Question 1

Which of the following lists are acceptable methods that may be used in adopting a reasonable transfer price between a Canadian parent and its foreign subsidiary corporations?&#10;A) Comparable arm's-length selling price method; cost-plus method; resale price method&#10;B) Cost-plus method; resale price method; profit-margin method&#10;C) Lowest tax rate method; resale price method; comparable arm's-length selling price method&#10;D) Comparable arm's-length selling price method; lowest tax rate method; profit-margin method

Accepted Answer

The comparable arm's-length selling price method, cost-plus method, and resale price method are all acceptable methods for determining a reasonable transfer price between a Canadian parent and its foreign subsidiaries according to Canadian transfer pricing rules. The profit-margin method can also be used, but it is not listed as an option in combination with the other methods. The lowest tax rate method is not a legitimate transfer pricing method and would not be accepted.

Question 2

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 will not apply?&#10;A) The branch will be subject to branch taxes in the foreign country.&#10;B) The branch profits will be included in the Canadian corporation's worldwide income.&#10;C) Provided a treaty is in place with the foreign country, a foreign tax credit will reduce the Canadian taxes payable.&#10;D) If the foreign country has a lower tax rate, a tax benefit will be recognized.

Accepted Answer

If the foreign country has a lower tax rate, it does not automatically result in a tax benefit for the Canadian corporation, as the profits will still be included in the Canadian corporation's worldwide income and subject to Canadian tax laws.

Question 3

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.

Question 4

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

Accepted Answer

The answer of Crispy Chips Inc.is considering an expansion into...

Question 5

Which of the following statements is true concerning domestic expansion of a business?&#10;A) Cash funding requirements will be lower for a corporation than a corporate division if the expansion activity incurs start-up losses.&#10;B) Cash funding requirements will be higher for a corporation than a corporate division if the expansion activity incurs start-up losses.&#10;C) Obligations of a new division are separate from the parent company due to the limited liability of the division.&#10;D) The main advantage of incorporating an expansion activity is the use of start-up losses against income from other divisions of the founding corporation.

Accepted Answer

When a corporation expands domestically, the cash funding requirements will generally be higher than for a corporate division, especially if there are start-up losses involved. This is because a corporation is a separate legal entity and will require its own resources and funding to operate. Option A is incorrect because a corporation's funding requirements will generally be higher due to the costs associated with setting up and operating the new entity. Option C is incorrect because a division is not a separate legal entity and the parent company is responsible for all of its obligations. Option D is misleading as start-up losses may be deductible for tax purposes, but this is not necessarily the main advantage of incorporating an expansion activity.

Question 6

Andy Griffin would like to invest $150,000 in his friend Ernie's company,which was founded and operates in a foreign country.This investment would give Andy 25% ownership of the company.An annual dividend of $15,000 is anticipated.
Andy's personal marginal tax rate is 45% on regular income,28% on eligible dividends,and 35% on non-eligible dividends.Ernie's company is subject to a tax rate of 38% on all business income.Any dividends received by Andy,personally,will be subject to a 15% withholding tax.
Required:
1)Determine a)the total tax liability (foreign and Canadian)that Andy will be subject to upon receiving dividends from Ernie's company,and b)the after-tax proceeds.
2)How would your answer in part 1 change if Andy established a Canadian holding company to purchase the shares,(subject to a 5% withholding tax on dividends received)?
3)What would Andy's proceeds be if he received the dividend income from the holding company?

Accepted Answer

The answer of Andy Griffin would like to invest $150,000...

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 25% 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

The answer of The Great Big Company (GBC)is a CCPC...

Question 8

The Sweater Corp.is a Canadian corporation which plans to expand internationally.The company has decided to establish a 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 not included in Canadian corporate taxable income.
D) Dividends received by the Canadian corporation from the foreign subsidiary may be subject to a withholding tax in the foreign jurisdiction.

Accepted Answer

The statement "The subsidiary's profits will be included in the Canadian corporation's worldwide income" is false because profits of a foreign subsidiary are not automatically included in the parent company's income unless the parent company has control over the subsidiary. However, the parent company may still be required to report the subsidiary's financial information for tax and regulatory purposes.

Deck 20: Domestic and International Business Expansion