Question 1

Martin Locks owns 100 percent of the shares of Locks Inc., a corporation with a December 31 year end.In January 2010, the corporation loans Martin $350,000 in order to assist him in acquiring a new principal residence.The loan is interest free and will be paid back on December 30, 2011.The corporation has no employees other than Martin.Assume that the prescribed rate is 4 percent throughout 2010 and 5 percent throughout 2011.Which of the following statements is correct?

Accepted Answer

The benefit from the interest-free loan is calculated using the prescribed rate, resulting in $14,000 for 2010 (4% of $350,000) and $17,500 for 2011 (5% of $350,000).

Question 2

Jacquie is the sole shareholder of Holdings Ltd., which has a January 31 year end.On Jan- uary 1, 2011, Jacquie borrowed $10,000 on an interest-free basis from Holdings Ltd.She used $8,000 of this amount to acquire shares of Arrow Inc.and the remaining $2,000 for personal purposes.Arrow Inc.is a small Canadian controlled private company that manu- factures cross-bows.In March 2011, Arrow Inc.paid a non-eligible dividend of $1,100 to Jacquie.Jacquie repaid her $10,000 loan to Holdings Ltd.on June 30, 2011.Assume that these were her only transactions with Holdings Ltd.and the prescribed interest rate was 4 percent for the first quarter of 2011 and 3 percent for the second quarter.Which one of the following represents Jacquie's 2011 Taxable Income as a result of these transactions?

Accepted Answer

First, we need to impute interest on the $10,000 loan from Holdings Ltd. to Jacquie. 
For Q1: $10,000 x 4% / 365 days x 91 days = $39.45
For Q2: $10,000 x 3% / 365 days x 91 days = $29.58
Total imputed interest = $39.45 + $29.58 = $68.03

Next, we need to calculate the taxable amount of the dividend from Arrow Inc. 
Non-eligible dividends receive a gross-up of 38%, so the taxable amount of the dividend is: $1,100 x 1.38 = $1,518

Finally, we subtract the imputed interest from the taxable dividend:
Taxable income = $1,518 - $68.03 = $1,450.97

However, Jacquie used $8,000 of the loan to invest in shares of Arrow Inc., making it an eligible investment. Therefore, she is entitled to an offsetting dividend tax credit of $1,110 x 15.02% = $166.42

Final taxable income = $1,450.97 - $166.42 = $1,284.55, rounded up to $1,409.68.

Question 3

John is thinking about incorporating his charter boat business.Which of the following de- scribes an advantage that could be associated with incorporating the business as compared to running it as a proprietorship?

Accepted Answer

If John incorporates his charter boat business, he would have limited liability protection. This means that if a client falls overboard and sues the corporation, they can only go after the assets of the corporation and not John's personal assets. If John were running the business as a proprietorship, he would be personally liable for any damages or lawsuits brought against the business.

Question 4

An owner-manager can generally choose whether he wishes to receive compensation in the form of dividends or, alternatively in the form of salary.All other things being equal which of the following would encourage the use of dividends?

Accepted Answer

A desire to eliminate a large CNIL (Cumulative Net Investment Loss) balance would encourage the use of dividends, as dividends can be used to offset this balance.

Question 5

Joan Farnun has employment income of about $100,000.This employment income is suf- ficient to cover her personal living expenses.In addition, she operates a consulting business which earns about $50,000 per year.She is considering the incorporation of the consulting business.With respect to the incorporation, which of the following statements is correct?

Accepted Answer

By incorporating her consulting business, Joan Farnun can qualify for the small business deduction, which provides a reduced tax rate on the first $500,000 of active business income. This would result in tax deferral, as the corporation can retain earnings at a lower tax rate than if they were paid out as dividends. However, when dividends are eventually paid out to the shareholder (Joan), they will be subject to personal income tax and the integration provisions of the Income Tax Act will ensure that the total tax paid is similar to if the income had been earned personally without incorporation. There is no mention of shareholder loans in the given information, so this option cannot be chosen.

Question 6

An individual owns a retail business that is unincorporated.The business earns about $150,000 per year, all of which is needed by the individual for his personal living ex- penses.The individual is considering incorporating this business.Which of the following statements is correct?

Accepted Answer

There can be a small tax advantage associated with incorporation, as the corporation may be eligible for lower tax rates on business income and the ability to write off certain expenses. However, the individual will also face additional costs such as incorporating fees and ongoing accounting and legal expenses.

Question 7

If the owner/manager of a CCPC has a large Cumulative Net Investment Loss (CNIL) bal- ance, he should pay himself dividends rather than salary.

Accepted Answer

If the owner/manager of a CCPC has a large CNIL balance, paying themselves dividends rather than salary can help reduce their personal tax liability. This is because dividends are taxed at a lower rate than salary and can also be eligible for the dividend tax credit.

Question 8

Larry Watts, a Canadian resident, owns 49 percent of the shares of Zatch Ltd., a Canadian corporation.Laura Marsh, who lives in England, owns the remaining 51 percent.For the current year, the corporation has $150,000 in income, all of which will be paid out as ei- ther salary or eligible dividends.Because of other sources of income, Larry is in the 29 percent federal tax bracket and an 18 percent provincial tax bracket.On both eligible and non-eligible dividends, the provincial dividend tax credit is equal to 10/23 of the gross up.Zatch Ltd.pays taxes at a combined federal/provincial rate of 32 percent.With respect to Larry's choice between receiving his share of the after tax corporate income in the form of salary or dividends, which of the following statements is correct?

Accepted Answer

Larry should take the salary because it is taxed at his personal tax rates without the additional gross-up and dividend tax credit calculations, which often result in a higher effective tax rate on dividends compared to salary.

Question 9

Lynn Baily paid $150,000 for 3,000 shares in Baily Inc., a company for which she is the managing director.She also personally guaranteed a bank loan to Baily Inc.in the amount of $75,000.If Baily Inc.goes bankrupt, which of the following statements is correct?

Accepted Answer

Lynn's financial risk includes the $150,000 she invested in shares and the $75,000 she personally guaranteed for the bank loan, totaling $225,000.

Question 10

Which of the following statements about the use of a corporation is correct?

Accepted Answer

Use of a corporation can result in a tax saving, but it is not always guaranteed as it depends on various factors such as the type of income earned and the individual's personal tax situation. The other choices are incorrect as they are either partially true or not necessarily relevant to the use of a corporation.

Question 11

Albert Jay is an employee and 15 percent shareholder of Rick's Welding Shop Ltd.(Rick's).During the 2011 calendar year, Albert Jay was having cash flow problems.Rick's gave Albert Jay a loan of $5,000 on May 1, 2011 to help him out.Rick's also gave Albert Jay's son, Jake, a loan of $2,000 on September 30, 2011 to help him meet expenses while at college.Rick's has said that Albert Jay and Jake can repay the loans whenever they can afford it.The loans remain outstanding as at January 31, 2013.Rick's year end for ac- counting and taxation purposes is December 31. How much, and in which taxation year, is Albert Jay required to include in his Taxable In- come as a result of the above transactions?

Accepted Answer

The loan to Albert Jay is a shareholder loan and is therefore taxable in the year it was received.

Question 12

With respect to the incorporation of a proprietorship earning less than $500,000 of active business income, which of the following statements is correct?

Accepted Answer

Incorporation of a proprietorship earning less than $500,000 of active business income can result in a deferral of taxes to the extent profits can be left in the corporation. This is because corporations are taxed at a lower rate than individuals on their active business income up to a certain threshold. By leaving profits in the corporation, the shareholder can delay paying personal taxes on that income until it is distributed as a dividend or salary. However, there may also be additional costs and administrative burdens associated with incorporation. Option A is incorrect because the tax savings from combining the small business deduction with the dividend tax credit may be offset by increased administrative and compliance costs associated with maintaining a corporation. Option B is incorrect because there may be items that can be deducted by an unincorporated business but not by a corporation. Option D is incorrect because incorporation does not necessarily limit shareholders' obligations to creditors.

Question 13

Which of the following is not a possible advantage of incorporating a business?

Accepted Answer

Incorporating a business does not allow business losses to be absorbed against personal employment income. This is typically a feature of sole proprietorships or partnerships, not corporations.

Question 14

Joan Barts owns all of the outstanding shares of Barts Ltd., a CCPC that is carrying on an ac- tive business.For the year ending December 31, 2011, she may prefer to pay herself salary instead of dividends if:

Accepted Answer

If the corporation has taxable income in excess of $500,000, the combined federal and provincial tax rate on dividends received by Joan as an individual shareholder would be higher than the combined tax rate on her salary income. This is because there is a limit to the dividend tax credit that can be claimed by an individual, whereas there is no such limit on the amount of salary that can be deducted by the corporation. Additionally, if the corporation has a large RDTOH balance, it may make more sense for Joan to receive dividends in order to reduce this balance and avoid excessive taxes in the future. However, the location of the corporation and the dividend tax credit available in the province are not relevant in this case.

Question 15

The use of a corporation is most likely to result in a reduction in total taxes if:

Accepted Answer

CCPCs (Canadian-controlled private corporations) earning active business income are eligible for the small business tax deduction, meaning they are taxed at a lower rate than other corporations. This can result in a significant reduction in total taxes. Public companies and CCPCs earning investment or dividend income do not qualify for this deduction and may not see a reduction in total taxes.

Question 16

All other things being equal, high corporate tax rates favour the use of salary to compen- sate the owner/manager of a CCPC.

Accepted Answer

This is because high corporate tax rates reduce the amount of after-tax income that can be paid out as dividends to the owner/manager. Thus, using salary as a form of compensation allows the owner/manager to receive a higher portion of the earnings, as salaries are deductible for tax purposes.

Question 17

Any resident Canadian individual over the age of 17 can receive over $41,000 in non-eli- gible dividends from a CCPC without paying any taxes.

Accepted Answer

This statement is false. As of 2021, the federal dividend tax credit rate is 15.0198%, meaning that individuals receiving non-eligible dividends from a CCPC will still owe taxes on that income. The specific amount of taxes owed will depend on the individual's personal income tax bracket.

Question 18

Paul is one of six shareholders, but not an employee, of a Canadian controlled private cor- poration that manufactures doors.The corporation has a large amount of cash on hand and the other shareholders have agreed that the corporation can lend him $200,000 for a few years.To avoid having the principal included in his Taxable Income, the loan must meet which of the following conditions?

Accepted Answer

The loan must be repaid within one year of the end of the fiscal year in which it was made to avoid being included in Paul's taxable income.

Question 19

All other things being equal, a low provincial dividend tax credit favours the use of divi- dends to compensate the owner/manager of a CCPC.

Accepted Answer

A low provincial dividend tax credit would make dividends less attractive as a form of compensation because it would result in higher taxes on dividend income for the owner/manager of a CCPC.

Question 20

An individual's only source of income is dividends from public companies.He is consid- ering transferring the public company shares to a corporation.If he was to do so, which of the following statements is correct?

Accepted Answer

The answer of An individual's only source of income is...

Quiz 2: Byrd Chens Canadian Tax Principles 2