Chapter 12

Question 1

a) ITA​ 110(1)(d)(d.01) Stock option deduction
b) ITA 111 Loss carryover deduction
c) ITA 110.6 Lifetime capital gains deduction
d) ITA​ 110(1)(f) Deduction for payments

Answer 1

b) ITA 111 Loss carryover deduction

Question 2

The ITA 126 foreign tax credit is calculated as the lesser of two amounts. Which of the following most accurately describes the two amounts utilized in the foreign tax credit​ calculation?

a) Foreign taxes withheld on foreign income​ (converted into Canadian​ dollars) and Part I taxes payable for the corporation in the year

b) Actual foreign taxes paid​ (converted into Canadian​ dollars) and a prorated amount​ (based on the percentage of foreign income to total​ income) of basic federal taxes payable for the corporation in the year
c) Actual foreign taxes paid​ (converted into Canadian​ dollars) and Part I taxes payable for the corporation in the year
d) Foreign taxes withheld on foreign income​ (converted into Canadian​ dollars) and a prorated amount​ (based on the percentage of foreign income to total​ income) of basic federal taxes payable for the corporation in the year

Answer 2

b) Actual foreign taxes paid​ (converted into Canadian​ dollars) and a prorated amount​ (based on the percentage of foreign income to total​ income) of basic federal taxes payable for the corporation in the year

Question 3

XYZ Corporation expects a net business loss for the current tax year. The loss is primarily due to a​ one-time terminal loss during the year. The company is considering making a charitable donation of​ $75,000. Which of the following is the best course of action to achieve​ management’s desired results as well as the most favourable tax​ results?

a) Do not make the donation.

b) Make the donation early in the following year without regard to expected results for the following taxation year.
c) Make the donation in the current year and carry forward the unused deduction.
d) Make the donation in the next tax year that XYZ has Net Income for Tax Purposes of​ $100,000 or more.

Answer 3

d) Make the donation in the next tax year that XYZ has Net Income for Tax Purposes of​ $100,000 or more.

Question 4

If a corporation has​ non-capital loss carryovers from multiple prior tax years available to deduct against its current​ year’s taxable​ income, ________.

a) the corporation can choose to deduct the loss from any tax​ year(s)

b) the corporation can only deduct the loss from one prior tax year in the current year
c) the corporations must deduct losses in​ order, beginning with the oldest tax year
d) the corporation must deduct losses in​ order, beginning with losses from the most recent tax year

Answer 4

c) the corporations must deduct losses in​ order, beginning with the oldest tax year

Question 5

Capital losses of a corporation can be carried​ ________.

a) back 2 years and forward 20 years

b) back 20 years and forward 3 years
c) back 3 years and forward indefinitely
d) back 3 years and forward 20 years

Answer 5

c) back 3 years and forward indefinitely

Question 6

Using only the information provided​ here, which of the following scenarios would constitute the Danco Corporation having a permanent establishment in the province of​ Alberta?

a) Danco has a commissioned salesperson living in Alberta. The salesperson will travel to customers and take orders that are subsequently filled from​ Danco’s Quebec facility.

b) Danco has its headquarters office in Ontario. The​ company’s CEO lives in Alberta and works primarily from the Ontario office.
c) Danco is a road construction contractor headquartered in Ontario. The company is building a major highway in Alberta and has approximately​ $50 million of equipment and labour at the work site.
d) ​Danco’s headquarters are in Ontario. They have a subsidiary​ company, Abelco, which is headquartered in Alberta. Danco owns​ 50% of the shares of Abelco.

Answer 6

c) Danco is a road construction contractor headquartered in Ontario. The company is building a major highway in Alberta and has approximately​ $50 million of equipment and labour at the work site.

Question 7

The general rate reduction applies ONLY to​ ________.

a) capital gains

b) income of CCPCs
c) income of corporations that is NOT subject to other tax benefits
d) property income of Canadian corporations

Answer 7

c) income of corporations that is NOT subject to other tax benefits

Question 8

​Rents, royalties, and interest are​ ________.

a) active business income any time they constitute more than​ 90% of a​ company’s gross revenues

b) considered active business income for a company that has less than 5 employees
c) considered active business income for a company that has more than 5​ full-time employees
d) considered passive income to a corporation

Answer 8

c) considered active business income for a company that has more than 5​ full-time employees

Question 9

The ITA defines a Specified Investment Business for the purposes of​ ________.

a) preventing companies with significant invested assets from placing them in separate companies and taking advantage of the small business deduction

b) allowing companies with significant invested assets from placing them in separate companies and taking advantage of the small business deduction
c) applying a higher tax rate to companies that primarily earn revenues from invested capital
d) encouraging the creation of holding companies that allow large corporations to invest their excess cash

Answer 9

a) preventing companies with significant invested assets from placing them in separate companies and taking advantage of the small business deduction

Question 10

The small business deduction is available to which of the following types of business​ enterprises?

a) partnerships and proprietorships

b) personal services corporations
c) professional corporations
d) Canadian public companies with less than​ $10 million of taxable capital employed in Canada

Answer 10

c) professional corporations

Question 11

Which of the following foreign taxes paid would be eligible for the foreign business income tax​ credit?

a) foreign taxes paid on foreign earned business income

b) foreign taxes paid on income that is exempt from tax in Canada under an income tax treaty
c) foreign taxes paid on foreign earned dividends and interest
c) foreign taxes paid on dividends received from a foreign affiliate

Answer 11

a) foreign taxes paid on foreign earned business income

Question 12

When determining if corporations are​ associated, control of a corporation is evidenced by​ ________.

a) ownership of shares that represent at least​ 30% of the market value of all issued and outstanding shares of the company when no other​ shareholder’s holding represents a higher percentage of the value

b) ownership of shares that represent​ 50% of the market value of all issued and outstanding shares of the company
c) ownership of shares that represent more than​ 50% of the market value of all issued and outstanding shares of the company
d) ownership of shares that represent at least​ 90% of the market value of all issued and outstanding shares of the company

Answer 12

c) ownership of shares that represent more than​ 50% of the market value of all issued and outstanding shares of the company

Question 13

Which of the following is not an example of​ “incidental” property income included in active business​ income?

a) Dividend income earned from a portfolio of investments

Interest income earned on the​ short-term investment of excess cash received by a corporation after selling a capital asset

c) Interest income earned on a​ corporation’s term​ deposit, the purpose of which is to ensure the business can meet its payroll requirements
d) Rental income earned from the temporary rental of excess warehouse space

Answer 13

a) Dividend income earned from a portfolio of investments

Question 14

Which of the following is an allowable deduction from a​ corporation’s Net Income for Tax Purposes in calculating Taxable​ Income?

a) ITA 110.6 Lifetime capital gains deduction

b) ITA 111 Loss carryover deduction
c) ITA​ 110(1)(f) Deduction for payments
d) ITA​ 110(1)(d)(d.01) Stock option deduction

Answer 14

b) ITA 111 Loss carryover deduction

Question 15

Which of the following items would NOT be additions to Accounting Income on Schedule 1 of a​ corporation’s tax​ return?

a) Recapture of CCA

b) Accounting amortization and depreciation
c) Capital cost allowance​ (CCA)
d) ​50% of business meals and entertainment expenses

Answer 15

c) Capital cost allowance​ (CCA)

Question 16

Which of the following items would be a deduction from Accounting Income on Schedule 1 of a​ corporation’s tax​ return?

a) Reasonable salaries and wages paid to​ arm’s length employees

b) ​50% of business meals and entertainment expenses
c) Accounting amortization or depreciation
d) Landscaping costs

Answer 16

d) Landscaping costs

Question 17

Which of the following statements BEST describes the​ “stop loss” rules for a corporation as per ITA​ 112(3) and​ (3.01)?

a) The​ “stop loss” rules prevent a corporation that owns less than​ 5% of another​ corporation’s shares for less than one​ year, from receiving a​ tax-free dividend and then selling the shares and triggering a capital loss.

b) The​ “stop loss” rules apply to both individuals and corporations that own more than​ 5% of another​ corporation’s shares for less than one year.
c) The​ “stop loss” rules reduce the loss on disposition of shares held by a corporation for less than one year by the amount of dividend received on those shares.
d) The​ “stop loss” rules increase the loss on disposition of shares held by a corporation for less than one year by the amount of dividend received on those shares.

Answer 17

c) The​ “stop loss” rules reduce the loss on disposition of shares held by a corporation for less than one year by the amount of dividend received on those shares.

Question 18

A CCPC is considered a large CCPC and is subject to a reduced annual business limit for purposes of calculating the small business deduction when​ ________.

a) the company has more than 100 employees

b) the company has taxable capital employed in Canada of​ $10 million or more in its preceding tax year
c) the company has operations outside of Canada
d) the company has net income for tax purposes in excess of​ $5 million

Answer 18

b) the company has taxable capital employed in Canada of​ $10 million or more in its preceding tax year

Question 19

Which of the following is NOT consistent with the definition of active business income for purposes of calculating the small business​ deduction?

a) Active business income includes income earned from an adventure or concern in the nature of trade as well as income earned that is incidental to the business.

b) Active business income includes income earned from an adventure or concern in the nature of trade as well as property income earned by the corporation in the year.
c) Active business income excludes any income earned by a personal services business.
d) Active business income excludes any income earned by a specified investment business.

Answer 19

b) Active business income excludes any income earned by a personal services business.

Question 20

Which of the following corporations is NOT eligible for the small business​ deduction?

a) Canadian-controlled private corporation earning active business income

b) A​ Canadian-controlled private corporation earning interest income on temporary excess cash balances resulting from active business operations
c) A Personal Services Business earning business income
d) A​ Canadian-controlled private corporation which earns only property income and employs more than five​ full-time employees throughout the year

Answer 20

c) A Personal Services Business earning business income

Question 21

Which of the following statements BEST describes a Specified Investment​ Business?

a) private corporation established to operate the professional practice of an​ accountant, dentist,​ lawyer, medical​ doctor, veterinarian or chiropractor referred to as a professional corporation.

b) A corporation where an individual shareholder provides services on behalf of the corporation and is referred to as an incorporated employee.
c) A corporation whose primary purpose is to earn property income and employs less than five​ full-time employees throughout the year.
d) A corporation whose primary purpose is to earn property income and employs five or more​ full-time employees throughout the year.

Answer 21

c) A corporation whose primary purpose is to earn property income and employs less than five​ full-time employees throughout the year.

Question 22

The manufacturing and processing profits deduction is​ ___________

a) calculated based on a​ corporation’s manufacturing and processing profits less income aggregate investment income.

b) a special deduction that provides tax assistance to organizations involved in manufacturing and processing activities.
c) available for any corporation that derives​ 50% or more of its Canadian active business gross revenues from Canadian manufacturing or processing activities.
d) a special deduction in taxes available to Canadian controlled private corporations earning active business income in excess of the annual business limit.

Answer 22

b) a special deduction that provides tax assistance to organizations involved in manufacturing and processing activities.

Question 23

The Income Tax Act defines a​ corporation’s tax year as​ ________.

a) its fiscal period​ (which can be any period not more than 53​ weeks)

b any​ 52-week period

c) the calendar year
d) any period of any duration

Answer 23

a) its fiscal period​ (which can be any period not more than 53​ weeks)

Question 24

The carry forward with the shortest retention period for a corporation is​ ________.

a) net capital loss carry forwards

b) excess charitable contributions
c) ​non-capital loss carry forwards
d) farm loss carry forwards

Answer 24

b) excess charitable contributions