CPA CFE Taxation Canada 6

Question 1

Under the Income Tax Act, what is the Part IV tax and when does it apply?

Accepted Answer

A 38.33% refundable tax on eligible dividends (and 38.33% on non-eligible dividends) received by a private corporation from non-connected corporations to prevent tax deferral through corporate investment structures

Answer

Part IV tax is a refundable tax imposed on portfolio dividends received by private corporations and certain subject corporations. It prevents the deferral advantage of receiving dividends through a corporation rather than individually. The tax is refunded through the RDTOH mechanism when dividends are paid out.

Question 2

Under the Income Tax Act, what is the tax consequence of an interest-free loan from a corporation to a shareholder?

Accepted Answer

The loan amount is included in the shareholder's income under subsection 15(2) unless repaid within one year after the end of the corporation's tax year or unless specific exceptions apply

Answer

Under subsection 15(2), shareholder loans are included in the borrower's income unless repaid within the specified timeframe or unless exceptions apply (loans to employees, loans for home purchase, etc.). If included in income and later repaid, a deduction is available under paragraph 20(1)(j).

Question 3

Under the Income Tax Act, what is the thin capitalization rule for Canadian corporations?

Accepted Answer

Interest deductions on debts owing to specified non-residents are denied to the extent that the outstanding debts exceed a 1.5:1 debt-to-equity ratio

Answer

Canada's thin capitalization rules (section 18(4)) deny the deduction of interest on debts to specified non-resident shareholders (25%+ ownership) to the extent that the average outstanding debts exceed 1.5 times the equity (contributed surplus, retained earnings, PUC). The denied interest is treated as a dividend.

Question 4

What are the loss carryover rules under the Income Tax Act for non-capital losses?

Accepted Answer

Non-capital losses can be carried back 3 years and forward 20 years

Answer

Non-capital losses (business losses, employment losses, and ABILs that become non-capital losses) can be carried back 3 taxation years and forward 20 taxation years from the year the loss arose. Net capital losses have different rules: carry back 3 years and forward indefinitely.

Question 5

Under the Income Tax Act, what is the purpose of the associated corporation rules?

Accepted Answer

To require associated corporations to share the $500,000 small business deduction limit, preventing multiplication of the benefit through the use of multiple corporations

Answer

The associated corporation rules ensure that a group of associated corporations must share the $500,000 small business deduction limit. Without these rules, taxpayers could multiply access to the low tax rate by establishing multiple CCPCs, each claiming its own $500,000 limit.

CPA CFE Practice Test

CPA CFE Practice Test

CPA CFE Taxation Canada 6