CPA CFE Taxation Canada 3 — Questions and Answers
Question 1: Under the Income Tax Act, what is the integration principle in Canadian taxation?
- All income should be taxed at the same rate regardless of the source
- The total tax paid on income earned through a corporation and distributed as dividends should be approximately equal to the tax that would be paid if the income were earned directly by the individual (Correct answer)
- Corporate income and personal income are taxed independently with no connection
- All provinces must have identical tax rates
Correct answer: The total tax paid on income earned through a corporation and distributed as dividends should be approximately equal to the tax that would be paid if the income were earned directly by the individual
Integration means that the combined corporate and personal tax on income earned through a corporation and distributed as dividends should approximately equal the personal tax if the individual earned the income directly. The gross-up and dividend tax credit mechanism achieves this.
Question 2: What are the qualifying conditions for a corporation to be considered a Canadian-controlled private corporation (CCPC)?
- It must be publicly listed on a Canadian stock exchange
- It must be a private corporation, incorporated in Canada or resident in Canada, and not controlled directly or indirectly by non-residents or public corporations (Correct answer)
- It must have annual revenues exceeding $10 million
- It must operate exclusively in the manufacturing sector
Correct answer: It must be a private corporation, incorporated in Canada or resident in Canada, and not controlled directly or indirectly by non-residents or public corporations
A CCPC must be a private corporation (not listed on a designated stock exchange), incorporated in Canada or resident in Canada, and not controlled directly or indirectly by one or more non-residents or public corporations. CCPC status provides access to the small business deduction and other benefits.
Question 3: Under the Income Tax Act, how is the taxable benefit for an employee's personal use of an employer-provided automobile calculated?
- A flat $5,000 annual benefit
- A standby charge based on the cost or lease payments of the vehicle, plus an operating cost benefit for personal kilometers driven (Correct answer)
- The fair market value of the automobile at the time of purchase
- No benefit is calculated for employer-provided vehicles
Correct answer: A standby charge based on the cost or lease payments of the vehicle, plus an operating cost benefit for personal kilometers driven
The automobile benefit has two components: a standby charge (2% per month of the vehicle cost for owned vehicles, or 2/3 of lease payments for leased vehicles, reduced if personal use is less than 50% and the vehicle is required for employment) and an operating cost benefit for personal-use kilometers.
Question 4: What is the purpose of the refundable dividend tax on hand (RDTOH) account for a CCPC?
- To provide a permanent tax on investment income
- To refund a portion of the tax paid on investment income when taxable dividends are paid to shareholders, facilitating integration (Correct answer)
- To eliminate all taxes on dividend income
- To defer corporate tax indefinitely
Correct answer: To refund a portion of the tax paid on investment income when taxable dividends are paid to shareholders, facilitating integration
RDTOH is a notional account that tracks refundable tax paid by a CCPC on investment income (and eligible dividends received). When the corporation pays taxable dividends to shareholders, it receives a dividend refund from the RDTOH, ensuring integration of corporate and personal tax.
Question 5: Under the Income Tax Act, what are the tax consequences of a Section 85 rollover?
- It creates a taxable event at fair market value
- It allows a taxpayer to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis by electing a transfer price between cost and fair market value (Correct answer)
- It eliminates all future tax liability on the transferred property
- It only applies to transfers between individuals
Correct answer: It allows a taxpayer to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis by electing a transfer price between cost and fair market value
Section 85 allows a tax-deferred transfer of eligible property to a Canadian corporation. The elected amount must be between the tax cost (floor) and fair market value (ceiling). The transferor receives shares (and limited boot) with the elected amount becoming the deemed proceeds and the corporation's cost.
Question 6: Under Canadian tax law, what is the tax treatment of allowable business investment losses (ABILs)?
- They can only offset capital gains
- They are deductible against all sources of income, representing 50% of a business investment loss arising from the disposition of shares or debt of a small business corporation (Correct answer)
- They are not deductible at all
- They can only be carried forward, never carried back
Correct answer: They are deductible against all sources of income, representing 50% of a business investment loss arising from the disposition of shares or debt of a small business corporation
An ABIL is 50% of a business investment loss (loss on disposition of shares or debt of a small business corporation). Unlike regular allowable capital losses (which only offset taxable capital gains), ABILs can be deducted against all sources of income.
CPA CFE Taxation Canada 3
Under the Income Tax Act, what is the integration principle in Canadian taxation?