CPA CFE Taxation Canada 5 — Questions and Answers
Question 1: Under the Income Tax Act, what is the tax treatment of a winding-up of a subsidiary under Section 88(1)?
- All assets are deemed disposed of at fair market value
- The subsidiary's assets are transferred to the parent at tax cost (UCC, ACB) and the subsidiary's tax attributes (losses, etc.) generally flow to the parent (Correct answer)
- The winding-up is always a taxable event
- No tax provisions address corporate wind-ups
Correct answer: The subsidiary's assets are transferred to the parent at tax cost (UCC, ACB) and the subsidiary's tax attributes (losses, etc.) generally flow to the parent
Section 88(1) allows a 90%+ subsidiary to be wound up into its parent on a tax-deferred basis. Assets transfer at tax cost, and certain tax attributes (non-capital losses, net capital losses, CCA pools) flow to the parent. A bump in the ACB of certain non-depreciable capital property may be available.
Question 2: Under the Income Tax Act, what is the tax treatment of a deemed disposition at death?
- There is no deemed disposition at death in Canada
- All capital property is deemed to be disposed of at fair market value immediately before death, triggering any accrued gains or losses (Correct answer)
- Capital property passes to heirs at the original cost with no tax consequences
- Only registered retirement savings plans are affected by death
Correct answer: All capital property is deemed to be disposed of at fair market value immediately before death, triggering any accrued gains or losses
Under subsection 70(5), a taxpayer is deemed to have disposed of all capital property at FMV immediately before death. This triggers recognition of accrued capital gains. An exception allows tax-deferred rollover to a spouse or qualifying spousal trust under subsection 70(6).
Question 3: What is the purpose of the capital dividend account (CDA) for a private corporation?
- To track taxable dividends paid
- To accumulate the non-taxable portion of capital gains and certain other amounts that can be distributed to shareholders as tax-free capital dividends (Correct answer)
- To calculate the corporation's income tax liability
- To determine the corporation's paid-up capital
Correct answer: To accumulate the non-taxable portion of capital gains and certain other amounts that can be distributed to shareholders as tax-free capital dividends
The CDA is a notional account for private corporations that accumulates the non-taxable portion of capital gains (currently 50%), capital dividends received, life insurance proceeds net of ACB, and other specified amounts. The corporation can elect to pay tax-free capital dividends from this account.
Question 4: Under the Income Tax Act, what are the conditions for a tax-free rollover of property to a spouse under Section 73?
- The transfer must be at fair market value
- The property is automatically deemed transferred at the transferor's cost/UCC, deferring tax, unless the transferor elects out of the rollover (Correct answer)
- Both parties must be Canadian residents for at least 10 years
- The property must be depreciable property only
Correct answer: The property is automatically deemed transferred at the transferor's cost/UCC, deferring tax, unless the transferor elects out of the rollover
Section 73 provides an automatic tax-free rollover for transfers of capital property to a spouse or common-law partner (or to a spousal trust). The transfer is deemed to occur at the transferor's cost amount unless the transferor elects to transfer at FMV. Attribution rules apply.
Question 5: Under Canadian tax law, what is the Accelerated Investment Incentive Property (AIIP) provision?
- It eliminates CCA for all new property acquisitions
- It provides an enhanced first-year CCA deduction by applying the prescribed CCA rate to 1.5 times the net addition to the class (replacing the half-year rule with a more generous calculation) (Correct answer)
- It only applies to used property purchases
- It provides a tax credit rather than a CCA deduction
Correct answer: It provides an enhanced first-year CCA deduction by applying the prescribed CCA rate to 1.5 times the net addition to the class (replacing the half-year rule with a more generous calculation)
The AIIP rules provide a first-year CCA enhancement for eligible property by applying the CCA rate to 1.5 times the net addition to the class, effectively allowing a larger deduction in the first year than the traditional half-year rule. This incentivizes business investment in Canada.
Question 6: Under the Income Tax Act, how is the principal residence exemption applied when a taxpayer disposes of a home?
- All homes owned are automatically exempt from capital gains tax
- The gain is exempt based on the formula: gain × (1 + years designated) / years owned, with only one property per family unit designatable per year (Correct answer)
- Only the first $500,000 of gain is exempt
- The exemption only applies if the home was owned for more than 5 years
Correct answer: The gain is exempt based on the formula: gain × (1 + years designated) / years owned, with only one property per family unit designatable per year
The principal residence exemption formula exempts a portion of the gain based on the number of years the property is designated as a principal residence plus one (the '1 plus' rule) divided by the total years owned. A family unit can only designate one property per year.
CPA CFE Taxation Canada 5
Under the Income Tax Act, what is the tax treatment of a winding-up of a subsidiary under Section 88(1)?