
When proceeds exceed the UCC but are below original cost, the excess of proceeds over UCC represents recapture of previously claimed CCA. This recapture is included in income as business or property income under subsection 13(1), reflecting that too much CCA was claimed.
Question 3: Under the Income Tax Act, what is the attribution rule for income from property transferred to a spouse?
- No attribution rules apply to spousal transfers
- Income and capital gains earned on the transferred property are attributed back to the transferor and taxed in their hands (Correct answer)
- Only capital gains are attributed back
- Attribution only applies if the transfer exceeds $100,000
Correct answer: Income and capital gains earned on the transferred property are attributed back to the transferor and taxed in their hands
Under sections 74.1 and 74.2, when property is transferred or loaned to a spouse (or common-law partner), both the income and capital gains earned on that property are attributed back to the transferor. Exceptions include transfers at fair market value and prescribed rate loans.
Question 4: What is the tax treatment of a shareholder benefit under Section 15 of the Income Tax Act?
- Shareholder benefits are tax-free
- The value of the benefit conferred on a shareholder (other than certain corporate shareholders) is included in their income (Correct answer)
- Shareholder benefits are deductible to the corporation but not taxable to the shareholder
- Only benefits exceeding $10,000 are taxable
Correct answer: The value of the benefit conferred on a shareholder (other than certain corporate shareholders) is included in their income
Section 15(1) includes in income the value of a benefit conferred on a shareholder in their capacity as shareholder. This includes personal use of corporate assets, loans not repaid within one year, and appropriations of corporate property at less than fair market value.
Question 5: Under the Income Tax Act, what is the General Anti-Avoidance Rule (GAAR) designed to do?
- Reduce the overall tax burden for Canadian residents
- Deny tax benefits from transactions that comply with the literal words of the Act but result in a misuse or abuse of the provisions of the Act (Correct answer)
- Eliminate all tax planning opportunities
- Apply only to non-resident taxpayers
Correct answer: Deny tax benefits from transactions that comply with the literal words of the Act but result in a misuse or abuse of the provisions of the Act
GAAR (section 245) is a backstop provision that denies tax benefits from avoidance transactions that, while technically complying with the Act, result in a misuse or abuse of the provisions. It requires three elements: a tax benefit, an avoidance transaction, and abusive tax avoidance.
Question 6: For GST/HST purposes, which of the following supplies is zero-rated in Canada?
- Restaurant meals and prepared foods
- Basic groceries (milk, bread, vegetables, fresh meat) (Correct answer)
- Alcoholic beverages
- Snack foods and carbonated drinks
Correct answer: Basic groceries (milk, bread, vegetables, fresh meat)
Basic groceries are zero-rated under the Excise Tax Act, meaning GST/HST is charged at 0% but the supplier can claim input tax credits on inputs. This distinguishes zero-rated supplies from exempt supplies (no GST but no ITCs) and taxable supplies (GST charged).
CPA CFE Taxation Canada 2
Under the Income Tax Act, what is the general rule for the tax treatment of capital cost allowance (CCA) on depreciable property?