Chapter 5 / 6 - Main Considerations in Tax Planning / The Business and Its Employees

Question 1

If the income of a CCPC eligible for the small business deduction exceeds ___ , it is usually preferable for the shareholder officer to be paid through ___

Answer 1

$500,000
a salary or bonus

Question 2

If the after-tax income is retained in the corporation, (i.e., not paid in dividends),
then what happens to the second layer of tax that usually is charged to the shareholder on the dividends?

Answer 2

It will be deferred until this income is paid out as a dividend in a future year

Question 3

For its ___ income, even a small business corporation pays the full rate of corporate taxation

Answer 3

investment

Question 4

The RRSP contribution is calculated based on earned income, which does not include ___.

Answer 4

dividends

Question 5

The corporation should consider declaring a dividend when it has (2)

Answer 5

• refundable dividend tax on hand
• a balance in its capital dividend account (CDA)

Question 6

Refundable dividend tax on hand consists of (2)

Answer 6

• refundable portion of Part I income tax on investments
  *Part IV income tax on dividends

Question 7

Refundable dividend: Only ___ are entitled to this kind of income tax refund.

Answer 7

private corporations

Question 8

Private corporations may also accumulate the non-taxable portion of capital gains and the net proceeds of life insurance in the ___ and pay tax-free dividends to their shareholders out of this special account

Answer 8

CDA

Question 9

A deferred profit-sharing plan is a tool that allows small employers to ___. Only the ___ pays into the deferred profit-sharing plan

Answer 9

pay their employees pensions
employer

Question 10

Employees who, with related persons, hold more than 10% of the shares in a class of shares in the corporation are not eligible for

Answer 10

the deferred profit-sharing plan

Question 11

when a corporation makes a loan to a shareholder (or individual connected to a shareholder), the full amount of the principal of the loan should be included in ___ in the year that the loan is made.

Answer 11

the income of the shareholder

Question 12

Sharholder loan has the same impact as providing the same amount of salary to the shareholder. However, there are two differences:

Answer 12

• no deduction for the amount of the loan
• shareholder able to claim a deduction on personal tax return when they repay some or all of the loan.

Question 13

loan is included in income only if ___

Answer 13

the person to whom the loan is made is a shareholder or is connected with a shareholder

Question 13

A loan must be repaid when?

Answer 13

in the following taxation year

Question 14

Loans and advances that are not repaid within one year following the end of the taxation year must be included in the taxpayer’s income unless the loan was made to allow the shareholder to acquire: (3)

Answer 14

• A house for individual or spouse
• unissued shares of the corporation or a related corporation
• An automobile for performance of duties

Question 15

Shareholder officers must also show that it is reasonable to conclude that they obtained the loan on account of ___ and not because they are shareholders.

Answer 15

their employment

Question 16

Individuals can defer capital gains realized on the disposition of investments in a small business, tax free, when ___

Answer 16

the proceeds of the disposition are reinvested in one or several eligible small businesses

Question 17

Financial planners should ensure that their clients benefit as much as possible from the lifetime capital gains deduction.
Some helpful strategies toward achieving this: (4)

Answer 17

• Incorporate the sole proprietorship or partnership
• crystallizing the capital gains
• Transfer qualified shares or property to the spouse or children
• Hold income-producing investment property personally, rather than through the corporation, so that the corporation will remain a small business corporation

Question 18

ADVANTAGES OF A PRIVATE HOLDING COMPANY (8)

Answer 18

• income and capital gains splitting among family members
• efficient estate planning tool
• Creation of earned income allowing the taxpayer to contribute to an RRSP
• Reduction in net personal income, to maintain certain tax credits and reduce refunds.
• Conversion of interest from non-deductible to deductible
• Control over amount and type of income received
• Avoiding alternative minimum tax for individuals,
• Payment of tax-free dividends from connected companies

Question 19

The various tax measures offered to corporations fall under two main headings:

Answer 19

investments and job creation.

Question 20

A corporation may earn an investment tax credit equal to __% of qualified expenditures for SR&ED. This credit increases to 35% for ___

Answer 20

15
Canadian-controlled private corporations.

Question 21

Unused investment tax credits can be deferred over the next twenty years or the previous three years to reduce ___

Answer 21

Part I tax

Question 22

Any eligible individual or company that is entitled to an investment tax credit but cannot
deduct it from tax owing for the year in question or a previous year can receive a refundable tax credit equal to 40% of ___

Answer 22

the unused Investment tax credit (ITC)

Question 23

Eligible companies for the ITC must have been listed as a ___ during the entire year

Answer 23

CCPC

Question 24

An SMB is a Canadian-controlled corporation whose assets (on the financial statements) of all
corporations in the group are less than ___

Answer 24

$50 million

Question 25

The Small and Medium Business (SMB) tax credit in Quebec is increased to 37.5% on the first ___ in eligible expenses per year

Answer 25

$3,000,000

Question 26

There are two kinds of anti-avoidance rules:

Answer 26

a general rule and specific anti-avoidance rules

Question 27

general anti-avoidance rule is part of the arsenal at the disposal of tax authorities to battle abusive tax planning.
To minimize the risk of running afoul of this rule, financial planners must emphasize a number of points to clients: (3)

Answer 27

• Transactions must be undertaken primarily for non-tax-related reasons.
• Avoid end-of-year planning. It is best to draw up tax planning strategies as early as possible, preferably at the beginning of the fiscal year.
• Each specific transaction should be analyzed before it is finalized

Question 28

If it cannot be demonstrated that there is a meaningful contribution to the business, then the client is only allowed to split income with: (3)

Answer 28

• A spouse, once the owner turns 65
• Adults aged 25 or older who hold a 10% voting share in a non-professional corporation that earns less than 90% of its income from services
• Adults aged 18 or older who have averaged 20 hours of work in the business per week during the year, or any of the five previous years

Question 29

Attribution rules concern ___ income, not business income

Answer 29

property

Question 30

taxable benefit is added to one’s income at the lesser of either(2)

Answer 30

the cost of the item or the fair market value (FMV) of the item.

Question 31

The value of the standby charge on an automobile represents the benefit derived from having ___ at disposal or on standby for personal use

Answer 31

an employer-supplied vehicle

Question 32

value of the standby charge can be reduced if the following two conditions are met:

Answer 32

• The automobile is used primarily (i.e., more than 50%) for business purposes.
• The distance travelled for personal purposes is less than 1,667 kilometres per month.

Question 33

Trip logbook must indicate

Answer 33

the number of days in the year that the automobile was placed at the employee’s disposal, as well as the distance covered each day for personal and business use.

Question 34

Simplified Method - If the automobile were used more than 50% for ___ , this method could be used.

Answer 34

business purposes

Question 35

training activities and tuition fees reimbursed to employees constitute a taxable benefit and the value must be included in the calculation of employee income. one exception, however, is

Answer 35

training activities are undertaken at the employer’s request or required for the employee’s success at work

Question 36

The value of the following tax-exempt benefits should not be included in the employee’s income: (2)

Answer 36

• A non-monetary gift given for a special occasion (such as Christmas, a birthday, a wedding, or a similar occasion), up to a value of $500 (including taxes) per year.
• A non-monetary reward given in recognition of certain accomplishments, up to a value of $500 (including taxes) per year are intended as a gift that is given periodically, not on an annual basis, and should not be included.

Question 37

The following benefits are fully taxable and their value should be included in the employee’s income: (3)

Answer 37

• Gifts and rewards paid in cash, or easily convertible into cash
• Personal insurance premiums that the employer pays
• Gifts and rewards for work performance

Question 38

The following positions are not subject to EI premiums: (4)

Answer 38

• Casual employment
• Positions where there is a non-arm’s-length relationship (especially for a spouse or children), provided it has been established that the position would not exist otherwise
• Positions occupied by persons holding more than 40% of the corporation’s voting shares.
• Employment that is an exchange of work or services (barter).

Question 39

Eligibility for EI benefits is calculated by the number of ___ in a given year

Answer 39

hours worked

Question 40

Self-employed individuals have to contribute both the ___ share of the QPP premiums

Answer 40

employee and employer

Question 41

Any Quebec employer with a total payroll of more than $2,000,000 is subject to the Act to

Answer 41

promote workforce skills development and recognition.

Question 42

employers must earmark 1% of their payroll for

Answer 42

training activities to develop the competencies
of their personnel

Question 43

Commission de la santé et de la sécurité du travail (CSST) provides insurance for employees who are injured in an ___ or who ___

Answer 43

industrial accident
contract an occupational disease.

Question 44

All companies with at least one employee, whether full-time or not, are obliged to register with the ___

Answer 44

CSST

Question 45

The following individuals may register with the CSST for coverage under the Act: (5)

Answer 45

• Self-employed individuals who are not considered employees
• Sole proprietors of companies that employ workers
• Partners in a general partnership
• Directors of corporations who also perform supervisory functions as part of ongoing operations management
• Domestics

Question 46

CSST is calculated principally by looking at three factors:

Answer 46

• The size of the employer’s payroll
• The dangers associated with the employer’s industry in general (e.g., office worker vs. steelworker)
• The employer’s performance

Question 47

HIRING OF SELF-EMPLOYED WORKERS - tax authorities consider such individuals to be ___

Answer 47

employees

Question 48

Businesses that hire an eligible apprentice may receive a non-refundable tax credit equal to __% of the eligible salaries and wages payable to eligible apprentices, to a maximum of $__ per year, for two years, for each eligible apprentice.

Answer 48

10
2,000

Question 49

To calculate overtime, the regular workweek has been set at 40 hours. For certain employees, however, the regular
workweek is as follows:
* A regular workweek for employees working in a forestry operation or a sawmill is __ hours.
* Security guards who guard property for a surveillance services enterprise have a regular workweek of __ hours.
* Security guards who do not work for an enterprise supplying surveillance services have a regular workweek of __ hours.

Answer 49

47
44
60

Question 50

For employment contracts of indeterminate duration, employees who have at least three months of uninterrupted service with the same employer are entitled to a layoff notice. The length of such notice is as follows:

Answer 50

• One week, for less than one year of uninterrupted service
• Two weeks, for one to three years of uninterrupted service
• Three weeks, for three or more years of uninterrupted service