Question 1

The Great Big Company (GBC) is a CCPC located in Saskatchewan. GBC owns a foreign subsidiary, The Little Company (TLC). 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 TLC by 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 lower tax rate? Why or why not?
B) What are three methods used to establish transfer prices for non-arm's length transactions?

Accepted Answer

A) Fiona cannot adjust the selling price of the component parts in order to take advantage of the lower tax rate, if the new selling price is 'unreasonable'. An unreasonable selling price would be in violation of the reasonableness test in Canadian tax law [ITA 69]. B) 1. Compare prices to those used between arm's length parties 2. Cost plus method 3. Resale price method

Question 2

Which of the following statements is TRUE concerning domestic expansion of a business?&#10;A) Cash funding requirements will be lower to establish a new corporation than a corporate division if the expansion activity incurs substantial start-up losses.&#10;B)Cash funding requirements will be higher to establish a new corporation than a corporate division if the expansion activity incurs substantial start-up losses.&#10;C) Obligations of a new division will have no impact on the founding corporation.&#10;D) The main advantage of incorporating an expansion activity is the use of start-up losses from the new corporation against income from the founding corporation.

Accepted Answer

Establishing a new corporation for domestic expansion will require a higher cash funding requirement compared to establishing a corporate division, especially if the expansion activity incurs substantial start-up losses. This is because a new corporation is a separate legal entity from the founding corporation, requiring its own set of resources to operate effectively. The obligations of the new division will also have an impact on the founding corporation, especially if the new division incurs losses or debts. While incorporating an expansion activity can provide tax advantages, the main advantage is not the use of start-up losses from the new corporation against income from the founding corporation.

Question 3

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

B

Accepted Answer

B

Question 4

In the Canada-U.S. tax treaty, the definition of a 'permanent establishment' does not include&#10;A) a place of management.&#10;B) a factory.&#10;C)a storage facility.&#10;D) an office.

Accepted Answer

The definition of a 'permanent establishment' in the Canada-U.S. tax treaty typically includes places of management, factories, and offices as locations where business activities are conducted, thus establishing a taxable presence in the country. However, a storage facility, by itself, is not usually considered a permanent establishment under this treaty, as it is generally used for the storage, display, or delivery of goods without involving significant business operations or authority.

Deck 20: Domestic and International Business Expansion