CPA CFE Taxation Canada 4 — Questions and Answers
Question 1: Under the Income Tax Act, what is the 'stop-loss' rule regarding the transfer of property between affiliated persons?
- There are no restrictions on losses between affiliated persons
- Losses on dispositions of property to affiliated persons are denied and generally added to the cost base of the property acquired by the affiliated person (Correct answer)
- Losses are doubled when transferred between affiliated persons
- Stop-loss rules only apply to capital property, not depreciable property
Correct answer: Losses on dispositions of property to affiliated persons are denied and generally added to the cost base of the property acquired by the affiliated person
When property is transferred to an affiliated person (spouse, controlled corporation, etc.) at a loss, the loss is denied to the transferor under the stop-loss rules. The denied loss is generally added to the affiliated person's cost base of the property, preserving the loss for eventual realization.
Question 2: For Canadian tax purposes, what is the tax treatment of a stock option benefit for an employee of a CCPC?
- Stock option benefits are always tax-free for CCPC employees
- The benefit is included in employment income in the year the shares are disposed of (not when the option is exercised), and a 50% deduction may apply if certain conditions are met (Correct answer)
- Stock option benefits are taxed as capital gains
- The benefit is included in income when the option is granted
Correct answer: The benefit is included in employment income in the year the shares are disposed of (not when the option is exercised), and a 50% deduction may apply if certain conditions are met
For CCPC employees, the stock option benefit (FMV at exercise minus exercise price) is deferred until the shares are sold. A 50% deduction under paragraph 110(1)(d.1) applies if shares are held for at least 2 years after the grant date, effectively taxing the benefit at capital gains rates.
Question 3: Under the Income Tax Act, what is the purpose of the paid-up capital (PUC) of shares?
- It has no tax significance
- It represents the amount that can be returned to shareholders tax-free as a return of capital and is used to calculate Part IV tax and other provisions (Correct answer)
- It always equals the fair market value of shares
- It determines the corporation's income tax rate
Correct answer: It represents the amount that can be returned to shareholders tax-free as a return of capital and is used to calculate Part IV tax and other provisions
PUC represents the amount of capital contributed by shareholders that can be returned to them tax-free (as a return of capital rather than a dividend). It is relevant for determining deemed dividends on share redemptions, capital distributions, and certain anti-avoidance provisions.
Question 4: What is the deadline for filing a T1 personal income tax return in Canada for an individual who is not self-employed?
- March 31 of the following year
- April 30 of the following year (Correct answer)
- June 15 of the following year
- December 31 of the current year
Correct answer: April 30 of the following year
For individuals who are not self-employed (or whose spouse is not self-employed), the T1 return is due April 30 of the following year. Self-employed individuals have until June 15, but any balance owing is still due by April 30.
Question 5: Under the Income Tax Act, how are capital losses treated when an individual dies?
- Capital losses expire at death and cannot be used
- In the year of death (and the preceding year), net capital losses can be applied against all sources of income, not just capital gains (Correct answer)
- Capital losses are transferred to the surviving spouse
- Capital losses are doubled in the year of death
Correct answer: In the year of death (and the preceding year), net capital losses can be applied against all sources of income, not just capital gains
In the year of death and the immediately preceding year, net capital losses can be deducted against all sources of income (after adjusting for previously claimed capital gains deductions). This is an exception to the normal rule that capital losses can only offset capital gains.
Question 6: Under Canadian GST/HST rules, what is the difference between a zero-rated supply and an exempt supply?
- There is no difference; both terms mean the same thing
- Both are not subject to GST/HST, but registrants making zero-rated supplies can claim input tax credits while those making exempt supplies cannot (Correct answer)
- Zero-rated supplies are taxable at the standard rate
- Exempt supplies allow for input tax credit claims
Correct answer: Both are not subject to GST/HST, but registrants making zero-rated supplies can claim input tax credits while those making exempt supplies cannot
Zero-rated supplies are technically taxable at 0%, so suppliers can claim ITCs on related inputs. Exempt supplies are not subject to GST/HST at all, but suppliers cannot claim ITCs on inputs used to make exempt supplies. This distinction significantly affects the supplier's GST/HST costs.
CPA CFE Taxation Canada 4
Under the Income Tax Act, what is the 'stop-loss' rule regarding the transfer of property between affiliated persons?