Question 1

Match each of the following terms with the most accurate example. Use each example only once.
TERMS:
Tax evasion
Tax planning
Tax avoidance
EXAMPLES:
A. An individual is seeking a beneficial outcome, and therefore, applies an application that is not specifically prohibited by law.
B. A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned during the year.
C. Two unrelated companies take steps to become related solely for the purpose of loss utilization.

Accepted Answer

An individual is seeking a beneficial outcome, and therefore, applies an application that is not specifically prohibited by law. Tax planning A business is seeking a beneficial outcome, and therefore, does not report a portion of revenue earned during the year. Tax evasion Two unrelated companies take steps to become related solely for the purpose of loss utilization. Tax avoidance

Question 2

Part A: List the three key factors of cash flow.&#10;Part B: List the six skills required for tax planning as suggested in the textbook.

Accepted Answer

Part A: Three key factors of cash flow 1. Amount of money coming in 2. Amount of money going out 3. Timing Part B: Six skills required for tax planning 1. Anticipation 2. Flexibility 3. Speculation 4. Applying the 8^th Wonder of the World 5. Perspective 6. Global approach

Question 3

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) Converting the nature of income from one type to another.
C)Shifting income from one time period to another.
D) This is a form of tax evasion and is not allowed.

C

Accepted Answer

The CEO at Big Company Corporation will be using the tax planning method of shifting income from one time period to another by selling the capital equipment after the year-end. This will result in the capital gains tax being paid in the following year, thereby deferring the tax liability. This is a legal practice and is commonly used by businesses to optimize their tax liabilities.

Question 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?&#10;A) Applying the time value of money is a tool used for wealth accumulation.&#10;B) 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%.&#10;C)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%.&#10;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 interest will be $77.

Accepted Answer

The annual after-tax return should be calculated as 12% * (1 - 0.40) = 7.2%, not 4.8%.

Question 5

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 avoidance.
B) tax evasion.
C)tax planning.
D) GAAR.

Accepted Answer

The controller is engaging in tax planning, which is the legitimate practice of arranging financial affairs in such a way as to minimize tax liability. Tax avoidance involves exploiting loopholes and technicalities to pay less tax than is actually owed, while tax evasion is the illegal act of not paying taxes that are owed. GAAR stands for General Anti-Avoidance Rule, which is a tax law that enables authorities to counter aggressive tax planning schemes that seek to exploit technicalities and loopholes.

Question 6

Which of the following statements regarding GAAR is true?&#10;A) The purpose of GAAR is to catch tax evaders.&#10;B) When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances.&#10;C)Canada Revenue Agency states that &#34;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.&#34;&#10;D) Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR.

Accepted Answer

GAAR is an anti-avoidance rule that targets transactions or arrangements that are undertaken primarily to obtain a tax benefit, and not for bona fide business, investment, or family purposes. Therefore, statement C is correct as it reflects the criteria for determining whether an arrangement falls within GAAR or not. Statements A, B, and D are incorrect as they do not reflect the purpose or application of GAAR accurately.

Deck 2: Fundamentals of Tax Planning