Practice Exam SOLUTIONS - Vol 2 (2020)

Chapter 11 Solutions to Practice Exam Volume 2
Practice Exam Solution
Chapter 11 (Tax Payable For Individuals II)
Examination Summary
The marks you have received on each question can be added in the final column.
Total Your
Question Type Of Question Or Subject Marks Mark
1 Essay Questions 10
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 Loss Carry Overs 20
16 Lifetime Capital Gains Deduction and ABILs 20
17 Alternative Minimum Tax 20
Total 100
Solution 1 (10 Marks)

A. Losses on listed personal property can be deducted during the current year, but only against
gains on listed personal property. If the loss cannot be used during the current year, it can be
carried back three years or forward seven years.
However, in the carry back or carry forward years, it can only be deducted against gains on
listed personal property during those years.
B. This recommendation reflects the fact that most tax credits are non-refundable and cannot be
carried over to past or future years.
This means that, unless a taxpayer has Taxable Income and Tax Payable, the value of these
credits is simply lost. This, in effect, is what would happen if various types of loss carry overs
were used to reduce Taxable Income to Nil.
1 grading point for each correct answer. Total 9

Your Mark = [(# of grading points ÷ 9)(10%)] = ___%
Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solutions 2 Through 7 (9 Marks)

2. True. Farm losses can be carried back 3 years and forward for 20 years.
3. True. To the extent possible, losses incurred in the current taxation year must be deducted
in the current taxation year.
4. False. A business investment loss arises on the disposition of shares or debt in a small
business corporation. Not all CCPCs are small business corporations.
5. True. All of the split income of a specified individual will be taxed at the maximum federal
rate of 33 percent.
6. False. The transfer can only be made if it creates or increases the taxpayer’s spousal credit.
7. False. The base is limited to 75 percent of Net Income For Tax Purposes plus 25 percent
of any taxable capital gain arising as the result of the gift, plus 25 percent of any recaptured
CCA resulting from the gift.


8. B. Losses on “listed” personal property can be deducted to the extent of gains on listed
personal property.
9. D. They can be deducted against any type of income in the year of death or the immediately
preceding year.
10. C. Dividends received on public company shares that were gifted to a specified individual
by that individual’s grandfather. While the income attribution rules might be applicable, these
dividends would not be considered to be split income.
11. C. $162,750 [(75%)($182,500) + (25%)(1/2)($320,000 - $217,000) + (25%)($217,000 -
$165,000)]
12. A. The limit on the base for charitable donations in the year of death and the immediately
preceding year is 100 percent of Net Income For Tax Purposes.
13. B. The foreign tax credit for taxes withheld on foreign non-business income will be the
lesser of the amount withheld and an amount determined by a formula in which tax otherwise
payable is multiplied by the ratio of foreign non-business income divided by adjusted Division
B Income. This is not correct as the credit will not be equal to the amount withheld if it
exceeds 15 percent of the foreign non-business income.
14. C. RRSP deductions.



Net And Taxable Income
For 2020, Mr. Li will have:
• Net Income For Tax Purposes of nil.
• Taxable Income of nil.
Net Capital Loss Carry Forward

Mr. Li has a net capital loss carry over from 2019 of $9,000 [(1/2)($18,000)]. This can be
deducted to the extent of the net taxable capital gain in 2020, an amount of $3,750 [(1/2)($15,700
- $8,200)].
This will leave a carry forward of $5,250 ($9,000 - $3,750).
Non-Capital Loss Carry Forward

The 2020 non-capital loss and related carry back is calculated as follows:
Business Loss $123,000
Net Capital Loss Carry Forward Deducted 3,750
Income Under ITA 3(c) ( 3,750)
Non-Capital Loss $123,000
Carry Back (Ignoring Tax Credits In Previous Year) ( 62,000)
Non-Capital Loss Carry Forward $ 61,000
Amended Figures For Previous Year

The amended figures for 2019 are as follows:
2019 Net Income For Tax Purposes $62,000

Non-Capital Loss Carry Back ( 62,000)
2019 Taxable Income (Amended) Nil
1 grading point for each highlighted item. Total 20


Since Mr. Lindon had claimed the lifetime capital gains deduction in a previous year for an
amount greater than $3,000, his business investment loss is disallowed and is equal to nil. The
$3,000 loss is treated as an ordinary capital loss.
Mr. Lindon’s minimum Net Income For Tax Purposes and Taxable Income would be calculated
as follows:
Net Employment Income $21,300
Taxable Capital Gain $18,300
Allowable Capital Loss On Share Sale ( 4,800)
Allowable Capital Loss On Loan
(Disallowed ABIL) [(1/2)($3,000)] ( 1,500) 12,000
Net Income For Tax Purposes $33,300
Non-Capital Loss Carry Forward ( 3,500)
Net Capital Loss Carry Forward Nil
Lifetime Capital Gains Deduction (See Note) ( 10,800)
Taxable Income $19,000

Note The lifetime capital gains deduction is the least of:
Capital Gains Deduction Available

($441,692 - $50,000) $391,692
Annual Gains Limit = Net Taxable Capital Gains $12,000
Sum Of Annual Gains Limit ($50,000 + $12,000) $62,000

Lifetime Capital Gains Deduction In Previous Year ( 50,000)
CNIL Balance ( 1,200)
Cumulative Gains Limit $10,800
While it would have been possible for Mr. Lindon to deduct the $10,250 net capital loss carry
forward instead of $10,250 of the available lifetime capital gains deduction, the problem states
that he prefers to use the lifetime capital gains deduction first. This likely reflects the fact that
there is no time limit on using the net capital loss carry forward and, more importantly, it can be
used against any type of taxable capital gain. In contrast, the lifetime capital gains deduction can
only be used for certain types of capital gains that are not common.

Ms. Morganstern’s regular Tax Payable would be calculated as follows:
$38,088 At 15 Percent $5,713
Basic Personal Credit [(15%)($11,809)] ( 1,810)
Dividend Tax Credit [(6/11)(38%)($27,600)] ( 5,721)
Federal Tax Payable - Regular Nil
Her Adjusted Taxable Income for alternative minimum tax purposes would be as follows:
Regular Taxable Income $ 38,088
30 Percent Of Capital Gains [(30%)(2)($180,000)] 108,000
Dividend Gross Up [(38%)($27,600)] ( 10,488)
Adjusted Taxable Income $135,600
The calculation of the alternative minimum tax would be as follows:

Adjusted Taxable Income $135,600
Basic Exemption ( 40,000)
Amount Subject To Tax $ 95,600
Rate 15%
Minimum Tax Before Credit $ 14,340
Basic Personal Credit ( 1,810)
Alternative Minimum Tax Payable $ 12,530
As the alternative minimum tax payable is higher than the regular tax payable, the alternative
amount would have to be paid.

Chapter 12 (Corporate Taxable Income/Tax

Payable)
Examination Summary
Total Your
2-7 True Or False 9
8 - 14 Multiple Choice 21
15 Corporate Loss Carry Overs 25
16 Corporate Taxable Income And Tax Payable 35
Total 100

Part A
The two deductions can be described as follows: 6
Dividends Corporations can deduct dividends received from taxable Canadian
corporations. Individuals gross up the dividends and claim a dividend tax credit.
Donations Corporations can deduct charitable donations. Individuals claim a tax
credit.
Part B
The objective of the 10 percent federal tax abatement is to leave room for the provinces to apply
their respective income tax rates. In those cases where some part of a corporation's income is 5
not earned in a province, there will be no provincial taxes assessed. Given this, the abatement
will not be available for that portion of Taxable Income that is not earned in a province.
1 grading point for each item. Total 11



2. False. Such dividends are not included in Taxable Income. However, they are included in
Net Income For Tax Purposes.
3. False. Only dividends from taxable Canadian corporations can be deducted.
4. True. A net capital loss carry forward can only be deducted to the extent that there are
net taxable capital gains in the carry forward year.
5. False. 10 percent of Taxable Income must be multiplied by the percentage of that income
that is allocated to the provinces.
6. True. The general rate reduction is implemented through a deduction from Tax Payable
equal to 13 percent of full rate Taxable Income.
7. False. Incidental amounts of interest on temporarily invested funds are considered to be
active business income.

8. D. Losses of other years
9. B. $220,000 [($250,000 + $15,000 + $35,000) - ($35,000 + $45,000)]
10. B. The general rate reduction percentage is applied to full rate taxable income.
11. A. The maximum amount of the claim for the small business deduction is the active
business income earned in Canada of $275,000. The AAII grind would be nil as the AAII for
the preceding year was less than $50,000.
12. C. $3,900
The amount eligible for the small business deduction would be limited to the annual business
limit of $500,000. This means that the M&P deduction would be 13 percent of the lesser of:
M&P Profits $575,000
Amount Eligible For The Small Business Deduction ( 500,000)
$ 75,000
Taxable Income ($625,000 - $75,000) $550,000

Amount Eligible For The Small Business Deduction ( 500,000)
4 Times The Foreign Tax Credit Of $5,000 ( 20,0000)
$ 30,000
The lesser figure is $30,000 and the M&P deduction would be $3,900 [(13%)($30,000)].

13. B. 50 {[13%][$450,000 - ($50,350 ÷ 19%) – ($13,000 ÷ 13%)]}

14. D. The full amount of foreign non-business income earned must be included in the
corporation’s Taxable Income.

The required calculation of Net Income For Tax Purposes and Taxable Income is as follows:
ITA 3(a) Dividends $ 50,250
ITA 3(b) Taxable Capital Gains $14,400 9
Allowable Capital Losses ( 6,638) 7,762
ITA 3(c) Labels for net
$ 58,012
ITA 3(d) Net Business Loss ( 212,700) and taxable
income
Net Income For Tax Purposes Nil
required.
Dividends Received ($ 50,250)
Net Capital Loss Carry Forward Must show
(Limited To Net Taxable Capital Gains) ( 7,762) donations as
Charitable Donations Nil nil.
Taxable Income Nil
The carry forward balances available at the end of the year are as follows:
Net Capital Loss Carry Forward
Beginning Balance $14,500

Used During Year ( 7,762)
6
Net Capital Loss Carry Forward $ 6,738
Labels for
Charitable Donations Carry Forward net capital
and unused
Beginning Balance $ 1,975 charitable
Added During Year 8,100 required.
Used During Year Nil
Unused Charitable Donations $10,075
Non-Capital Loss Carry Forward
Balance Under E:
Net Business Loss $212,700
Dividends Received And Deducted 50,250 5
Net Capital Loss Carry Forward Deducted 7,762 Must show
Total Balance Under E $270,712 all components.
Balance Under F - Income Under ITA 3(c) ( 58,012) No
Non-Capital Loss Carry Forward $212,700 marks for
simply
As per the policy of the company, this solution minimizes the net capital loss carry forward. In the listing
absence of this policy, an alternative solution could minimize the non-capital loss balance. $212,700


The minimum Taxable Income for Carter Inc. would be calculated as follows:

Deductions: 5
Dividends ($38,800)
Taxable
Charitable Donations ( 46,100)
income label
Non-Capital Loss Carry Forward ( 57,800) ( 142,700)
required
Based on this, the company’s Tax Payable would be calculated as follows:
Base Amount Of Part I Tax [(38%)($519,500)] $197,410 4

Federal Tax Abatement [(10%)($519,500)] ( 51,950)
Small Business Deduction (Note 1) ( 23,750) Your figure for
M&P Deduction (Note 2) ( 39,169) taxable income
General Rate Reduction (Note 3) ( 12,116) would be
Part I Federal Tax Payable $ 70,425 accepted
Note 1 The small business deduction is based on the least of the following:
5
Active Business Income $623,400 All calculations
Taxable Income (no foreign tax credit adjustment needed) 519,500 required to
Annual Business Limit [(1/4)($500,000)] 125,000 receive marks
The small business deduction is equal to $23,750 [(19%)($125,000)].
Note 2 The base for the M&P deduction would be the lesser of:
6
M&P Profits (Given) $426,300 All calculations
Amount Eligible For The SBD ( 125,000) $301,300 required to
receive marks
Amount Eligible For The SBD ( 125,000) $394,500
Based on these figures, the deduction would be equal to $39,169 [(13%)($301,300)].
Note 3 The general rate reduction would be calculated as follows:

Amount Eligible For The SBD ( 125,000)
4
Amount Eligible For The M&P Deduction ( 301,300) All calculations
Full Rate Taxable Income $ 93,200 required to
Rate 13% receive marks
General Rate Reduction $ 12,116


Chapter 13 (Corporate Investment Income)
Examination Summary
Total Your
2-7 True Or False 9
15 Part I And Part IV Tax 30
16 Corporate Tax Payable 30
Total 100

A. As described in the text, the reason for this limit is to ensure that such deductions as charitable
donations or non-capital loss carry overs have not totally or partially eliminated the investment 5
income from the amount flowing through to Taxable Income. The goal is to prevent the ART
from being inappropriately applied to active business income.
B. The following types of dividends received by a private company are not subject to Part IV
tax: 3
• Capital dividends
• Dividends received from a connected company that did not receive a refund as a result
of paying the dividends
C. The required three items can be selected from the following:

• Net Taxable Capital Gains 3
• Interest
• Rents
• Royalties
• Net Capital Losses Deducted



2. True. For integration to work properly, the combined federal/provincial dividend tax credit
must be equal to the gross up. For eligible dividends, this will occur when the provincial
dividend tax credit rate is equal to 5/11 of the gross up.
3. True. The Part I refundable tax procedures are designed to prevent deferral of taxes on
income from investments that have been transferred to a corporation by an individual.
4. False. It does not include dividends that are deductible in the calculation of Taxable
Income.
5. False. It is only assessed on dividends received from connected companies in those
situations where the paying company received a dividend refund as a result of paying the
dividend.
6. True. Company A owns more than 10 percent of the voting shares and more than 10
percent of the fair market value of all of the issued shares of Company B.
7. False. Part IV taxes that are paid on non-eligible dividends from a connected company are
not added to the Eligible RDTOH.

8. C. To the extent that the company has an LRIP balance, dividends paid by public
companies will be non-eligible.
9. B. Net taxable capital gains for the year, less net capital loss carry overs deducted.
10. A. $320 [(10-2/3%)($495,000 - $492,000)]
11. D. The Part IV tax is assessed on all portfolio dividends.
12. B. $28,483.
Non-Eligible RDTOH, end of preceding year $25,000
Less: Dividend refund for preceding year (Given) ( 5,000)
Non-Eligible RDTOH, end of preceding year $20,000
Add: Refundable portion of Part I tax 4,600
Part IV Tax Payable - Connected Corporation Dividends 3,883
Non-Eligible RDTOH, end of year $28,483
13. D. The balance is increased by Part IV taxes paid on non-eligible portfolio dividends.
14. D. The base for calculating a CCPC’s GRIP balance will be reduced by 100 percent of the
amount eligible for the small business deduction. The reduction will be 72 percent of the
eligible amount.


Part A - Refundable Taxes
Part IV Refundable Tax The Part IV Tax Payable for Translux Inc. would be calculated as
follows:
Mercer’s Dividend Refund $11,500

Translux’s Percentage Of Ownership 55% 5
Part IV Tax Payable On Mercer’s Non-Eligible Dividends $ 6,325
Part IV Tax Payable On Eligible Portfolio Dividends From
Bank Of Montreal [(38-1/3%)($19,620)] 7,521
Part IV Tax Payable $13,846
Part I Refundable Tax As the interest received appears to be related to temporary balances
resulting from the company’s normal business activities, it would be viewed as active business
income, and would not influence the following calculations.
The refundable portion of the Part I tax would be the least of the following amounts:
Aggregate Investment Income [(1/2)($26,850)] $13,425 8
Rate 30-2/3%
All calculations
ITA 129(4)(a)(i) $ 4,117 required to
receive
Taxable Income $74,300 marks
Amount Eligible For Small Business Deduction ( 60,000)
Total $14,300
Rate 30-2/3%
ITA 129(4)(a)(ii) $ 4,385
ITA 129(4)(a)(iii) Part I Tax Payable - Given $16,480
The refundable portion of Part I tax is equal to $4,117, which is the least of the preceding three
amounts.
Part B - GRIP Balance

As indicated in the problem, the corporation has no GRIP at December 31, 2019. The only
addition during 2020 would be the eligible portfolio dividends received of $19,620, leaving the 2
December 31, 2020, balance at this amount.

Part C - RDTOH Balances

The Non-Eligible RDTOH balance at the end of 2019 is $17,877 ($31,342 - $13,465).
Based on this, the required December 31, 2020, balances would be as follows: 6
Eligible RDTOH - December 31, 2019
Part IV Tax On Eligible Portfolio Dividends [(38-1/3%)($19,620)] 7,521
Eligible RDTOH - December 31, 2020 $7,521
Non-Eligible RDTOH - December 31, 2019 $17,877

Part I Refundable Tax 4,117
Part IV Tax On Mercer Non-Eligible Dividends 6,325
Non-Eligible RDTOH - December 31, 2020 $28,319
Part D - Dividend Refund

The GRIP balance would allow the corporation to designate $19,620 of its 2019 dividends as
eligible. This would leave $11,980 ($31,600 - $19,620) as non-eligible dividends. The balances in
the two RDTOH accounts would provide a refund on all of these dividends. Given this, the total
refund would be as follows:
Refund On Eligible Dividends [(38-1/3%)($19,620)] $ 7,521 4
Refund On Non-Eligible Dividends [(38-1/3%)($11,980)] 4,592
Total Refund $12,113


The required calculation of Part I Tax Payable would be as follows:
Taxable Income (Given) $335,000
Base Amount Of Part I Tax [(38%)($335,000)] $127,300

Federal Tax Abatement [(10%)($335,000)] ( 33,500)
Small Business Deduction (Note One) ( 33,250)
Additional Refundable Tax On Investment Income (Note Two) 5,547
Manufacturing And Processing Profits Deduction (Note Three) ( 1,430) 5
General Rate Reduction (Note Four) ( 12,610)
All calculations
Foreign Non-Business Income Tax Credit (Equal To Withholding) ( 6,000)
required to
Part I Tax Payable $ 46,057 receive
Note One There is a circular calculation involved in the calculation of foreign tax credits, the marks
small business deduction, and the ART. This adds considerable complexity to the calculation
of Tax Payable and, in most situations, the additional calculations do not influence the
outcome (that would, in fact, be the case in this problem). To avoid these additional
calculations, we have stated that the foreign tax credit is equal to the amount withheld.

Given the preceding assumption with respect to the foreign tax credit, the small business
deduction would be equal to 19 percent of the least of: 7
1. Active Business Income (Given) $356,000 All calculations
2. Taxable Income $335,000 required to
Less[(100/28)($6,000)] Of The Foreign receive marks.
Non-Business Tax Credit ( 21,429) $313,571
3. Allocated Annual Business Limit (Given) $175,000
The least of the three figures is $175,000, resulting in a small business deduction of $33,250
[(19%)($175,000)].
Note Two The aggregate investment income is equal to the gross foreign investment income plus
the taxable capital gain. The ITA 123.3 refundable tax (ART) is 10-2/3 percent of the lesser of: 6
All calculations
1. Aggregate Investment Income ($40,000 + $12,000) $ 52,000
required to
2. Taxable Income $335,000 receive marks.
Deduct: Amount Eligible For The SBD ( 175,000) $160,000
The ITA 123.3 tax on aggregate investment income is $5,547 [(10-2/3%)($52,000)].
Note Three The manufacturing and processing deduction would be 13 percent of the lesser of:
1. Canadian M&P Profits (Given) $186,000
Deduct: Amount Eligible For SBD ( 175,000) $11,000
7
All calculations
2. Taxable Income $335,000 required to
Deduct: receive marks.
Amount Eligible For The SBD ( 175,000)
Aggregate Investment Income (Note Two) ( 52,000) $108,000
Given these calculations, the M&P deduction would be $1,430 [(13%)($11,000)].

Note Four The general rate reduction is nil, calculated as follows:
Amount Eligible For The SBD ( 175,000) 5
Amount Eligible For The M&P Deduction ( 11,000) All calculations
Aggregate Investment Income (Note Two) ( 52,000) required to
Full Rate Taxable Income $ 97,000 receive marks.
Rate 13%
General Rate Reduction $ 12,610


Chapter 14 (Other Issues In Corporate Taxation)
Examination Summary
Total Your
2-7 True Or False 9
15 Acquisition Of Control 20
16 PUC And ACB 20
17 Redemption Of Shares 20
Total 100

A. The non-capital losses can be deducted in future periods, provided certain conditions are 4
met. As specified in your text, these conditions are as follows:
• after the acquisition of control has taken place, the corporation must continue to carry on
the business in which the loss occurred;
• there must be a reasonable expectation of profit in that business; and
• the losses can only be applied against future income generated by the same or a similar
business.
B. For the related individuals, the eight could be selected from the following:
• Parents and grandparents, as well as parents and grandparents of the taxpayer’s spouse 8
or common-law partner.
1 for each
• The taxpayer’s spouse or common-law partner, as well as the spouse or common-law
partner’s siblings and their spouses and common-law partners. to a
maximum
• Siblings of the taxpayer, as well as spouses or common-law partners of the taxpayer’s
siblings. of 8
• Children, including those that are adopted or born outside of marriage. Also included
here would be spouses and common-law partners of children and children of the Continued
on next
taxpayer’s spouse or common-law partner.
page
For individual corporations, such corporations would be related to:
• a person who controls it, if it is controlled by one person;
• a person who is a member of a related group that controls it; or
• any person related to a person who controls it or who is related to a member of a related
group that controls it.

For two corporations, they would be related if:

• they are controlled by the same person or group of persons;
• each of the corporations is controlled by one person and the person who controls one of
the corporations is related to the person who controls the other corporation;
• one of the corporations is controlled by one person and that person is related to any
member of a related group that controls the other corporation;
• one of the corporations is controlled by one person and that person is related to each
member of an unrelated group that controls the other corporation;
• any member of a related group that controls one of the corporations is related to each
member of an unrelated group that controls the other corporation; or
• each member of an unrelated group that controls one of the corporations is related to at
least one member of an unrelated group that controls the other corporation.
1 grading point for each item. Total 12 Your Mark =
[(# of grading points ÷ 12)(10%)] = ___%

2. False. The write down is required when the fair market value is less than the UCC.
3. False. The elected value must be between the adjusted cost base of the asset and its fair
market value at the time the acquisition of control takes place.
4. True. ITA 256(1.3) deems such shares to be owned by the taxpayer.
5. False. For association to exist, there would have to be cross ownership of shares that are
not of a specified class.
6. True.
7. True.

8. B. Items 1, 3, and 4
9. C. AAA and BBB are associated companies and must share one SBD.
CCC is not associated. $500,000 + $500,000 = $1,000,000.
10. A. Total investment tax credit: $157,500; Refundable portion: $157,500. [Total =
(35%)($450,000) = $157,500; Refundable = (100%)(35%)($450,000) = $157,500]
11. A. $9,720.
PUC per share = $6.48 {[(5,000)($4.40) + (10,000)($6) + (10,000)($8)] ÷ 25,000} (1,500)
($6.48) = $9,720.
12. C. $12,650 [($22,000)(50%)(115%)]
13. D. The corporation will be taxed on a capital gain of $25,000; the shareholder will be taxed
on a dividend received of $35,000.
$35,000 - $10,000 = $25,000 capital gain; $35,000 received as a dividend in kind.

14. A. Angus will have a deemed dividend of $4,000 and a capital loss of $2,000.
Deemed dividend = $5,000 - $1,000 PUC = $4,000.
Capital loss = ($5,000 - $4,000 deemed dividend) - $3,000 ACB = ($ 2,000).

The deemed disposition election on the non-depreciable capital property would result in a taxable
capital gain of $103,500 [(1/2)($1,120,000 - $913,000)]. Given that the company will lose any
5
unused allowable capital losses with the change in control, this is clearly desirable. The deemed
disposition will leave a net capital loss carry forward of $78,500 ($182,000 - $103,500)
This carry forward can be completely eliminated by a deemed disposition election on the
depreciable capital property at an elected value of $687,000 [(2)($78,500) + $530,000]. 10
This deemed disposition would also result in recapture of $118,000 ($530,000 - $412,000). This
would serve to reduce the current year operating loss to $18,000 ($136,000 - $118,000).
As the deemed disposition election on the depreciable capital property would eliminate the net
capital loss carry forward and reduce the amount of the current loss that would be carried
forward, it is clearly advantageous to make both elections.

The adjusted cost base of the shares would be determined as follows:
7
Number of Shares Cost/Share Total Cost Need to use
First Purchase 8,000 $32 $256,000 label
Second Purchase 12,000 $35 420,000 “adjusted
cost base
Totals 20,000 $676,000
per share”.
The adjusted cost base per share would be $33.80 ($676,000 ÷ 20,000).
The PUC for Shirley’s shares would be calculated as follows:

Number of Shares PUC/Share Total PUC
2019 Sale 250,000 $32 $ 8,000,000 4
2020 Sale 150,000 $35 5,250,000 Need to
Total PUC Of Outstanding Shares 400,000 $13,250,000 use label
“PUC
for Shirley’s
Number Of Shares (From First Table) 20,000 shares”.
PUC Per Share [$13,250,000 ÷ 400,000 Shares] $ 33.13
PUC For Shirley’s Shares $662,600



The tax consequences would be as follows:
Proceeds Of Redemption [(15,000)($14)] $210,000
PUC [(15,000)($13)] ( 195,000)
7
ITA 84(3) Deemed Dividend $ 15,000
Gross Up [(15%)($15,000)] 2,250
Taxable Non-Eligible Dividend $ 17,250
Proceeds Of Redemption [(15,000)($14)] $210,000

ITA 84(3) Deemed Dividend ( 15,000)
7
ITA 54 Proceeds of Disposition $195,000
Adjusted Cost Base [(15,000)($10)] ( 150,000)
Capital Gain $ 45,000
Inclusion Rate 1/2
Taxable Capital Gain $ 22,500
Both the taxable dividend and the taxable capital gain would be included in the shareholder’s Net
Income For Tax Purposes. The non-eligible dividend would qualify for a federal dividend tax credit 3
of $1,558 [(9/13)(15%)($15,000)].

Chapter 15 (Corporate Tax

and Management Decisions)
Examination Summary
Total Your
2-7 True Or False 9
15 Integration Calculations 25
16 Shareholder Loans 10
17 Salary Vs. Dividend 25
Total 100

A. Two conditions must be present. First, the tax rate on the corporation must be lower than the
individual’s tax rate on income received directly. This generally requires that the corporation
be a CCPC earning income that is eligible for the small business deduction.
The second condition is that the shareholders must be in a financial position to leave the
income in the corporation. There will be no tax deferral on income that is paid to share-
holders, either in the form of salary or in the form of dividends.
B. If the provincial dividend tax credit exceeds 4/13, it makes the use of a corporation more
attractive. Alternatively, if the dividend tax credit is less than 4/13, the use of a corporation
becomes less attractive.
Your Mark =[(# of grading points ÷ 11)(10%)] = ___%

2. True. For certain types of income, the use of a corporation can defer the payment of
taxes on income that can be left in the corporation.
3. False. This is only true to the extent that the income is eligible for the small business
deduction. If the income exceeds the annual business limit, any excess will not be favourably
taxed.

4. True.
5. True.
6. True. The shareholder is liable for tax on the $40,000 benefit. [ITA 15(1)]
7. True. The loan principal will not have to be included in income.


8. B. Use of a corporation is more desirable in a province that has a high dividend tax credit.
9. D. Lynn’s financial risk is limited to $225,000 ($150,000 + $75,000).
10. B. Varying combined federal/provincial dividend tax credit rates and varying combined
federal/provincial corporate tax rates
11. A. For individuals in the lowest tax bracket, each dollar of non-eligible dividends results in
more additional tax credits than the additional tax that is payable on the increased income.
12. A. Adult children could be sold shares in the corporation in order to receive dividend
income.
13. A. The loan was made to allow the shareholder who is also an employee to acquire shares
of a competing corporation.
14. D. Company supplied automobile for 100% personal use


Part A - Tax Payable Without Corporation
Personal Tax Payable without the corporation would be calculated as follows:
Business Eligible
Income Dividends
Income $120,000 $153,000
Gross Up (38% Of $153,000) N/A 58,140 9
Taxable Income $120,000 $211,140
Tax Rate (33% + 19%) 52% 52%
Tax Payable Before Dividend Tax Credit $ 62,400 $109,793
Dividend Tax Credit [(6/11 + 5/11)($58,140)] N/A ( 58,140)
Personal Tax Payable $ 62,400 $ 51,653

The personal Tax Payable if the income is received directly totals $114,053 ($62,400 + $51,653).
2
Part B - Corporate Tax Payable
The after tax corporate income available for distribution would be calculated as follows:
Business
Income Dividends
Income $120,000 $153,000 17
Part I Tax [(28% - 19% + 3%)($120,000)] ( 14,400)
Part IV Tax [(38-1/3%)($153,000)] ( 58,650)
Available For Dividends $105,600 $ 94,350
Dividend Refund (Note) N/A 58,650
Total Distributable Income $105,600 $153,000
Note The Part IV tax of $58,650 would be added to the Eligible RDTOH and
would be refunded on the payment of dividends. The dividend refund is $58,650
[($94,350 ÷ .616667) - $94,350] as it is also equal to the balance in the Eligible
RDTOH.
At this point, Morris Inc. can pay a dividend of $258,600 ($105,600 + $153,000).
Since the eligible dividends received by Morris Inc. will create an addition to the
company’s GRIP of $153,000, $153,000 can be designated as eligible dividends.
This means that the remaining dividends of $105,600 ($258,600 - $153,000) will
not be eligible for the enhanced dividend gross up and tax credit procedures.
Part B - Personal Tax Payable

Jennifer’s personal Tax Payable on receipt of the non-eligible dividend distribution would be
calculated as follows:
Non-Eligible Dividends $105,600
8
Gross Up [(15%)($105,600)] 15,840
Taxable Dividends $121,440
Tax Rate (33% + 19%) 52%
Tax Payable Before Non-Eligible Dividend Tax Credit $ 63,149
Non-Eligible Dividend Tax Credit
[(9/13 + 4/13)($15,840)] ( 15,840)
Personal Tax Payable - Non-Eligible Dividends $ 47,309
The personal Tax Payable of $51,653 on the eligible dividends was calculated in Part A. The
corporate (Part I only) and personal Tax Payable if Morris Inc. is used totals $113,362 ($14,400 + 3
$47,309 + $51,653).
Part C - Comparison Of Results

Comparing the total Tax Payable under the two alternatives provides the following result:
Tax Payable - Without Corporation $114,053

Tax Payable - With Corporation ( 113,362 2
Tax Savings With Corporation $ 691

NOT REQUIRED Flowing the income through Morris Inc. results in a tax savings of $691. By
calculating the tax burden on the active business income separately from the dividends, it is clear
that there is perfect integration on the portfolio dividends. The Part IV tax paid at the corporate
level is totally refunded and the personal taxes paid on the dividends are the same with or without
the corporation.
In this example, the Part I corporate rate of 12 percent (9% + 3%) on the active business income
is lower than the 13.04 percent level that is required for perfect integration. In addition, the
combined federal/provincial dividend tax credit is equal to the rate required for perfect integration.
As a result, there is a tax savings of $691 when the income is flowed through the corporation.


Part A
If the loan is repaid on January 1, 2021, it will not be included in two consecutive Donner Inc.
Balance Sheets. As a consequence, the principal amount will not have to be included in Martin’s
income.
However, as it is an interest free loan, he will be assessed with a taxable benefit on the loan. The
amount would be $1,230 [($82,000)(2% - Nil)(9/12)].
Part B
If the loan is not repaid until December 31, 2021, it will appear in two consecutive Donner Inc.
Balance Sheets. This means the $82,000 in principal will have to be included in Martin’s income
for the taxation year ending December 31, 2020.
However, there will be no imputed interest benefit resulting from the loan being interest free. In
addition, when the loan is repaid, the payment can be deducted from Martin’s Net Income For
Tax Purposes for the taxation year ending December 31, 2021.



Required Salary
Given Martha’s tax rate of 51 percent (33% + 18%), a salary of $265,306 [$130,000 ÷ (1 - .51)]
would be required to provide an additional $130,000 in after tax funds.
5
Tax Cost Of Salary Alternative

The corporate tax rate is 12% (38% - 10% - 19% + 3%). The net tax cost of this alternative would
be calculated as follows: 8
Personal Taxes On Salary [(51%)($265,306)] $135,306
Tax Savings To Corporation [(12%)($265,306)] ( 31,837)
Net Tax Cost Of Salary Alternative $103,469
Required Dividend
Martha’s tax rate on non-eligible dividends would be as follows:
[(115%)(51%) - (9/13 + 30%)(15%)] = 43.765% 8
This gives after tax retention of dividend income in the amount of 56.235 percent (1 - 43.765%).
This means a dividend of $231,173 ($130,000 ÷ 0.56235) will be required to provide an additional
$130,000 of after tax funds.
Tax Cost Of Dividend Alternative

The personal Tax Payable on the dividend would be calculated as follows:
8
Non-Eligible Dividends Received (Your Figure) $231,173
Gross Up At 15% 34,676
Tax Rate (33% + 18%) 51%
Tax Payable Before Dividend Tax Credit $135,583
Dividend Tax Credit [(9/13 + 30%)($34,676)] ( 34,410)
Personal Tax Payable On Dividend Alternative $101,173
Corporate Tax Cost (Savings) On Dividend Alternative Nil
Net Tax Cost Of Dividend Alternative $101,173
Subtracting the Tax Payable of $101,173 from the dividends received of $231,173 gives the
required $130,000 in after tax funds. 3
As the dividend payment would not be deductible, its payment would not change corporate taxes.
This means that the only tax cost would be the $101,173 in personal taxes that Ms. Bliss would
pay on the dividends received.
Conclusion*
The salary alternative has a net tax cost that is $2,296 ($103,469 - $101,173) higher than the net
tax cost of paying dividends. Given this, paying dividends would be the better alternative. 2
*Marks would be awarded here on the basis of having the correct conclusion
for the numbers you have calculated in the preceding parts of the problem.


Chapter 16 (Rollovers Under Section 85)
Examination Summary
Total Your
2-7 True Or False 9
15 Section 85 Vs. Direct Transfer 25
16 Short Cases - ACB And PUC 35
Total 100

Part A
The required three items can be selected from among the following six items listed in the text: 3
• Depreciable capital property 1 mark
• Non-depreciable capital property for each
• Canadian resource properties point to a
• Foreign resource properties maximum
• Inventories, other than inventories of real property of 3.
• Real property owned by a non-resident person and used in the year in a business carried on
by that person in Canada
Part B
If the transferor had simply sold the asset for an amount in excess of the UCC value, the
difference between the UCC and the capital cost would be treated as fully taxable recapture.
3
If the transferee were allowed to treat the transferor’s UCC as his capital cost, in a later sale of
the property, this difference would be treated as a capital gain, only one-half of which is taxable.
The requirement that the transferee retain the transferor’s capital cost prevents this from
happening and ensures that the transfer does not result in less taxation in the hands of the
transferee.



2. False. While it is better to transfer accounts receivable using the ITA 22 election, they are
eligible for transfer under ITA 85(1).
3. False. In the case of depreciable assets, the transfer price is usually the UCC, a value that
is normally below the capital cost of the asset.
4. False. If the transfer is to an affiliated person, which it usually is, any loss on the transfer
will be disallowed.
5. False. If preferred shares were part of the consideration, the excess of the total adjusted
cost base over the amount allocated to the non-share consideration would be allocated to the
preferred shares prior to any allocation to common shares.
6. False. The PUC reduction will be allocated on a pro-rata basis based on the fair market
values of the two classes of shares.
7. True.


8. C. A group of real properties that are being held for immediate resale
9. D. The capital cost of depreciable property transferred to the transferee
10. B. Business income equal to the difference between fair market value and cost.
11. A. Ms. Khan will not have to report a capital gain as a result of this transfer.
12. A. $100 ($15,000 - $14,900).
13. B. Preferred = $60,000 - $30,000 = $30,000. Common = Nil.
14. A. $ 160,000 [$180,000-($90,000-70,000)] The legal stated capital – the excess of transfer
price over the boot
B. $ 110,000 ($180,000-$70,000) This is the increase in legal stated capital – cash

received
C. $ 180,000 ($180,000 − 0) This is the increase in legal stated capital
D. $ 20,000 ($180,000 - $160,000) – this is the PUC after the reduction



Part A - Transfer Under ITA 85(1)
As the $1,118,691 elected value was equal to the tax value of the property, there would be no tax
consequences associated with the rollover. The tax consequences of selling the common stock 8
would be calculated as follows:
Total Elected Value $1,578,690

Non-Share Consideration Nil
Adjusted Cost Base - Common Stock (Residual) $1,578,690
Proceeds Of Disposition $2,180,000

Adjusted Cost Base - Common Stock ( 1,578,690)
Inclusion Rate 1/2
Part B - Comparison To Direct Sale

The tax consequences of selling the property directly would be as follows:
Land Building
Proceeds Of Disposition $520,000 $1,660,000
Adjusted Cost Base/Capital Cost ( 460,000) ( 1,400,000)
10
Capital Gain $ 60,000 $ 260,000
Inclusion Rate 1/2 1/2
Taxable Capital Gain $ 30,000 $ 130,000
Based on these calculations, the overall tax effect of the direct sale would be as follows:
Taxable Capital Gain On Land $ 30,000
Taxable Capital Gain on Building 130,000
Recapture On Building ($1,400,000 - $1,118,690) 281,310
Total Increase In Income $441,310
Not Required The reason for the difference is in the type of income that the two approaches
produce. The total amount of income, before consideration of preferential treatment, that you
would expect on this transaction is $601,310 ($2,180,000 - $1,578,690). When ITA 85(1) is used,
this full amount is received as a capital gain, resulting in an income inclusion of $300,655. In
contrast, with the direct sale, only $320,000 ($60,000 + $260,000) of the total income is received
as a capital gain, with the remaining $281,310 (see calculation in table) being received as fully
taxable recapture. The result is a higher amount included in income under the direct sale
alternative.
There is nothing illegal about this result. However, the CRA might view this situation as an
avoidance transaction and attempt to apply GAAR to these results.



Part A - Adjusted Cost Base Of Consideration
The adjusted cost base for each item of consideration, under the three alternatives, would be
Alternative
One Two Three
10
Elected Transfer Price $862,000 $862,000 $862,000
ACB - Boot ( 560,000) ( 624,000) ( 718,000)
Available For Preferred
And Common Shares $302,000 $238,000 $144,000
ACB - Preferred Shares
(Limited To Amount Available) ( 302,000) N/A ( 86,000)
ACB - Common Shares (Residual) N/A $238,000 $ 58,000
Part B - Legal Stated Capital And PUC

The legal stated capital for the two classes of shares would be as follows:
Alternative
One Two Three 4
Preferred Shares $1,200,000 Nil $ 86,000
Common Shares Nil $1,136,000 956,000
Total Legal Stated Capital $1,200,000 $1,136,000 $1,042,000
The required PUC reduction would be calculated as follows:

Alternative
One Two Three 12
Increase In Legal Stated Capital
- All Shares (A) $1,200,000 $1,136,000 $1,042,000
Elected Amount $ 862,000 $ 862,000 $ 862,000
Non-Share Consideration ( 560,000) ( 624,000) ( 718,000)
Elected Amount, Less Boot (B) $ 302,000 $ 238,000 $ 144,000
Required PUC Reduction (A - B) $ 898,000 $898,000 $ 898,000
Alternative One In Alternative One, the entire PUC reduction of $898,000 would be allocated
to the preferred shares, leaving a PUC of $302,000 ($1,200,000 - $898,000). 4
Alternative Two In Alternative Two, the entire PUC reduction of $898,000 would be allocated
to the common shares, leaving a PUC of $238,000 ($1,136,000 - $898,000).
Alternative Three In Alternative Three, the PUC reduction would have to be split between the
two classes of shares on the basis of their relative fair market values. The relevant calculation
would be as follows:
Preferred Shares: [($898,000)($86,000 ÷ $1,042,000)] = $74,115 Reduction
Common Shares: [($898,000)($956,000 ÷ $1,042,000)] = $823,885 Reduction
10
This would leave a PUC of $11,885 for the preferred shares ($86,000 - $74,115), and a PUC of
$132,115 for the common shares ($956,000 - $823,885).

Chapter 17 (Other Rollovers)
Examination Summary
Total Your
1 Essay Question 10
2-7 True Or False 9
15 ITA 85.1 Share For Share Exchange 25
16 ITA 86(1) Exchange Of Shares In Reorganization 35
Total 100

Part A
The proceeds of disposition for the shares given up will be their adjusted cost base immediately
before the disposition. The adjusted cost base of the newly acquired shares will also be the
adjusted cost base of the shares given up immediately before their disposition.
Part B
The adjusted cost base of the amalgamated company shares acquired will be equal to the
adjusted cost base of the predecessor company shares immediately prior to the amalgamation.
The proceeds of disposition for the predecessor company shares will be equal to their adjusted
cost base immediately prior to the amalgamation.


2. True.
3. False. There is no deemed year end for the parent company in an ITA 88(1) rollover.
4. True.
5. False. There will be an ITA 84(2) deemed dividend.

6. True.
7. True.


8. B. This rollover provision is commonly used in business combination transactions.
9. D. $200,000. The PUC reduction would be $1,200,000 {$1,400,000 - [(80%)($1,000,000) -
$600,000]}. This would leave a balance of $200,000 ($1,400,000 - $1,200,000).
10. D. This is not correct. The GRIP balance will only be available to the amalgamated company if it
is a CCPC.
11. D. An acquisition of control can be effected through an amalgamation, which would enable
prior year net capital losses of both predecessor companies to be utilized.
12. C. The bump up is available in a vertical amalgamation when the parent company owns
100% of the subsidiary and in a wind-up when the parent owns 90% or more of the
subsidiary.
13. A. Deemed dividend on winding-up = $250,000 - $25,000 = $225,000. Made up of a capital
dividend of $42,000 and a taxable non-eligible dividend of $183,000.
14. C. The ability to recognize the acquiree’s goodwill.


Part A - ITA 85.1 Applies
Maria elected to transfer her business using ITA 85(1) at a value of $842,000. She did not take
back any non-share consideration. Given this, the adjusted cost base of Rose Inc. common
shares would be calculated as follows:
Elected Value $842,000

Non-Share Consideration Nil 10
Adjusted Cost Base Of Common Shares $842,000
The PUC of these shares would be calculated as follows:
Increase in Legal Stated Capital $1,700,000

Less Excess, If Any, Of:
Elected Value ($842,000)
Non-Share Consideration Nil ( 842,000)
PUC Reduction $ 858,000
PUC Of Common Shares ($1,700,000 - $858,000) $ 842,000

If Maria does not opt out of ITA 85.1, the tax consequences would be as follows:
• Maria would be deemed to have disposed of her Rose Inc. shares at a value equal to their
adjusted cost base of $842,000. As a consequence, there would be no capital gain on the 16
disposition.
• Maria would be deemed to have acquired her Grand Ltd. shares at a cost equal to the
$842,000 adjusted cost base of the Rose Inc. shares.
• The PUC of the Grand Ltd. shares that have been issued to Maria would be $842,000, the
PUC of the Rose Inc. shares that were given up.
Part A - Opting Out Of ITA 85.1

Maria can opt out of ITA 85.1 by including a $829,000 [(1/2)($2,500,000 - $842,000)] taxable gain
in her income tax return.
Part B - ACB For Grand Ltd.

The adjusted cost base of the Rose Inc. shares in the hands of Grand Ltd. would be the lesser of
their $2,500,000 fair market value and their PUC. In this case, the $842,000 PUC amount is the
lower figure.


Part A - PUC Of New Preferred Shares
The PUC of the new preferred shares would be reduced as follows:
Legal Stated Capital Of Preferred Shares $180,000 7

Less The Excess, If Any, Of:
PUC Of Shares Given Up ($210,000)
Non-Share Consideration 100,000 ( 110,000)
Reduction In PUC $ 70,000
Given this reduction, the resulting PUC of the new preferred shares would be as follows:
Legal Stated Capital Of Preferred Shares $180,000
Reduction In PUC ( 70,000)
PUC Of Preferred Shares $110,000
Part B - ACB Of New Preferred Shares

The adjusted cost base of the new preferred shares would be calculated as follows:
Adjusted Cost Base Of Shares Given Up $210,000
3
Non-Share Consideration ( 100,000)
Adjusted Cost Base Of Preferred Shares $110,000

Part C - Proceeds Of Redemption And Disposition

As the PUC of the shares given up is equal to their ACB, the proceeds of redemption would be
equal to the proceeds of disposition. The amount would be calculated as follows:
PUC Of Preferred Shares $110,000
Non-Share Consideration 100,000 6
Proceeds Of Redemption $210,000
Adjusted Cost Base $110,000

Non-Share Consideration 100,000
Proceeds Of Disposition Of Shares Given Up $210,000
Part D - ITA 84(3) Deemed Dividend

As the proceeds of redemption are equal to the PUC of the shares given up, there would be no
ITA 84(3) deemed dividend. As the proceeds of disposition are equal to the adjusted cost base of 4
the shares given up, there would be no capital gain.
Part E - Redemption Of Preferred Shares

If the preferred shares were redeemed for $180,000, the tax consequences would be as follows:
Redemption Proceeds $180,000
Paid Up Capital Of Preferred Shares ( 110,000) 8
ITA 84(3) Deemed Dividend (Non-Eligible) $ 70,000
Proceeds Of Disposition $180,000

ITA 84(3) Deemed Dividend ( 70,000)
Adjusted Proceeds Of Disposition $110,000
Adjusted Cost Base Of Preferred Shares (110,000)
Capital Gain Nil
There would be a taxable non-eligible dividend of $80,500 [(115%)($70,000)], which would

qualify for a federal dividend tax credit of $7,269 [(9/13)(15%)($70,000)]. 5
Part F - Sale Of Preferred Shares

If the preferred shares were sold for $180,000, the tax consequences would be as follows:
Adjusted Cost Base Of Preferred Shares ( 110,000) 4
Inclusion Rate 1/2


Chapter 18 (Partnerships)
Examination Summary
Total Your
1 Essay Question 10
2-7 True Or False 9
15 Partnership Income And Adjusted Cost Base 40
16 Withdrawal Of A Partner 20
Total 100
Part A
A limited partnership is a partnership with at least one general partner (i.e., a partner whose
liability is unrestricted) and one or more limited partners. A limited partner has the same rights,
duties, and obligations as a general partner with one important difference: A limited partner is
only liable for partnership debt and wrongful or negligent actions of other partners to the extent of
the partner’s actual and promised contributions to the partnership.
Part B
The calculation begins with the limited partner’s adjusted cost base. This amount is added the
partner’s share of any positive amounts of partnership income earned during the year. Two items
are then subtracted from this total. The first is any amounts that the limited partner owes to the
partnership. The second is any other amount that serves to reduce the limited partner’s risk (e.g.,
a repurchase guarantee from the general partner).

Solution 2 Through 7 (9 Marks)

2. True.
3. True.
4. False. While members of a limited liability partnership are not liable for obligations related
to the negligent action of their professional partners, they are liable for most other
partnership obligations.

5. False. While a partnership must calculate income as if it was a separate person,

partnerships do not file tax returns.
6. True.
7. False. Unlike the situation with most capital assets, where “negative” balances must be
taken into income, a negative partnership interest can be carried forward beyond the end of a
taxation year.


8. D. A partnership must calculate income as if it were a separate person resident in Canada.
9. D. The concept of a partnership is not recognized by provincial legislation while the concept
of a joint venture is.
10. B. $152,000.
11. C. $78,400 [(40%)($123,000 + $42,000 + $11,000 + $3,000 + $17,000)]
12. B. Her share of the grossed up dividends received by the partnership in the preceding year.
13. C. $76,250 [$150,000 + (5%)($25,000) - $75,000]
14. B. A decrease of $10,000 [$105,000 - $95,000]


Saul’s Federal Tax Payable
The net business income of the partnership would be calculated as follows:
Operating Income $590,000
Additions: 6
Amortization Expense $16,000
One-Half Meals And Entertainment 13,500
Charitable Donations 20,000 49,500
Deductions:
CCA ( 22,000)
Net Business Income $617,500

Saul’s Taxable Income and share of charitable donations would be calculated as follows:
Partnership Share Taxable Income
Partnership Business Income $617,500 1/2 $308,750 13
Taxable Capital Gain [(1/2)($19,000)] 9,500 1/2 4,750
Partnership Dividends Received 8,000 1/2 4,000
Dividends Received Personally N/A 42,000
Gross Up On Dividends Received
[(38%)($4,000 + $42,000)] N/A 17,480
Charitable Donations $20,000 1/2 $10,000
Based on the preceding calculations, Saul’s federal Tax Payable would be as follows:
Tax On The First $210,371 $ 48,719
Tax On Additional $166,609 ($376,980 - $210,371)] At 33% 54,981 10
Tax Payable Before Credits $103,700
Basic Personal Credit [(15%)($12,069)] ( 1,810)
Dividend Tax Credit [(6/11)($17,480)] ( 9,535)
Charitable Donations (See Note) ( 3,264)
Federal Tax Payable $ 89,091
Note The charitable donations tax credit would be calculated as follows:

15 Percent Of $200 $ 30 8
33 Percent Of The Lesser Of:
• ($10,000 - $200) = $9,800
• ($376,980 - $210,371) = $166,609
[(33%)($9,800)] 3,234
Total Credit $ 3,264
Taxable Capital Gain From Sale Of Partnership Interest

The adjusted cost base of Saul’s partnership interest on January 1, 2019, would be calculated as
follows:
Partnership Share ACB

Capital Contribution N/A $280,000
2018 Partnership Business Income $225,000 1/2 90,000 13
2018 Drawings N/A ( 29,000)
2019 Drawings N/A ( 365,000)
December 31, 2019 ($ 24,000)
2019 Partnership Business Income $617,500 1/2 308,750
2019 Capital Gain 19,000 1/2 9,500
2019 Partnership Dividends Received 8,000 1/2 4,000
2019 Charitable Donations ( 20,000) 1/2 ( 10,000)
January 1, 2020, Adjusted Cost Base $288,250

Given this calculation, the taxable capital gain on Saul’s sale of the partnership interest would be
Adjusted Cost Base ( 288,250) 4
Capital Gain $358,750
Inclusion Rate 1/2
Taxable Capital Gain $179,375


The adjusted cost base of Ross Joyner’s partnership interest on the date he withdrew from the
partnership is calculated as follows:
Initial Capital Contribution $172,000
Additional Capital Contribution 42,000 9
Total Capital Contribution $214,000
Drawings From Partnership ( 31,000)
Income Allocations:
Net Business Income [(1/3)($153,000)] 51,000
Capital Gains [(1/3)($48,000)] 16,000
Charitable Donations [(1/3)($9,000)] ( 3,000)
Adjusted Cost Base - January 1, 2020 $247,000
Note Only one-half of the capital gain is included in the partner’s income on the
flow through of capital gains realized by a partnership. However, the remaining
one-half is included in the assets of the partnership and, in the absence of a
special provision to deal with this situation, the realization of this amount would
be added to any capital gain realized on the disposition of the partnership interest
and would result in double taxation. Given this, the full amount of realized capital
gains is added to the partnership adjusted cost base.
Part B - Taxable Capital Gain On Disposition

Given the preceding calculation, the gain on the disposition of the partnership interest can be
Proceeds Of Disposition [(2)($133,000)] $266,000
Adjusted Cost Base: 6
From Preceding Calculation ($247,000)
Legal And Accounting Fees ( 1,800) ( 248,800)
Inclusion Rate 1/2
This amount would be included in Ross Joyner’s Net Income For Tax Purposes for 2020 as a
taxable capital gain. He would not include any partnership income for the period January 1 to
March 1, 2020, as he was not allocated any of this income.

Part C - Effect On Other Partners

Since each partner paid $133,000 to Ross in return for one-half of his interest, both Billy Bob and
Randy Huxley would have a $133,000 increase in the adjusted cost base of their partnership 4
interest.


Chapter 19 (Trusts And Estate Planning)
Examination Summary
Total Your
1 Essay Question 10
2-7 True Or False 9
15 Basic Taxation Of Trusts 20
16 Transfer To And From A Trust 15
17 Tax Payable - Testamentary Trusts 25
Total 100
Part A
For inter vivos trusts and most testamentary trusts, the Income Tax Act requires the use of the
calendar year as the entity’s taxation year.
The major exception to this is testamentary trusts that have been designated graduated rate
estates. For the first 36 months after the death of the taxpayer, these trusts can use a non-
calendar taxation year. After this 36 month period, like other trusts, they will have to use the
calendar year as their taxation year.
Part B
The objective of an estate freeze is to eliminate future growth in the value of the estate (i.e.,
freeze it). Two techniques for accomplishing this goal without the use of a rollover provision can
be selected from the following list for a maximum of 2 marks:
• The use of gifts
• The use of instalment sales
• Establishing a trust
• The use of a holding company



2. True.
3. False. An alter ego trust can only be established by a living individual.
4. True. While there is a further condition for qualification as a spousal trust, the statement
that this is a requirement is true.
5. False. The term “discretionary” is a non-technical term that is popularly used to describe a
trust where the trustees have discretion with respect to the amounts that will be paid to each
beneficiary, the timing of the payments, or both.
6. True.
7. False. The preferred beneficiary election can only be made for individuals who are either
eligible for the disability tax credit or, alternatively, are eligible to be claimed by another
individual as an infirm dependant 18 years or older.


8. A. An individual.
9. B. 1, 2, and 3
10. C. Marjani will have to report a taxable capital gain of [(1/2)($250,000 - $80,000)] $85,000.
The trust will have no income, and Naeem will report dividend income of $25,000, which
must be grossed up. Naeem will receive the dividend tax credit.
11. A. Losses incurred on the disposition of trust capital property
12. C. [(138%)($20,000)] = $27,600
13. D. Charitable donation tax credit = [(15%)($200) + (33%)($9,800)] = $3,264 Trust
TP = [(33%)($100,000 - $70,000) - $3,264 = $6,636
14. A. Any income and capital gains earned by the trust and allocated to the beneficiaries will
be attributed back to the individual. Capital gains are not subject to attribution in this
situation.



When Garth transfers the securities to the trust in 2020, he will have to recognize a capital gain of
$37,500 [(1/2)($700,000 - $625,000)]. The adjusted cost base of the securities to the trust will be
$700,000.
With respect to the dividends, Vince is under 18 and, as a consequence, the full amount will be
attributed to Garth. This will result in an $48,300 [(138%)($35,000)] inclusion in his Net Income
For Tax Purposes. In addition, he will have a $7,255 [(6/11)(38%)($35,000)] federal dividend tax
credit.
When the securities are transferred to Vince in 2021, they will be transferred at the trust’s adjusted
cost base of $700,000 with no tax consequences to either the trust or Vince.
When Vince sells the securities in 2021, he will have a taxable capital gain of $15,000 [(1/2)($730,000
- $700,000)]. There is no income attribution of capital gains on securities transferred to related
persons under 18.


Case A
1. The settlor has deemed proceeds of disposition of the fair market value of $126,300 and will
record a taxable capital gain of $23,500 [(1/2)($126,300 - $79,300)]. 7
2. The trust will record the property at a deemed cost equal to the fair market value of $126,300.
Case B
1. The settlor has deemed proceeds of disposition of the fair market value of $32,400 and will
record a taxable capital gain of $5,400 [(1/2)($32,400 - $21,600)]. 12
2. The asset would be recorded in the trust records at the fair market value of $32,400.
3. When the asset is transferred to the capital beneficiary, the deemed proceeds to the trust will
be the carrying value of $32,400, resulting in no gain or loss on the transfer. The beneficiary
will be deemed to have acquired the property at a cost of $32,400.
Case C
1. The settlor has deemed proceeds of disposition of the fair market value of $31,300. There will
be no capital gain on the transfer. However, there will be recapture of CCA of $7,700 13
($31,300 - $23,600).
2. The asset would be recorded in the trust records at the settlor’s capital cost of $45,100, with
deemed CCA of $13,800 ($45,100 - $31,300), resulting in a UCC of $31,300.



Alternative One
Income Allocation GRE Sally Thomas

Business Income $ Nil $ 6,000 $ 4,000
Interest Nil 4,800 3,200 15
Non-Eligible Dividends Received 12,500 7,500 5,000
Dividend Gross Up (15%) 1,875 1,125 750
Net Rental Income (Note) Nil 3,000 2,000
Net Income And Taxable Income $14,375 $22,425 $14,950
Federal Income Tax:
Trust [(15%)($14,375)] $2,156
Sally [(15%)($22,425)] $3,364 15
Thomas [(15%)($14,950)] $ 2,243
Basic Personal Credit [($13,220)(15%)] N/A ( 1,984) ( 1,984)
Federal Dividend Tax Credit
[(9/13)($1,875)] ( 1,298)
[(9/13)($1,125)] ( 779)
[(9/13)($750)] ( 519)
Federal Tax Payable (Total = $1,459) $ 858 $ 601 Nil
Note The $5,000 net rental income is calculated as the rent receipts of $20,000,
less the operating expenses of $13,000 and CCA of $2,000. The CCA is claimed at
the trust level.
Alternative Two
Income Allocation Sally (60%) Thomas (40%)

Business Income $ 6,000 $ 4,000
Interest 4,800 3,200 10
Non-Eligible Dividends Received 15,000 10,000
Dividend Gross Up (15%) 2,250 1,500
Net Rental Income 3,000 2,000
Net And Taxable Income $31,050 $20,700
Federal Income Tax:

Sally [(15%)($31,050)] $4,658 10
Thomas [(15%)($20,700)] $3,105
Basic Personal Credit ( 1,984) ( 1,984)
Federal Dividend Tax Credit
Sally [(9/13)($2,250)] ( 1,558)
Thomas [(9/13)($1,500)] ( 1,038)
Federal Tax Payable (Total = $1,199) $1,116 $ 83
While it is not part of the requirements, you might wish to note that the $260 ($1,459 - $1,199)
difference is equal to the the amount of the credit that was unused in Alternative One because
Thomas did not have sufficient income.


Chapter 20 (International Issues In Taxation)
Examination Summary
Total Your
1 Essay Question 10
2-7 True Or False 9
15 Part I Tax On Non-Residents 15
16 Part XIII Tax On Non-Residents 15
17 Emigration 15
18 Foreign Source Dividends 15
Total 100


Part A
Non-residents will be taxed under Part I of the Income Tax Act on the following types of income:
• Employment Income
3
• Business Income
• Gains (Losses) on the disposal of Taxable Canadian Property
Non-residents will be taxed under Part XIII of the Income Tax Act on the following types of
income. Only three are required for maximum marks. Maximum
• Interest 3
• Rent
• Royalties
• Dividends
• Pension Benefits
Part B
The required three types could be selected from the following five types that were listed in the
Maximum
text. Only three are required for maximum marks.
• Funds held outside Canada (e.g., funds in a foreign bank account)
3
• Shares of a non-resident corporation
• Indebtedness owed by a non-resident
• Real property outside of Canada other than excluded property such as personal use or
business use properties
• An interest in a non-resident trust
1 grading point for each highlighted item. Total 9 (Maximum of 6 for part
A and maximum of 3 for part B)


2. True.
3. False. If the individual is in Canada no more than 183 days and the employer cannot
deduct the cost, the employment income will not be taxable, even if it exceeds $10,000.
4. True.
5. False. Regardless of other actions, there is a deemed disposition/reacquisition of most
capital property that will usually result in various income inclusions.
6. False. This concept includes not just corporations but, in addition, any other type of entity
that could be used for investment purposes.
7. False. In addition to the 1 percent requirement, the aggregate equity percentage of the
taxpayer and persons related to the taxpayer must be at least 10 percent.


8. B. $60,000 [$42,000 + $18,000]
9. C. Martin Thomson will be subject to Canadian Part I tax.
10. A. Sam Jackle, a Canadian citizen who has lived in Barbados for the last 15 years
11. A. A multinational manufacturing business that has a factory in Canada
12. A. $23,000; $36,000
13. B. Land and building that is being used as a rental property
14. D. The gross amount received, prior to the deduction of any Italian taxes withheld, will be
taxable in Canada. Maria will receive a Canadian tax credit for the Italian taxes paid.


Case 1
As Margot is earning employment income in Canada, she would generally be taxable under ITA 6
2(3). With respect to the Canada/U.S. tax treaty provisions, while her income exceeds $10,000,
her stay in Canada is less than 183 days. In addition, the payor is not a Canadian entity that will
be able to deduct these payments against Canadian taxes. Given this, Margot would be exempt
from Part I tax under the provisions of the Canada/U.S. tax treaty.
Case 2
With respect to private companies incorporated in Canada if, within the preceding 60 months,
more than 50 percent of their value is derived from Canadian real property, their shares are 8
considered to be Taxable Canadian Property. This means that gains on the sale of such shares
would be taxable under ITA 2(3).
While the Canada/U.S. tax treaty serves to exempt gains on certain types of Taxable Canadian
Property, shares of Canadian incorporated private companies is not on this list. Therefore, Part I
tax would be applicable on the gain.

Case 3
Under the Canada/U.S. tax treaty, Part I tax is applicable to a U.S. resident only when the 6
business is carried on through a permanent establishment. While the U.S. firm in this Case is
carrying on business, it is not through a permanent establishment. The treaty specifically
exempts the warehouse as it is used exclusively for holding inventories. In addition, Glenda
Whorton could not be viewed as a permanent establishment as she does not have authority to
conclude individual sales contracts. Fortext would be exempt from Part I tax.

Your Mark = [(# of grading points ÷ 20)(15%)] = %

Case 1
The interest she has received is not from holding participating debt and she is at arm’s length
5
with the bank. The interest would not be subject to Part XIII tax.
Case 2
As the amount of interest is calculated on the basis of the corporation’s revenues, it would appear
that Percy is receiving interest on a participating debt security. The interest would be subject to
Part XIII tax.
Case 3
As she is not a resident of a country with which Canada has a tax treaty, Sherie would be subject
to Part XIII tax at a rate of 25 percent. Depending on whether she uses the available election to 7
be taxed under Part I, the Tax Payable would be as follows:
Without Election - Part XIII [(25%)($70,000)] $17,500
With Election - Part I [(15%)(148%*)($70,000 - $54,000)] $3,552
*The 148% reflects the additional federal tax on individual income that is not earned
in a province.
The use of the election is clearly desirable in this Case.


When an individual leaves Canada, there is a deemed disposition of all property owned at the
time of departure at fair market value with certain exceptions. For each of the listed assets, the
tax consequences that result from Jonathan’s departure are as follows:
City Home* Real property situated in Canada is exempted from the deemed disposition rule.
There would be no deemed disposition and no tax consequences at the time of Jonathan’s 4
departure. However, the city home would be classified as Taxable Canadian Property and, as
a result, any gain on the disposition of the property would be subject to Canadian taxation
even though Jonathan is no longer a Canadian resident.
Cottage* As was the case with the city home, for the cottage there would be no deemed
disposition and no tax consequences at the time of Jonathan’s departure. However, the
cottage would also be classified as Taxable Canadian Property and, as a result, any gain on
the disposition of the property would be subject to Canadian taxation even though Jonathan is
no longer a Canadian resident.
*While this is not a required part of the solution, we would note that either the city home
and/or the cottage could qualify for the principal residence exemption. However, this would
require an election for a deemed disposition of the relevant property.
Automobile While gains on personal use property are taxable, losses are not deductible.
Given this, there would be no tax consequences associated with the deemed disposition of the 4
automobile.
Cash There are never any tax consequences associated with dispositions of cash.
RRSP As an "excluded right", RRSP assets are exempted from the deemed disposition rule.
There would be no deemed disposition of the RRSP assets and no tax consequences when
Jonathan departs from Canada. Payments from the RRSP will be taxed under Part XIII when
they are withdrawn and remitted to Jonathan as a non-resident.
Shares In Public Companies There is no exemption from the deemed disposition rules for
any type of shares. There would be a deemed disposition of these shares on Jonathan’s 10
departure resulting in a taxable capital gain of $61,000 [(1/2) ($185,000 - $63,000)].
Shares In A CCPC There would be a deemed disposition of these shares on Jonathan’s

departure resulting in a taxable capital gain of $7,500 [(1/2)($120,000 - $105,000)].



As Canadian residents are taxed on worldwide income, the gains on the foreign company shares
are taxable.
The CH Ltd. withholding equals 25 percent ($5,250 ÷ $21,000) of the dividend paid. The VN Ltd.
tax withholding equals 10 percent ($965 ÷ $9,650) of the dividend paid.
As the foreign non-business tax credit is limited to 15 percent, the additional 10 percent (25% -
10%) withheld by Foreign Country 1 will have to be deducted in the determination of Sarah’s Net
Income For Tax Purposes.
Net Employment Income $ 58,300
Taxable Capital Gains 3,250
Eligible Canadian Dividends 15,760
Gross Up [(38%)($15,760)] 5,989
CH Ltd. Dividends (No Gross Up) 21,000
VN Ltd. Dividends (No Gross Up) 9,650
Excess Withholding [(25% - 15%)($21,000)] ( 2,100)
Net Capital Loss Carry Forward* ( 3,250)
Business Loss Carry Forward ( 6,400)
* The net capital loss carry forward is limited to the $3,250 of taxable capital gains.


Chapter 21 (GST/HST)
Examination Summary
Total Your
1 Essay Question 10
2-7 True Or False 9
15 Registration Requirements 15
16 Regular And Quick Method GST 45
Total 100

Part A
The required three examples can be selected from the following exempt supplies that were listed
in the text: 3
• basic health care and dental services (which does not include cosmetic surgery), 1 mark
• financial services provided to Canadian residents, for each
• sales of used residential housing and long term residential rents (e.g., rentals for more than point to a
30 days), maximum
• most land sold by individuals where the land was not used in a business, of 3.
• educational courses leading to certificates or diplomas, tutoring for credit courses, and
music lessons,
• child or personal care services, and
• a variety of services provided by charities, not-for-profit, and government organizations
Part B
The following are the major differences that are described in Chapter 21 of your text:
• Accounting procedures are based on matching expenses with revenues. GST procedures
make no attempt to match costs with revenues.
• Most accounting allocations, for example amortization, are irrelevant for GST/HST
purposes.
• Many expenses for accounting purposes do not affect the GST/HST payable or refund. For
example, GST/HST does not apply to employee wages, interest, property taxes, and
educational services.

In addition, from Chapter 6, Income Or Loss From A Business, there are two differences between
accounting income and net income for tax purposes that would also apply to GST/HST
procedures:
• In applying GAAP, accountants are generally not required to distinguish between expenses
that are reasonable and those that are not. For tax purposes, only those expenditures that are 3
considered reasonable in the circumstances are deductible in the computation of Net Income
For Tax Purposes. This would affect the GST/HST payable or refund since if an expense is 1 mark
not deductible for tax purposes, no input tax credit can be claimed for the expense. for each
concept
• ITA 69 can require adjustments when non-arm’s length transactions take place at values explained
other than fair market value (see Chapter 9 for a complete discussion of these rules). No to a
similar adjustment would be required under GAAP. This could affect the GST/HST payable or maximum
refund since the GST/HST charged and/or the input tax credit could be affected by any of 3.
adjustments.


2. False. It is a transaction tax based on transactions in both goods and services.
3. True.
4. False. Provision of zero-rated supplies is included in the definition.
5. False. While there is no matching in the GST/HST return, the basic figures are determined
on an accrual basis.
6. True.
7. True.

8. C. The tax for nightly use of camp sites in national parks
9. D. The provision of employment services by an employee to their employer.
10. B. $3,100 [($75,000 - $13,000)(5%)]
11. C. $138.05 [($1,200 ÷ 1.13)(13%)]
12. A. [$80,000 - ($100,000 + $50,000 + $6,400)][5%] = ($3,820)
13. D. Current expenditures are not tracked separately for purposes of determining input tax
credits.
14. A. Nil. [$6,300][($450,000 - $650,000) ÷ $100,000]



Calendar Quarter Test
Under this test, persons are required to register for the GST if taxable revenues exceed $30,000
in any single quarter. As Marta’s revenues do not exceed this threshold value in any of the 3
calendar quarters under consideration, she would not be required to register because of this test.
Last Four Calendar Quarters Test (Cumulative)

Under this test, persons are required to register for the GST if their taxable revenues accumulate
to more than $30,000 in any four consecutive calendar quarters. Based on the information
provided, Marta’s results are as follows:
Individual Cumulative
Quarter Four Quaters 7
October To December 2019 $ 7,200 $ 7,200
January To March 2020 4,300 11,500
April To June 2020 6,400 17,900
July To September 2020 11,600 29,500
October To December 2020 12,300
($29,500 - $7,200 + $12,300) 34,600
As shown in the table, the cumulative $30,000 is reached in the October to December 2020
quarter. As a result, Marta is required to start collecting GST on the first sale on or after
February 1, 2021, one month after the quarter in which the $30,000 threshold is reached.
Registration is required within 29 days of the first sale on which GST is collected.


Part A
When Fortunato’s HST included taxable sales of $221,932 [(113%)($196,400)] are combined
with the associated company’s HST included taxable sales of $214,700 [(113%)($190,000)], they
total $436,632. 6
As this is greater than $400,000, Fortunato and the associated company cannot use the Quick
Method.
Part B
Using the regular calculations, the HST payable for Fortunato Inc. for the current year would be
calculated as follows: 14
HST Collected [(13%)($196,400)] $25,532
Input Tax Credits On Current Expenditures:
Purchases [(13%)($107,600 + $13,200)] ($15,704)
Amortization Expense Nil
Salaries And Wages Nil
Interest Expense Nil
Other Operating Expenses [(13%)($37,900)] ( 4,927) ( 20,631)
Total Payable Before Capital Expenditures $ 4,901
Input Tax Credits On Capital Expenditures
[(13%)(100%)($101,700 ÷ 1.13)] ( 11,700)
HST Payable (Refund) ( $ 6,799)

Notes:
• Amortization expense does not affect the HST calculation.
• No HST is paid on salaries and wages or interest. As a result no input tax credits are
available.
• Full input tax credits are available on capital expenditures other than real property if more
than 50 percent of their usage is to provide fully taxable supplies.
Part C
The Quick Method calculations would be as follows:
Basic Tax [(4.4%)(113%)($196,400)] $ 9,765 11

Credit On First $30,000 [(1%)($30,000)] ( 300)
Total Payable Before Capital Expenditures $ 9,465
Input Tax Credit On Capital Expenditures
[(13%)(100%)($101,700 ÷ 1.13)] ( 11,700)
HST Payable (Refund) ($ 2,235)
If Fortunato could use the Quick Method (which it cannot), it would produce a smaller HST refund
than the regular HST calculation. As a consequence, even if Fortunato could use the Quick
Method, it would not be a good choice for the company.


Practice Exam SOLUTIONS - Vol 2 (2020)

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Chapter 11 Solutions to Practice Exam Volume 2

Practice Exam Solution

Chapter 11 (Tax Payable For Individuals II)

Solution 1 (10 Marks)

1 grading point for each correct answer. Total 9

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solutions 2 Through 7 (9 Marks)

1 grading point for each correct answer. Total 6

Solutions 8 Through 14 (21 Marks)

1 grading point for each correct answer. Total 7

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solution 15 (20 Marks)

Net Capital Loss Carry Forward

Non-Capital Loss Carry Forward

Amended Figures For Previous Year

2019 Net Income For Tax Purposes $62,000

1 grading point for each highlighted item. Total 20

Solution 16 (20 Marks)

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Note The lifetime capital gains deduction is the least of:

Capital Gains Deduction Available

Annual Gains Limit = Net Taxable Capital Gains $12,000

Sum Of Annual Gains Limit ($50,000 + $12,000) $62,000

Solution 17 (20 Marks)

The calculation of the alternative minimum tax would be as follows:

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Practice Exam Solution

Chapter 12 (Corporate Taxable Income/Tax

Solution 1 (10 Marks)

1 grading point for each item. Total 11

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solutions 2 Through 7 (9 Marks)

Solutions 8 Through 14 (21 Marks)

Taxable Income ($625,000 - $75,000) $550,000

Canadian Tax Principles - Practice Exam Solution (2020/2021)

13. B. 50 {[13%][$450,000 - ($50,350 ÷ 19%) – ($13,000 ÷ 13%)]}

Solution 15 (25 Marks)

Beginning Balance $14,500

Non-Capital Loss Carry Forward

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solution 16 (35 Marks)

Net Income For Tax Purposes $662,200

Based on this, the company’s Tax Payable would be calculated as follows:

Base Amount Of Part I Tax [(38%)($519,500)] $197,410 4

The small business deduction is equal to $23,750 [(19%)($125,000)].

Based on these figures, the deduction would be equal to $39,169 [(13%)($301,300)].

Note 3 The general rate reduction would be calculated as follows:

Taxable Income $519,500

1 grading point for each highlighted item. Total 24

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Practice Exam Solution

Chapter 13 (Corporate Investment Income)

Solution 1 (10 Marks)

C. The required three items can be selected from the following:

1 grading point for each item. Total 11

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solutions 2 Through 7 (9 Marks)

Solutions 8 Through 14 (21 Marks)

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Solution 15 (30 Marks)

Mercer’s Dividend Refund $11,500

ITA 129(4)(a)(iii) Part I Tax Payable - Given $16,480

Part B - GRIP Balance