Deck 21: The Corporation Tax

Question 1

A tax on economic profits can be shifted.

A)True
B)False
C)Uncertain

Answer 1

False

Question 2

The federal corporate tax rate on small business is the corporate tax rates on small business levied by provinces and territories.

A)lower than
B)higher than
C)equal to
D)lower than or equal to

Answer 2

higher than

Question 3

According to research, the effective marginal tax rate on investments is in forestry and manufacturing compared to construction.

A)not comparable
B)higher
C)basically the same
D)lower

Answer 3

lower

Question 4

Firms deducting the asset's full cost at the time of acquisition from taxable income is called an investment tax credit.

A)True
B)False
C)Uncertain

Question 5

Estimates of the effect of the user cost on investment vary greatly.

A)True
B)False
C)Uncertain

Question 6

The is a way to reduce the degree of double taxation.

A)dividend exclusion method
B)split-rate method
C)arm's length system
D)both A. and B.

Question 7

When calculating the user cost of capital, the after-tax rate of return and the economic rate of depreciation interact by

A)addition.
B)multiplication.
C)division.
D)subtraction.

Question 8

When each stockholder incurs a tax liability on his or her share of the earnings of a corporation (whether or not the earnings are distributed), this is known as

A)dividend deduction.
B)partial imputation.
C)double taxation.
D)full integration.

Question 9

In 1997, the Technical Committee on Business Taxation reported in Canada's corporate income taxes.

A)distortions among industrial sectors with differing tax rates across industries.
B)distortions that favour debt over equity financing.
C)distortions that favour small corporations over large ones.
D)all of these answers are correct.

Question 10

Income from branch operations of Canadian corporations in foreign countries is not included in the taxable income of the Canadian corporations.

A)True
B)False
C)Uncertain

Question 11

Before applying the corporate tax rate, firms may deduct

A)interest payments.
B)wage payments.
C)depreciation allowances.
D)all of these answers are correct.

Question 12

Economic depreciation is

A)the money value of the net increase in an individual's power to consume during a period.
B)the change in the distribution of real income induced by a tax.
C)a subtraction from tax liability (as opposed to a subtraction from taxable income).
D)the extent to which an asset decreases in value during a period of time.

Question 13

Schemes that allow a firm to deduct from taxable income an asset's full cost at the time of acquisition is referred to as

A)expensing.
B)economic depreciation.
C)capital cost allowance.
D)accelerated depreciation.

Question 14

Interest deductibility does not provide an incentive for debt finance.

A)True
B)False
C)Uncertain

Question 15

There are circumstances under which the corporation tax is equivalent to an economic profits tax.

A)True
B)False
C)Uncertain

Question 16

A plausible elasticity of investment with respect to the user cost is

A)0.83.
B)0.25.
C)1.6.
D)0.4.

Question 17

Full integration would lower the effective tax rate on capital and, therefore, lead to increased saving.

A)True
B)False
C)Uncertain

Question 18

The procedure for allocating income between domestic and foreign operations is

A)the user cost of capital.
B)the transfer pricing problem.
C)the arm's length system.
D)double taxation.

Question 19

The cost that a firm incurs as a consequence of owning an asset is known as

A)economic depreciation.
B)accelerated depreciation.
C)expensing.
D)user cost of capital.

Question 20

Cash flow is the difference between assets and revenues.

A)True
B)False
C)Uncertain

Question 21

Where dividends received come from a foreign affiliate in a country with which Canada has a tax treaty, the dividends must be included in the taxable income of the Canadian owner.

A)True
B)False
C)Uncertain

Question 22

The excess burden of the corporate income tax is

A)greatest when the interest elasticity of saving is zero.
B)almost zero.
C)a result of the combined distortion in the pattern of investment and a reduction in total investment.
D)none of these answer options is correct.

Question 23

Double taxation of dividends refers to the possibility that 21)

A)corporate earnings are taxed at the corporate level and again when distributed to the shareholder.
B)corporate profits and assets being taxed.
C)shareholders pay tax on dividends and personal income.
D)none of these answers is correct.

Question 24

For firms, dividends are not deductible. 24)

A)True
B)False
C)Uncertain

Question 25

Your textbook highlights a debate that has been going on for some years. The issue is whether there should be a corporation tax, given that corporations are nothing more than groups of people. Should there be a corporation tax? Why or why not?

Question 26

Investment tax credits (ITCs)are the firm's tax bill when particular capital assets are purchased.

A)close to zero for
B)deducted from
C)added to
D)none of these answers is correct.

Question 27

The ABC Corporation is contemplating purchasing a new computer system that would yield a before-tax return of 30 percent. The system would depreciate at a rate of 3 percent per year. The after-tax interest rate is 11 percent, and the corporation tax rate is 35 percent. Assume for simplicity that there are no depreciation allowances or investment tax credits. Do you expect ABC to buy the new computer system?

Question 28

How is Canada's tax treatment of multinational corporations favourable? What are the incentives for this favourable treatment?

Question 29

Stockholders have limited liability for the acts of the corporation in which they hold stock.

A)True
B)False
C)Uncertain

Question 30

A firm is considering building a new facility for $5 million that will generate a before tax value of
$5.5 million in output. The firm must borrow at an interest rate of 11 percent in order to finance the project. Net income is taxed at 30 percent. The loan will be paid back in one year. Should the firm make the investment in the new facility? Suppose that the interest rate is instead 6 percent. Does this change anything?

Question 31

Assume that the user cost of capital (C)is simply
where r is the after-tax rate of return, 6 is the depreciation rate, and q is the corporate tax rate. Now assume further that the after-tax rate of return is 10 percent and the economic depreciation rate is 2 percent. The firm faces corporate taxes of 35 percent. What is the user cost of capital in this case?

Question 32

The difference between revenues and expenditures for inputs is known as

A)cash flow.
B)net revenue.
C)debts.
D)profits.

Question 33

Why do firms pay dividends? It would appear that they are subject to double taxation, giving more incentive to eliminate them.

Question 34

Assume that the user cost of capital (C)is simply
where r is the after tax rate of return, 6 is the depreciation rate, and q is the corporate tax rate. Now assume further that the after-tax rate of return is 12 percent and the economic depreciation rate is 4 percent. The firm faces corporate taxes of 35 percent. Suppose that we now know that the present value of depreciation allowances is 0.20. In addition, there is an investment tax credit of 0.10. What effect does this new information have on the user cost of capital?