Chapter 6 - Liability for Tax and Other Tax Considerations

Question 1

following factors are among the most important to be considered resident (6):

Answer 1

• maintenance of a dwelling in Canada, available for year-round occupancy
• immediate family members (i.e., spouse or dependent children) in Canada
• existence of social and financial connections with Canada
• mode and routine of the individual’s life
• amount of time spent in Canada on a regular basis
• motives for being present or absent

Question 2

A non-resident (individual or business) of Canada must pay Canadian income tax on
the following incomes (3):

Answer 2

• employment income earned in Canada;
• business income earned in Canada;
• capital gains from sale of certain Canadian property (taxable Canadian
  property), including real estate in Canada.

Question 3

People liable for Canadian income taxes fall into three categories

Answer 3

• Deemed Residents / Full-time Residents
• Part-time residents
• Non-residents who have either:
• Employment in Canada
• Income from a business earned in Canada
• Gains from sale of taxable Canadian property

Question 4

When is a trust considered non resident

Answer 4

when it was established outsisde canada and the majority of trustees / beneficiaries are non-residents

Question 5

if a corporation was incorporated in Canada after ___ , the corporation is deemed to be resident in Canada.

Answer 5

April 26, 1965

Question 6

if mind and management is considered to be in Canada, the corporation is deemed a resident of canada. 2 things determine mind and management:

Answer 6

• the location of the board of directors meeting
• where the day-to-day decisions are made

Question 7

corporations deemed non-residents must pay income taxes on… (2)

Answer 7

• income from their business conducted in Canada
• gains from the
  sale of taxable Canadian property

Question 8

Situations in which
Proceeds are Deemed (5)

Answer 8

1. Change in use of property
2. Death
3. Making a gift
4. Leaving Canada
5. Property held in a trust

Question 9

four main exemptions from capital gains:

Answer 9

• Principal residence
• Capital gains eligible for the capital gains deduction
• Capital gains reserve
• Capital gains deferral realized at the time of sale of certain shares when the vendor uses the proceeds of disposition to acquire other eligible shares.

Question 10

what is the Capital gains reserve?

Answer 10

Allows the deferral of capital gains when the taxpayer has not received the full amount of a property sale’s proceeds of
disposition by year-end.

Question 11

Formula for Exempt Portion of a Gain on the Disposition or
Deemed Disposition of a Principal Residence

Answer 11

( [ 1 + number of years designated ] × Gain) /
Number of years owned

Question 12

Even though part of the house is considered a rental property, the entire property will retain its principal residence status, where all of the following conditions are met (3):

Answer 12

• income-producing use is ancillary to the main use of the property as a residence
• No structural change to the property
• no CCA is claimed on the property

Question 13

In order to claim the enhanced capital gains deduction, a capital gain must be realized on the sale of ___

Answer 13

QSBC shares.

Question 14

A Qualified Small Business Corporation Share must meet each of the following tests: (3)

Answer 14

• Must be a canadian business
• Shares must be held only by the individual or related person 24 months before disposition
• more than 50% of it’s value were used in an active business in canada in preceding 24 months

Question 15

2 factors determine if a canadian business is a QSBC

Answer 15

1- corporation must be canadian controlled. (no more than 50% owned by non-residents or public corporation
2- on date of disposition, more than 90% of FMV must be used in an active business carried on in Canada

Question 16

Purification techniques involve reducing the non-business assets from the corporation.
The non-business assets from the corporation could be used to (5)

Answer 16

1- Reduce liabilities
2- Pay dividends
3- repay shareholder loans
4- Expand
5- Pay salary to the owners / managers

Question 17

When reviewing financial statements to determine whether the shares qualify as small business corporation shares, a financial planner should review the following situations (3)

Answer 17

• large cash balances and/or short-term investment;
• significant investment in marketable securities
• rental properties.

Question 18

The property is considered to be “used in the course of carrying on the business of
farming in Canada” if: (2)

Answer 18

• The property has been held for 24 months prior to the time of sale by the taxpayer, spouse, child or parent;
• In any two years of ownership, by a family member, the gross revenue of the user of the farm from the farming business exceeded income from all other sources

Question 19

Capital Gains Reserve Formula is
The lesser of:

Answer 19

1.( [ proceeds not due yet ] × gain) / Total proceeds
2. [ 20% of gain ] × [ 4 – number of years after disposition ]

Question 20

Capital loss exception in year
of Death

Answer 20

in year of death and year before the year
of death, ½ of capital losses can be used to offset all other income.

Question 21

What is a A personal use property (PUP) ?

Answer 21

A property used primarily for personal use or enjoyment (i.e., boat, car, jewelry etc.). While gains on PUP are subject to tax, losses on such property cannot be deducted.

Question 22

What is listed personal property (LPP)

Answer 22

a subset of PUP and only includes specific types of assets: works of art, jewelry, rare books, stamps and coins.

Question 23

difference between PUP and LLP for capital loss?

Answer 23

losses on LPP can be claimed, but only against gains
from LPP realized in the year, three years back or seven
years forward— but only against LPP gains in those carry-over years.

Question 24

what happens when a property is changed from income producing use to personal use for income tax purposes?

Answer 24

Deemed to have:
* sold the property at the fair market value; and
* reacquired the same property immediately thereafter at the fair market value which becomes its new adjusted cost base.

Question 25

2 situations for Capital Gain Deferral of personal property (meaning only have to pay tax on the actual disposition of the asset)

Answer 25

1. A property is converted from personal use to an income-producing use;
2. An income-producing use property is converted into a personal use property in order to become the taxpayer’s principal residence.

Question 26

Tax treatment of spouse and child support payments after April 30th 1997. (different for spouse and child)

Answer 26

• child support
  payments are not deductible to the payer or taxable to the recipient.
• Spousal support
  payments are still deductible from the payer’s income and taxable to the recipient

Question 27

tax treatment of payment to third parties such as medical expenses, tuition and rent
directly to a third party for the benefit of his or her spouse or common-law partner, former spouse or common-law partner, or children

Answer 27

• May deduct the payments from his or her income
• Both parties must agree that payments are deductible by payer and taxable to recipient

Question 28

What is Listed personal property (LPP) ?

Answer 28

is a subset of PUP and only includes specific types of assets: works of art, jewelry, rare books, stamps and coins.

Question 29

unique aspect in the calculation of gains of PUP is that the taxpayer’s cost is deemed

Answer 29

to be the greater of the actual cost of the property or $1,000

Question 30

Difference between sojourn and resident becoming non resident in Canada for 182 days rule

Answer 30

• sojourn - deemed resident so taxes on worldwidce income
• Resident becoming non resident is only taxed on part of income for the year.

Question 31

filing deadline for personal if spouse owns a business?

Answer 31

June 15th

Question 32

Deceased individual filing deadline Due the later of: (2)

Answer 32

• six months after date of death
• the usual filing date (April 30 or June 15)

Question 33

Filing deadline for Trust Return (T3) Quebec
(TP-646)

Answer 33

90 days after the end of taxation year

Question 34

Corporate Tax Return (T2) Quebec (C0-17) Due when?

Answer 34

six months after end of taxation year

Question 35

Penalty for failure to file a tax return

Answer 35

5% of balance owing, plus 1% of balance owing for each full month return is late, to a maximum of 12 months.

Question 36

Failure to file an information return (T4, T5) penalty (per day, min and max)

Answer 36

$25 per late day, subject to a minimum of $100 and a
maximum of $7,500.

Question 37

calculate capital gain formula

Answer 37

cap gain - acb - expenses of disposition - less reserve (if any)

Question 38

Can you offset an non-LPP gain with an LPP loss?

Answer 38

No