CPA CFE Taxation Canada 5

Question 1

Under the Income Tax Act, what is the tax treatment of a winding-up of a subsidiary under Section 88(1)?

Accepted 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

Answer

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?

Accepted Answer

All capital property is deemed to be disposed of at fair market value immediately before death, triggering any accrued gains or losses

Answer

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?

Accepted 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

Answer

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?

Accepted Answer

The property is automatically deemed transferred at the transferor's cost/UCC, deferring tax, unless the transferor elects out of the rollover

Answer

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?

Accepted 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)

Answer

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.

CPA CFE Practice Test

CPA CFE Practice Test

CPA CFE Taxation Canada 5