Deck 11: Corporations-An Introduction

Question 1

Bride and Groom Co. is a Canadian controlled private corporation with active
business income of $750,000. The company is in the business of producing and selling bridal wear. Dividends were received from a taxable Canadian
corporation in the amount of $80,000. The company recognized a $50,000 capita gain during the year.
Additional information is as follows:
Net capital loss carry-over balance is $200,000. Non capital loss carry-over balance is $70,000.
Required:
Calculate the following for the company for the current year:

A) Net income for tax purposes
B) Taxable income
C) Federal tax liability

Answer 1

Question 2

Using general terms, explain how a change in control of a corporation can affect the net-capital losses and the non-capital losses.

Answer 2

When there is a change in control, net-capital losses are deemed to have expired. Non-capital losses may only be used against the business that
originated the losses, or against income from a 'similar' business, provided that the original business is not terminated before the losses are used, and the original business must be carried on to earn a profit or a reasonable
expectation of profit in the year the loss is deducted.

Question 3

When shares are transferred from one group of shareholders to another and there is a change in control, which of the following is correct?

A) Net capital losses arising prior to the change in control will be lost and any non-capital losses arising prior to the change in control may be used if the business that incurred the loss is terminated.
B) Non-capital business losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or reasonable expectation of profit in the year in which the losses are
Applied.
C) Non-capital losses are automatically deemed to have expired.
D) Any net capital losses that arise following the change in control will be lost.

Answer 3

B

Question 4

Which of the following scenarios is FALSE?

A) Mr. A's taxable income may be reduced by the amount of dividends received from taxable Canadian corporations.
B) The taxable income of ABC Co. may be reduced by the amount of dividends received from affiliated foreign corporations.
C) The taxable income of ABC Co. may be reduced by the amount of dividends received from other taxable Canadian corporations.
D) It is possible for the after-tax profits of ABC Co. to be shifted to its parent company by way of dividends, without an immediate tax consequence.

Question 5

The Stevens Company is a public Canadian corporation that is primarily engaged in manufacturing. The company's head office is located in Saskatchewan. In
20X1, a small branch was established in Manitoba, to be used for sales purposes only.
In 20X2, the company's books showed the following:
Required:

A) Calculate the company's net income for tax purposes for 20X2.
B) Calculate the company's taxable income, both federal and provincial. (Round all number to two decimal places.)
C) Calculate the manufacturing and processing profits for the company.
D) Calculate the federal tax liability. (Round all numbers to zero decimal points.)

Question 6

Which of the following statements accurately describes the tax treatment of Canadian corporations?

A) Public corporations are granted beneficial tax treatment on the first $500,000 of business income.
B) CCPCs recognize the general tax reduction on all business income.
C) Public and private Canadian corporations are eligible for the small business deduction.
D) Public and private Canadian corporations are eligible for the general tax reduction.

Question 7

Johnson Co. is a CCPC with active business income of $350,000 in 20X2. The company engages in retail and wholesale activities. Capital gains in 20X0 were
$84,000.
Johnson Co. will utilize a net capital loss carry-over of $28,000 on its 20X2 tax return.
Required:
Calculate the following for Johnson Co. for 20X2:
a) Net Income for Tax Purposes
b) Taxable Income
c) Federal tax liability

Question 8

Coffee Co. began operations in 20X0 and recognized $37,000 in business income and $1,000 in taxable capital gains that year. In 20X1, the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000.
Business income for 20X2 was $50,000, taxable capital gains were $4,000, and the
Company received $10,000 in dividends from a taxable Canadian corporation. Coffee Co. utilizes any unused losses in the earliest years possible, Which of the following
Taxable incomes are correct, after all carry-over adjustments have been made?

A) 20X0: $38,000; 20X1: ($28,000); 20X2: $64,000
B) 20X0: $13,000; 20X1: ($0; 20X2: $61,000
C) 20X0: $37,000; 20X1: $0; 20X2: $27,000
D) 20X0: $12,000; 20X1: $0; 20X2: $52,000

Question 9

Many corporations carry on business in more than one province. Assuming a corporation from Province A wishes to conduct business in Province B, the corporation will not have to pay tax in Province B if:

A) the parent corporation sets up a branch in Province B.
B) business is conducted with the other province by way of direct sales from Province A.
C) a branch treaty exists between the two provinces.
D) the permanent establishment in Province B has a lower sales to wage ratio than the ratio in Province A.