Deck 11: Corporationsan Introduction

Question 1

Katt Co.began operations two years ago (Year 1) and recognized $37,000 in business income and $1,000 in taxable capital gains that year.Last year (Year 2) the company incurred a business loss of $25,000, a taxable capital gain of $2,000, and an allowable capital loss of $5,000.During the current year (Year 3) business income was $50,000, taxable capital gains were $4,000, and the company received $10,000 in dividends from a taxable Canadian corporation.Katt Co.utilizes any unused losses in the earliest years possible, Which of the following taxable incomes are correct after all carry-over adjustments have been made?

A)Year 1: $12,000; Year 2: $0; Year 3: $52,000
B)Year 1: $38,000; Year 2: ($28,000); Year 3: $64,000
C)Year 1: $13,000; Year 2: $0; Year 3: $61,000
D)Year 1: $37,000; Year 2: $0; Year 3: $27,000

Answer 1

A

Question 2

Many corporations carry on business in more than one province.Assuming a corporation from Newfoundland wishes to conduct business in Nova Scotia, the corporation will not pay tax in Nova Scotia if

A)the parent corporation sets up a branch in Nova Scotia.
B)the permanent establishment in Nova Scotia has a lower sales to wage ratio than the ratio in Newfoundland.
C)a branch treaty exists between Newfoundland and Nova Scotia.
D)business is conducted with Nova Scotia by way of direct sales from Newfoundland.

Answer 2

D

Question 3

Spider Ltd.had the following accounts in 2020: Revenue $100,000, COGS $65,000, Salaries $45,000, Gain on Sale of Assets $20,000, Administrative Expenses $8,000.Which of the following is correct?

A)Spider Ltd.will have a non-capital loss carryforward of $0 at the end of the year.
B)Spider Ltd.will have a non-capital loss carryforward of $4,000 at the end of the year.
C)Spider Ltd.will have a non-capital loss carryforward of $8,000 at the end of the year.
D)Spider Ltd.will have a non-capital loss carryforward of $18,000 at the end of the year.

Answer 3

C

Question 4

Which of the following scenarios is not an allowable tax transaction?

A)The taxable income of ABC Co., (a Canadian controlled private corporation), is reduced by the amount of dividends received from other taxable Canadian corporations.
B)An individual's taxable income on their T1 tax return is reduced by the amount of dividends received from a taxable Canadian corporation.
C)A donation of $5,000 made to a registered charity by XYZ Co.in the year is used to reduce XYZ's $100,000 net income for tax purposes to a taxable income of $95,000.
D)Small Co., (a Canadian controlled private corporation), has a net income for tax purposes of $125,000 in 2020, an $8,000 non-capital loss from 2019, and $10,000 of taxable dividends received from a Canadian corporation in 2020.The non-capital loss and the dividends can both be deducted from Small Co.'s net income for tax purposes in 2020.

Question 5

The Canadian tax system practices integration between corporations and individuals in order to address and reduce double taxation.The following information has been provided for analysis purposes:
$$\begin{array} { | l | r | } \hline \text { Corporate income } & \$ 200,000 \\\hline \text { Non-eligible dividends paid to shareholder } & 174,000 \\\hline \text { Corporate tax rate } & 13 \% \\\hline \text { Personal tax rate } & 50 \% \\\hline \text { Marginal non-eligible dividend tax rate } & 43 \% \\\hline\end{array}$$
Required:
Using the data provided, demonstrate numerically the concept of integration.

Question 6

Which of the following statements accurately describes the tax treatment of Canadian corporations?

A)Public and private Canadian corporations are eligible for the small business deduction.
B)Public and private Canadian corporations are eligible for the general rate reduction.
C)Public corporations are granted beneficial tax treatment on the first $500,000 of business income.
D)Canadian controlled private corporations recognize the general tax reduction on all business income.

Question 7

Khensu Ahmed incorporated a small Canadian controlled private corporation in 2018.The company pays non-eligible dividends.The balance sheet for 2020 is as follows:

A.Determine the tax that Khensu will realize as a shareholder if the company is sold.
B.Determine the tax that Khensu will realize as a shareholder if the corporation is wound up.

Question 8

The Honeymoon Co.is a Canadian controlled private corporation with active business income of $750,000 in 2020.Dividends were received during 2020 from a taxable Canadian corporation in the amount of $80,000.The company recognized a $50,000 capital gain during 2020.The company's year-end is December 31^st.
Additional information is as follows:
Net capital loss carry-over from 2019 is $30,000.
Non capital loss carry-over from 2019 is $70,000.
Required:
Calculate the following for the company for the 2020 tax year:
A.Net income for tax purposes
B.Taxable income
C.Part I Federal Tax - Identify amounts for 1) basic federal tax, 2) federal abatement, 3) refundable tax on investment income, 4) small business deduction, 5) general rate reduction), and 6) the total federal tax.

Question 9

When shares are transferred from one group of shareholders to another and there is a change in control, which of the following applies?

A)Net-capital losses that arise following the change in control are automatically deemed to have expired.
B)Non-capital losses arising prior to the change in control are automatically deemed to have expired.
C)Net-capital losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.
D)Non-capital business losses arising prior to the change in control may be used against income from the business that incurred the loss if that business is carried on at a profit or with a reasonable expectation of profit in the year in which the losses are applied.

Question 10

Band Inc.is a public Canadian corporation which was established five years ago.The company's head office is located in Saskatchewan.A small branch was established in Manitoba last year.
The company's books show the following for the current year:
$$\begin{array} { | l | r | } \hline \text { Sales in Saskatchewarn } & \$ 5,000,000 \\\hline \text { Sales in Maritoba } & \$ 1,000,000 \\\hline \text { Total labour costs of the compary } & \$ 2,000,000 \\\hline \text { Labour costs paid in Saskatchewarn } & \$ 1,500,000 \\\hline \text { Wages at the Marnitoba branch } & \$ 500,000 \\\hline \text { Inconne from operations in Saskatchewarn } & \$ 550,000 \\\hline \text { Incorne from operations in Maritoba } & \$ 100,000 \\\hline \text { Dividend received from a taxable } & \$ 50,000 \\\text { Carnadiarn corporation } & \\\hline\end{array}$$
A.Calculate the company's net income for tax purposes for the current year.
B.Calculate the company's taxable income, both federal and provincial.(Round all amounts to two decimal places.)
C.Calculate Band Inc.'s Part I federal tax liability.(Round all amounts to zero decimal points.)
Use rates applicable for 2020.

Question 11

Using general terms, explain how a change in control of a corporation can affect the net-capital losses and the non-capital losses.

Question 12

Rainbow Co.is a Canadian controlled private corporation with active business income of $350,000 in 2020.The company engages in retail and wholesale activities.Capital gains recognized by the company in 2020 totaled $84,000.Rainbow Co.will utilize a net capital loss carry-over of $28,000 on its 2020 tax return.
Required:
Calculate the following for Rainbow Co.for 2020:
A.Net Income for Tax Purposes
B.Taxable Income
C.Part I Federal Tax - Identify amounts for 1) basic federal tax, 2) federal abatement, 3) refundable tax on investment income, 4) small business deduction, 5) general rate reduction), and 6) the total federal tax.
A.
$\begin{array}{|l|r|r}\hline \text { Business income } & \$ 350,000 \\\hline \text { Taxable capital gain }(\$ 84,000 X .5) & 42,000 \\\hline \text { Net Income for Tax Purposes } & \$ 392,000\\\hline \end{array}$

B.
$\begin{array}{|l|r|r|}\hline \text { Less: } & & \\\hline \text { Net-capital loss } & & -28,000 \\\hline \text { Taxable Income } && \$ 364,000 \\\hline\end{array}$

C.
$\begin{array}{|l|r|r|}\hline \text { Primary federal tax } \$ 364,000 \times 38 \%= & 1) & \$ 138,320 \\\hline \text { Less federal abatement } \$ 364,000 \times 10 \%= & 2) & -36,400 \\\hline \text { Refundable tax on investment income: } & &\\\hline102 / 3 \times \text { lessor of: }\\\hline\end{array}$
$\$ 14,000 \text { aggregate investment income (taxable capital gain less net-capital loss) }$
$\begin{array}{|l|l|l|}\hline \$ 14,000 \text { (TI } \$ 364,000-\text { SBD amount } \$ 350,000) & 3) & 1,493 \\\hline \text { Less small business deduction: } & & \\\hline 19 \% \times \text { the lessor of: } & & \\\hline \text { Taxable income } \$ 364,000 & & \\\hline \text { Active business income } \$ 350,000 & 4) & -66,500 \\\hline \text { Small business annual limit } \$ 500,000 & & \\\hline \text { General tax reduction } 13 \%-(\$ 364,000-\$ 350,000-\$ 14,000) & 5)&0 \\\hline \text { Part I Federal Tax } & 6) & \$ 36,913 \\\hline\end{array}$

Question 13

The Great Big Cookie Corp.(GBCC) is a Canadian controlled private corporation which realized a total net income for tax purposes of $230,000 in 2020.During the year, GBCC received $25,000 in dividends from a taxable Canadian corporation during the year, and they also donated $15,000 to a registered charity.What is GBCC's taxable income in 2020?

A)$190,000
B)$205,000
C)$215,000
D)$240,000