Question 1

Vadel Inc., a Canadian public company, has 1,000,000 shares outstanding with a total PUC of $1,750,000.Mr.Vincent Dorval owns 5,000 of these shares with an adjusted cost base of $11,250.Vadel Inc.declares a 5 percent non-eligible stock dividend at a time when its shares are trading at $2.50 per share.Which of the following statements is cor- rect?

Accepted Answer

The dividend is non-eligible, so it is not taxable. The adjusted cost base of the shares is increased by the amount of the dividend, which is $5,000 x 5% = $250. The PUC of the shares is increased by the amount of the dividend, which is $1,750,000 x 5% = $87,500.

Question 2

All other things being equal, higher provincial tax rates on corporations favour the use of a corporation to earn business income.

Accepted Answer

Higher provincial tax rates on corporations make it less favorable to use a corporation to earn business income, as they reduce the after-tax profits of the corporation.

Question 3

Which of the following transactions will not result in a deemed dividend?

Accepted Answer

A deemed dividend occurs when a corporation takes certain actions that result in a shareholder receiving a benefit (such as the redemption or repurchase of shares) without being taxed on that benefit.

A) Paying off debt with shares that have a fair market value greater than the debt amount results in a deemed dividend because the shareholder is receiving a benefit (the excess fair market value) without being taxed on it.

B) Redeeming shares for an amount equal to the PUC of the shares does not result in a deemed dividend, as the amount received by the shareholder is considered a return of capital and is not taxed as income.

C) A liquidating dividend reduces PUC and may result in a deemed dividend if the amount of the dividend exceeds the shareholder's PUC.

D) Winding-up and distributing the assets of a corporation may result in a deemed dividend if the amount received by the shareholder exceeds their PUC or the corporation's capital dividend account balance.

Question 4

If all of the income earned by a business is active business income, flowing the income through a Canadian controlled private corporation, as opposed to earning the income in an unincorporated business, will always provide a tax savings.

Accepted Answer

This statement is false. While incorporating a business can provide tax savings in certain circumstances, it is not always the case. The tax implications of incorporating a business depend on several factors, such as the size of the business, the nature of its income, and the owner's individual tax situation. It is recommended to seek professional advice before making a decision to incorporate a business.

Question 5

Income splitting refers to procedures which are designed to spread an individual's Tax- able Income over several taxation years.

Accepted Answer

Income splitting refers to strategies used to distribute income among family members to reduce the overall tax burden, not spreading income over several years.

Question 6

Mark is the only shareholder of Sico Ltd., a Canadian controlled private corporation.The CCPC has no balance in its GRIP account.In 2011, Sico paid a dividend in kind by distrib- uting securities with fair market value of $72,000 and an adjusted cost base of $56,000.Which of the following statements properly reflects the tax consequences of this transac- tion?

Accepted Answer

The answer of Mark is the only shareholder of Sico...

Question 7

Torin Inc.has 500,000 shares issued and outstanding.These shares were issued for total consideration of $1,125,000.At a later point in time, Jane Dow acquired 1,000 of these shares at a total cost of $3,500.With respect to Ms.Dow's holding of Torin shares, which of the following statements is not correct?

Accepted Answer

Option D is incorrect because if Ms. Dow were to sell the Torin shares for $4,000, she would have a taxable capital gain of $500 (proceeds of $4,000 minus adjusted cost base of $3,500). She would not have a deemed dividend as the company did not declare a dividend and her shares would not be eligible for any dividend payments. The information provided does not allow us to determine the PUC or any other tax implications.

Question 8

The tax concept of Paid Up Capital (PUC) is, in general, the same as the accounting con- cept of contributed capital.

Accepted Answer

The tax concept of Paid Up Capital (PUC) is indeed the same as the accounting concept of contributed capital, as both refer to the amount of money or assets that shareholders have contributed to a company in exchange for ownership.

Question 9

If a corporation acquires goodwill for $200,000, deducts maximum CEC for three years, and then sells the goodwill for $250,000, there will be an addition to the capital dividend account of $37,500.

Accepted Answer

The addition to the capital dividend account would be based on the non-taxable portion of the capital gain, which is 50% of the gain. The gain here is $50,000 ($250,000 - $200,000), so the addition would be $25,000 (50% of $50,000), not $37,500.

Question 10

When a corporation redeems all or part of its outstanding shares, the difference between the proceeds of redemption and the PUC of the shares will be treated as a capital gain for tax purposes.

Accepted Answer

When a corporation redeems all or part of its outstanding shares, the difference between the proceeds of redemption and the adjusted cost base (ACB) of the shares will be treated as a capital gain for tax purposes, not the Paid-Up Capital (PUC).

Question 11

Mr.Hanes owns 100% of the common shares of Jimbo Corp.and 40% of the common shares of Hughes Corp.Hughes Corp.owns 80% of the common shares of ARC Ltd.Mr.Hanes' daughter-in-law also owns 5% of the common shares of Hughes Corp., and 15% of the common shares of ARC Ltd.The remaining shares are held by parties who deal at arm's length with Mr.Hanes and his daughter-in-law.The following Companies are asso- ciated under ITA 256 of the Income Tax Act:

Accepted Answer

Under the ITA 256, two or more corporations are associated if one corporation directly or indirectly controls the other. In this case, Hughes Corp. owns 80% of the common shares of ARC Ltd., so they are associated. And since Mr. Hanes owns 40% of the common shares of Hughes Corp., he indirectly owns 32% (40% of 80%) of the common shares of ARC Ltd. Therefore, Jimbo Corp., Hughes Corp., and ARC Ltd. are all associated.

Question 12

For an individual, 40 percent of investment tax credits are eligible for a refund if the indi- vidual does not have sufficient Tax Payable to use them during the current taxation year.

Accepted Answer

According to the statement, if an individual does not have sufficient Tax Payable to use the investment tax credits during the current taxation year, they are eligible for a refund of 40 percent of the credits. Therefore, the statement is true.

Question 13

Martin Borak owns 50 percent of the shares of a Canadian controlled private corporation. The CCPC has declared a 10 percent, non-eligible stock dividend which has resulted in a
$22,000 increase in its Paid-Up Capital.Which of the following amounts must be in- cluded in Martin's income as a result of the stock dividend?

Accepted Answer

The answer of Martin Borak owns 50 percent of the...

Question 14

Which of the following items would not be added to the capital dividend account of a pri- vate company?

Accepted Answer

Dividends received from other taxable Canadian corporations are not added to the capital dividend account; they are typically included in the company's income.

Question 15

The use of a corporation can provide tax deferral only if the owner of the shares can leave the income in the corporation.

Accepted Answer

This is true because if the owner of the shares withdraws the income from the corporation, it would be taxed as personal income. However, if the income is left in the corporation, it can be reinvested or distributed at a later time, allowing for tax deferral.

Question 16

Which of the following is not a consequence of an acquisition of control?

Accepted Answer

The answer of Which of the following is not a...

Question 17

Simon Williams owns 100 percent of Wonder Technologies Inc.Peter Maximoff owns 100 percent of Speedy Delivery Service Ltd.Simon and Peter each own 50 percent of
Scarlet Decorating Ltd.Simon is married to Peter's sister, Wanda.
Assuming each of the three corporations is a CCPC and has at least $500,000 of active business income earned in Canada, what is the maximum combined corporate income on which the three corporations can claim the small business deduction?

Accepted Answer

Each corporation can claim the small business deduction on the first $500,000 of active business income earned in Canada, for a total of $1,500,000. Since each corporation has at least $500,000 of active business income, the maximum combined income on which they can claim the small business deduction is $1,000,000 (the sum of each corporation's $500,000 limit).

Question 18

All other things being equal, a higher provincial dividend tax credit favours the use of a corporation.

Accepted Answer

A higher provincial dividend tax credit reduces the amount of taxes an individual would pay on dividends received from a corporation. Therefore, corporations become a more attractive option for individuals looking to receive dividend income, as opposed to receiving it personally and being subject to higher taxes.

Question 19

Rushmore Limited, a distributor of leather raw materials, currently owns 15 percent of the outstanding common shares of Mount Limited.Bush Limited and Trailco respectively own 52 percent and 33 percent of the outstanding common shares of Mount Limited.Mount Limited, a large shoe manufacturer, has had several years of large losses. Which one of the following percentages represents the minimum percentage of addi- tional common shares of Mount Limited that Rushmore Limited must purchase in order that there be an acquisition of control?

Accepted Answer

Rushmore Limited currently owns 15% of Mount Limited. To acquire control, it needs more than 50% of the shares. Since Bush Limited owns 52%, Rushmore needs to surpass this. Therefore, Rushmore needs at least 36% additional shares to reach 51% (15% + 36% = 51%).

Question 20

Which of the following statements with respect to acquisition of control procedures is not correct?

Accepted Answer

Subsequent to the deemed year end, non-capital losses can only be deducted against income of the same type, not any type of income.

Quiz 2: Byrd Chens Canadian Tax Principles 2