Deck 20: Domestic and International Business Expansion

Question 1

In the Canada-U.S. tax treaty, the definition of a 'permanent establishment' does not include

A)a factory.
B)a place of management.
C)an office.
D)a storage facility.

Answer 1

D

Question 2

Which of the following statements is TRUE concerning domestic expansion of a business?

A)Obligations of a new division are separate from the founding corporation.
B)Cash funding requirements will be higher to establish a corporation than a corporate division if the expansion activity incurs substantial start-up losses.
C)The main advantage of incorporating an expansion activity is the use of start-up losses against income from other divisions of the founding corporation.
D)Cash funding requirements will be lower to establish a corporation than a corporate division if the expansion activity incurs substantial start-up losses.

Answer 2

B

Question 3

Crispy Chips Inc. is considering an expansion into the United States. Jeff Arthur, the CEO, is not sur structure this new venture and would like some general information before he meets with his accoun lawyer.
Required:
Write a memo to Jeff informing him of the two fundamental approaches he can take to conduct his fo operations (branch and subsidiary corporation), listing two advantages and two disadvantages of
each approach.

Answer 3

2. A Canadian foreign tax credit is available to offset the branch's foreign tax.
Disadvantages
1. Foreign taxes will apply to the branch profits.
2. Depending on tax rates applied, double taxation could occur on the foreign profits.
Foreign Subsidiary Advantages
1. The subsidiary is only taxed in the foreign jurisdiction, which is advantageous if the foreign lower than the Canadian rate.
2. Dividends flow tax-free from the foreign affiliate to the Canadian corporation.
Disadvantages
1. Losses incurred in the foreign subsidiary cannot be applied against the parent corporation's i
2. A foreign withholding tax will be imposed on dividends paid to foreign shareholders.
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Question 4

Which of the following lists are acceptable methods for adopting a reasonable transfer price between a Canadian parent and its foreign subsidiary corporations?

A)Comparable arm's-length selling price method; cost-plus method; resale price method
B)Comparable arm's-length selling price method; lowest tax rate method; profit-margin method
C)Cost-plus method; resale price method; profit-margin method
D)Lowest tax rate method; resale price method; comparable arm's-length selling price method

Question 5

The Running Shoe Corp. is a Canadian corporation which plans to expand internationally. The company has decided to establish a foreign branch in another country. Which of the following is FALSE?

A)Provided a treaty is in place with the foreign country, a foreign tax credit will reduce the Canadian taxes payable.
B)The profits of the branch will be subject to tax in the foreign country.
C)The branch profits will be included in the Canadian corporation's worldwide income.
D)If the foreign country has a lower tax rate, a tax benefit will be recognized.

Question 6

The Sweater Corp. is a Canadian corporation which plans to expand internationally. The company has decided to establish a wholly-owned foreign subsidiary corporation in another country. Which of the following is FALSE?

A)Dividends received by the Canadian corporation from the foreign subsidiary may be subject to a withholding tax in the foreign jurisdiction.
B)Dividends received by the Canadian corporation from the foreign subsidiary are excluded from the Canadian corporation's taxable income.
C)The subsidiary's profits will be included in the Canadian corporation's worldwide income.
D)The subsidiary will be subject to taxes in the foreign country.

Question 7

The Great Big Company (GBC)is a CCPC located in Saskatchewan. GBC owns a foreign subsidiary, The Little Company (TLC), which is located in a foreign country. GBC manufactures electronic component parts which are then sold to TLC for assembly. GBC is subject to a 27%
corporate tax rate and TLC is subject to a 19% corporate tax rate. Fiona Big, the CEO of GBC, has mentioned that due to the lower tax rate in the foreign country, the profits of GBC could be shifted to adjusting the selling price of the component parts.
Required:

A)Can Fiona Big adjust the selling price of the component parts in order to take advantage of the lo rate? Why or why not?
B)What are three methods used to establish transfer prices for non-arm's length transactions?

Question 8

What would Andy's after-tax proceeds be if he received eligible dividend income from the holding company?