Question 1

Certain skills are necessary for successful tax planning.One of these skills is applying the time value of money.Which of the following is FALSE regarding this skill?
A)Applying the time value of money is a tool used for wealth accumulation.
B)If Cindy invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, Cindy's tax rate is 40%.
C)If Randy earns an annual return of 12% and is subject to a 40% tax rate, Randy's annual after-tax rate of return is 4.8%.
D)If Lou invests $1,000 for one year at a rate of return of 14% and is subject to a 45% tax rate, Lou's after-tax value of the interest will be $77.

Accepted Answer

C) is false because the correct after-tax rate of return for Randy, given a 12% annual return and a 40% tax rate, would be 7.2% (12% annual return - 40% of 12% = 7.2%).

Question 2

Quinn's proprietorship earned $160,000 in pre-tax profits this year.Quinn does not require personal funds from the business.
Personal tax rates (federal plus provincial) in Quinn's province are:
(All rates are assumed for this question.)
The combined federal and provincial rate of tax for Canadian-controlled private corporations in Quinn's province is 13% on the first $500,000 of income.
Quinn has been considering incorporating the business.

Required:
A.Calculate the after-tax profits for the business as i) a proprietorship, and ii) a corporation.Show all calculations.
B.Name the type of tax planning that Quinn would be engaging in if the company was changed from a proprietorship to a corporation.
 $\begin{array}{|l|r|}
\hline \text { On the first } \$ 49,000 & 20 \% \
\hline \text { On the next } \$ 48,000 & 30 \% \
\hline \text { On the next } \$ 54,000 & 40 \% \
\hline \text { On the next } \$ 63,000 & 45 \% \
\hline \text { On income over } \$ 214,000 & 50 \% \
\hline
\end{array}$ 
A.Calculate the after-tax profits for the business as i) a proprietorship, and ii) a corporation.Show all calculations.
B.Name the type of tax planning that Quinn would be engaging in if the company was changed from a proprietorship to a corporation.
A) After-tax profits as a proprietorship:
 $\begin{array}{|l|r|r|}
\hline\$ 160,000.00 & & \$ 160,000.00 \
\hline \text { Less Tax: } & & \
\hline 49.000 .00 & \times 20 \% & \$ 9,800.00  \
\hline 48,000.00 & \times 30 \% &\$ 14,400.00 \
\hline \$ 54,000.00 & \times 40 \% &  \$ 21,600.00\
\hline\$ 9,000.00 & \times 45 \%  &\$ 4,050.00 \
\hline \text { After-tax profits: } & & \$ 110,150.00  \
\hline
\end{array}$ After-tax profits as a corporation:
 $\begin{array}{|l|r|r|}
\hline\$ 160,000.00 & & \$ 160,000.00 \
\hline \text { Less Tax: } && \
\hline \$ 160,000.00 &  \times 13 \% & \$ 20,800.00\
\hline \text { After-tax profits: } & & \$ 139,200.00 \
\hline
\end{array}$ B) Transferring income from one entity to another (individual to corporation)

Accepted Answer

A) After-tax profits as a proprietorship:
 $\begin{array}{|l|r|r|}
\hline\$ 160,000.00 & & \$ 160,000.00 \
\hline \text { Less Tax: } & & \
\hline 49.000 .00 & \times 20 \% & \$ 9,800.00  \
\hline 48,000.00 & \times 30 \% &\$ 14,400.00 \
\hline \$ 54,000.00 & \times 40 \% &  \$ 21,600.00\
\hline\$ 9,000.00 & \times 45 \%  &\$ 4,050.00 \
\hline \text { After-tax profits: } & & \$ 110,150.00  \
\hline
\end{array}$

After-tax profits as a corporation:
 $\begin{array}{|l|r|r|}
\hline\$ 160,000.00 & & \$ 160,000.00 \
\hline \text { Less Tax: } && \
\hline \$ 160,000.00 &  \times 13 \% & \$ 20,800.00\
\hline \text { After-tax profits: } & & \$ 139,200.00 \
\hline
\end{array}$ 
B) Transferring income from one entity to another (individual to corporation)

Question 3

Parker has $10,000 to invest.He wants to put his money in a one-year investment earning an annual interest rate of 12%.Parker is in a 42% tax bracket.
Required:
a) Calculate the total value of Parker's investment, after-tax, at the end of the year.
b) Calculate the amount of tax Parker will pay on his investment.

Accepted Answer

a) $10,000 + (($10,000 * 12) *(1 -.42)) = $10,696
b) $10,000 *.12*.42 = $504

Question 4

The controller of Little Company Ltd.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying tax on capital gains this year.The controller is engaging in
A)tax planning.
B)tax avoidance.
C)tax evasion.
D)GAAR.

Accepted Answer

The controller is engaging in tax planning by taking legitimate steps to minimize the company's tax liability. Tax planning is the proactive and lawful arrangement of a taxpayer's financial affairs to minimize tax liability. The sale of capital equipment is a legitimate tax planning strategy that can reduce a company's capital gains tax liability.

Question 5

The CEO at Big Co.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying capital gains tax this year.Which tax planning method will the CEO be using?
A)Transferring income to another entity.
B)Shifting income from one time period to another.
C)Converting the nature of income from one type to another.
D)This is a form of tax evasion and is not allowed.

Accepted Answer

The CEO is using the method of shifting income from one time period (next year) to another (this year) in order to avoid paying capital gains tax this year. This is a legitimate tax planning method, as long as it is done within the boundaries of the law.

Question 6

Which of the following scenarios illustrates unacceptable tax planning?
A)Property transferred between Stan and Reed (arm's-length parties) is valued at fair market value.
B)Mr.A transfers his shares to his spouse and the dividends from the shares are included in Mr.A's income.
C)Faizan owns two corporations and undertakes legal steps in order to permit loss utilization between the two companies.
D)Ben transfers property to his child at a value less than fair market value.

Accepted Answer

Transferring property to a child at a value less than fair market value is considered unacceptable tax planning as it is a form of tax evasion. This is because it is done with the intention of reducing the donor's tax liability by undervaluing the asset being transferred. This violates the principle of paying taxes based on the true value of the asset. The other options involve legitimate tax planning measures such as fair market valuations, proper inclusion of income, and loss utilization between two legally owned corporations.

Question 7

Which of the following statements regarding GAAR is true?
A)The purpose of GAAR is to catch tax evaders.
B)When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances.
C)Canada Revenue Agency states that "A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes."
D)Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR.

Accepted Answer

GAAR, or General Anti-Avoidance Rule, is a provision in tax law that allows tax authorities to disregard or recharacterize transactions that have been made solely for the purpose of avoiding taxes. However, a transaction will not be considered an avoidance transaction if the taxpayer can establish that it is primarily for bona fide business, investment, or family purposes. The purpose of GAAR is not solely to catch tax evaders, but to prevent abusive tax avoidance. It is not automatically applied in all circumstances when an avoidance transaction takes place, and individuals who organize their affairs in order to pay as little tax as possible are not automatically subject to GAAR.

Question 8

Match between columns
                        Premises:  Rory has run a successful proprietorship for the past four years and has now decided to incorporate the business.
 The sole shareholder of ABC Co. purchased the shares of the company in 2016 for $25,000, and has recently valued the shares at $150,000. In preparation to sell the company to an arm's-length party, the shareholder decided not to issue the usual annual dividend of $20,000.
 XYZ Inc. has chosen to delay the recognition of a discretionary reserve until the following year.

Accepted Answer

The Answer of Shifting income from one time period to is...

Quiz 2: Fundamentals of Tax Planning

Certain skills are necessary for successful tax planning.One of these skills is applying the time value of money.Which of the following is FALSE regarding this skill?

The controller of Little Company Ltd.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying tax on capital gains this year.The controller is engaging in

The CEO at Big Co.has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying capital gains tax this year.Which tax planning method will the CEO be using?

Which of the following scenarios illustrates unacceptable tax planning?

Which of the following statements regarding GAAR is true?

For each of the three examples listed below, identify the category of tax planning (A-C) that has been applied.