CPA CFE Taxation Canada 3

Question 1

Under the Income Tax Act, what is the integration principle in Canadian taxation?

Accepted 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

Answer

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)?

Accepted 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

Answer

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?

Accepted Answer

A standby charge based on the cost or lease payments of the vehicle, plus an operating cost benefit for personal kilometers driven

Answer

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?

Accepted Answer

To refund a portion of the tax paid on investment income when taxable dividends are paid to shareholders, facilitating integration

Answer

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?

Accepted 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

Answer

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.

CPA CFE Practice Test

CPA CFE Practice Test

CPA CFE Taxation Canada 3