MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)The CEO at Big Company Corporation has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying capital gains tax this year. Which tax planning method will the CEO be using?A)Transferring income to another entity.B)This is a form of tax evasion and is not allowed.C)Shifting income from one time period to another.D)Converting the nature of income from one type to another.

Answer:C

2)Which of the following scenarios illustrates a potential tax avoidance scheme?A)Dividends received from shares transferred from a wife to her husband are taxed in the hands of the wife.B)Property transferred between arm's-length parties is valued at fair market value.C)A man transfers property to his child at a value less than fair market value.D)A shareholder owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies.

Answer:C

3)The controller of Little Company Ltd. has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying tax on capital gains this year. The controller is engaging in A)tax evasion. B)tax avoidance. C)tax planning. D)GAAR.

Answer:C

4)Certain skills are necessary for successful tax planning. One of these skills is applying the time value of money. Which of the following is FALSE regarding this skill?A)Applying the time value of money is a tool used for wealth accumulation.B)If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annual after-tax return is 4.8%.C)If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, the taxpayer's tax rate is 40%.D)If a taxpayer invests $1,000 for one year at a rate of return of 14% and is subject to a 45% tax rate, the after-tax value of the investment will be $1,077.

Answer:B

1 Canadian Income Taxation 2017 2018 Canadian 20th Edition Buckwold Test Bank Visit TestBankDeal.com to get complete for all chapters

5)Which of the following statements regarding GAAR is true?A)Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR.B)The purpose of GAAR is to catch tax evaders.C)When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances.D)The Canada Revenue Agency states that "A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes."

Answer:D

ESSAY. Write your answer in the space provided or on a separate sheet of paper.6)Steven James earned $150,000 this year in profits from his proprietorship, which placed him in a 45% tax bracket. The rate of tax for Canadian-controlled private corporations in his province is 15% on the first $500,000 of income. Personal tax rates (federal plus provincial) in James' province are: On the first $46,000 24% On the next $46,000 32% On the next $50,000 40% On the next $61,000 45% On income over $203,00050% (All rates are assumed for this question.) Steven withdraws $3,000 per month for his personal living expenses. All remaining profits are used to pay taxes and to expand the business. Steven expects the same business after-tax profits next year.Steven is considering incorporating his business next year. If he incorporates, he will pay himself a gross salary of $48,000.

Required:

• Determine the increase in Steven's cash flow if he incorporates his company? Show all calculations.
• Name the type of tax planning that Steve would be engaging in if he incorporated his company.

Answer:A) Excess cash as a proprietorship: Pre-tax Profits$150,000

Tax:

24% 46,000 $11,040

32% 46,000 14,720

40% 50,000 20,000

45% 8,000 3,600

(Assume federal plus provincial rates)

(49,360)

After-tax profits $100,640 2

Living expenses withdrawn (36,000) Available for expansion $64,640

Excess cash as a corporation:

Profits before salary $150,000 Salary(48,000) Corporate pre-tax profits 102,000

Tax: 15% x 102,000 (15,300)

After-tax profits (Available for expansion)

$86,700

Excess cash available for expansion

($86,700 - $64,640)

$22,060

• Transferring income from one entity to another (individual to corporation)

7)Part A: List the three key factors of cash flow.

Part B: List the six skills required for tax planning as suggested in the textbook.Answer:Part A: Three key factors of cash flow

• Amount of money coming in
• Amount of money going out
• Timing

Part B:

Six skills required for tax planning

• Anticipation
• Flexibility
• Speculation
• Applying the 8th Wonder of the World
• Perspective
• Global approach

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8)Andrew has $10,000 to invest. He wants to put his money in a one-year investment earning an annual interest rate of 12%. Andrew is in a 42% tax bracket.

Required:

a) Calculate the total value of Andrew's investment, after-tax, at the end of the year.

b) Calculate the amount of taxes Andrew will have to pay on his investment.

Answer:a) ($10,000 × 1.12) × (1 - .42) = $10,696

• $10,000 × .12 × .42 = $504

9)Match each of the following terms with the most accurate example. Use each example only once.

TERMS:

Tax evasion Tax planning Tax avoidance

EXAMPLES:

• An individual is seeking a beneficial outcome, and therefore, applies an application that is not specifically

prohibited by law.

• A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned

during the year.

• Two unrelated companies take steps to become related in order to shift income from the profitable business

to the company with losses.Answer:An individual is seeking a beneficial outcome, and therefore, applies an application that is not specifically prohibited by law. Taxplanning A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned during the year. Taxevasion Two unrelated companies take steps to become related in order to shift income from the profitable business to the company with losses. Taxavoidance 4