General

Question 1

Basic federal tax formula

Answer 1

NIFTP (Div B) - Div C deductions = Taxable Income x tax rates = Federal tax before tax credits - Tax credits = Basic federal tax

Question 2

Net Income for tax purposes consists of

Answer 2

Employment Income
Business Income/Loss
Property Income/ Loss (interest, dividend, rental, royalty)
Other Income (pension, support, assistance etc)
Add 1/2 capital gains net of cap losses
Deduct other deductions (support, moving, RRSP, child-care, etc)
If > 0 then = NI
If <0 then NI = 0

Question 3

Straight-line method for CCA is used for 2 classes

Answer 3

Class 13 - leasehold interest, and

Class 14 - patents, franchises, licences

Question 4

UCC Balance formula

Answer 4

UCC Balance, beginning
\+ additions
-disposals (lesser of disposal or orig cost)
\+ 50% of net additions (accelerated investment incentive on first year)
= Base amount for CCA
-CCA claimed in the year
- 50% of net additions
= UCC balance, end

Question 5

Property types excluded from accelerated investment incentive

Answer 5

Property acquired on a rollover basis (Section 85 rollover)
Property acquired through Section 87, amalgamation
Property that was previously owned or acquired that was not at arm’s length

Question 6

Recapture calculation for CCA class

Answer 6

Recapture arises if, after adding the cost of all additions and deducting all disposals, the UCC balance is negative. A negative UCC balance means the taxpayer has previously claimed too much CCA.
Add to NIFTP

Question 7

Terminal Loss calculation for CCA class

Answer 7

If cost of all additions less all disposals is > 0 then Terminal Loss if no other assets in class
This means the taxpayer did not claim enough CCA
Deduct from NIFTP

Question 8

Income Tax rule for Capital Losses on depreciable ppty

Answer 8

The ITA specifically prohibits capital losses on the disposal of depreciable property

Question 9

Property income includes

Answer 9

Interest
Dividends
Rental income
Foreign-source property income
Royalties

Question 10

What are non-eligible dividends

Answer 10

Dividends paid by Canadian-controlled private corps out of after-tax business income eligible for SBD OR from after-tax aggregate investment income

Question 11

2020 gross-up and federal dividend tax credit rates

ELIGIBLE DIVIDENDS

Answer 11

Dividend gross up: 38%
Dividend tax credit: 6/11
Div gross up x DTC: 20.727%

Question 12

2020 gross-up and federal dividend tax credit rates

NON- ELIGIBLE DIVIDENDS

Answer 12

Dividend gross up: 15%
Dividend tax credit: 9/13
Div gross up x DTC: 10.385%

Question 13

Rental property building CCA rules

Answer 13

1. Each rental building costing 50K or more must be included in a separate class
2. A taxpayer may not create or increase a net rental loss by claiming CCA on a property or group of properties

Question 14

income classification on Royalties

Answer 14

If the taxpayer is the author or inventor, the royalty pmts are business income.

If the taxpayer purchased or inherited the right to the royalties, the pmts are property income

Question 15

Deductions from property Income: Carrying charges on vacant land

Answer 15

Property taxes and interest on vacant land are only deductible to the extent that there is income from the land.
Property taxes and interest that are in excess of income earned on land are added to the cost base of the land

Question 16

Deductions from property Income: Carrying charges on vacant land

Answer 16

Property taxes and interest on vacant land are only deductible to the extent that there is income from the land.
Property taxes and interest that are in excess of income earned on land are added to the cost case of the land

Question 17

Deductions from property Income: Soft Costs

Answer 17

Soft costs include interest, legal, and accounting fees, insurance, and property taxes on the building or related land.
These soft costs are not deductible during the period of construction, renovation, or alteration of the building and are added to the cost base of the building.

Question 18

Canadian Securities election

Answer 18

Can elect to treat the disposition of Canadian securities as a capital transaction, regardless of the nature.
Not available to:
Trader or dealer of securities
Financial institution
Principal business is lending money or purchasing debt

Question 19

net capital loss carryforward/back rules

Answer 19

Carryforward: Indefinitely

Carried back: 3 years

Question 20

Lifetime capital gains exemption

Answer 20

An eligible individual is entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains realized on the disposition of qualified property

Eligibility
You were a resident of Canada for at least part of the tax year
You were a resident of Canada throughout the years preceding or proceeding the tax year.

Qualified Property
Dispositions of QSBC shares
Depositions of qualified farm or fishing property

Eligible up to 883,384 LCGE or cumulative capital gains deduction of 441,692

Can claim any amount, up to the maximum

Question 21

When can taxpayers start claiming CCA on depreciable assets

Answer 21

The earlier of the time it is put in use or the second taxation year following the acquisition.
Public companies can deem property other than buildings available for use in the year that deprecation is first recorded

Question 22

Short taxation year rule

Answer 22

All classes except for class 14 must calculate a short year when applicable. 
Accelerated investment incentive must be prorated as well

Question 23

Non-arms length and the half year rule

Answer 23

Depreciable property sold or transferred in a non-arm’s length transaction is not considered an accelerated investment incentive property. Therefore, the half year rule applies, unless the depreciable ppty was owned for more than one year and was used to earn income and stays in the same class when transferred.

Question 24

Non-Arm’s length new UCC beginning balance formula

Answer 24

Original cost from transferor plus the TCG of transferor.

This rule restricts the amount of future recapture for the transferee

Question 25

Non-Arm’s Length disposal credit to UCC

Answer 25

Does not use the lesser of cost and sold price. Instead uses lesser of sold and UCC balance. By not using the actual cost recapture is limited to the amount added to UCC.

Question 26

Non-arm’s length deemed CCA formula

Answer 26

When a seller sells the depreciable asset for a price less than the orig cost, the difference between the price the purchaser paid and the orig cost is to be the purchaser’s deemed CCA.

Question 27

Non-arm’s length deemed Capital Cost

Answer 27

When a seller sells the depreciable asset for a price less than the orig cost, the purchaser’s capital cost is deemed to be the org cost to the seller

Question 28

Capital gains reserve formula

Answer 28

The reserve is calculated as the lesser of two amounts:

1. Capital gain × (Proceeds not due / Total proceeds)
2. 20% of the capital gain × (4 – Number of preceding years ending after the disposition); this ensures the entire amount of the taxable capital gain is brought into income by the end of the fifth year

Question 29

Limitation of deducting leasing costs passenger vehicle

Answer 29

$800 + tax

Question 30

Interest on money borrowed for certain vehicles

Answer 30

The lesser of:

1. Actual Amount paid
2. $10 x the number of days in the period in respect of which the interest was paid or payable, as the case may be.

Question 31

Donation carryforward rules

Answer 31

5 years

Question 32

Allowable Business Loss (ABIL) carryforward/back rules

Answer 32

Carryforward: 10 years, then added to net capital loss balance
Carryback: 3 years

Question 33

non-capital loss carryforward/back rules

Answer 33

Carryforward: 20 years
Carryback: 3 years

Question 34

Farm loss carryforward/back rules

Answer 34

Can apply to any income
Carryforward: 20 years
Carryback: 3 years

Question 35

Restricted Farm loss carryforward/back rules

Answer 35

Apply to farm income only
Carryforward: 20 years
Carryback: 3 years

Question 36

Replacement property rules apply when

Answer 36

1. An involuntary disposition of property where the ppty is lost, stolen, destroyed, or confiscated (any kind of ppty except vacant land), new ppty must be acquired within 24 months of the end of taxation year
2. A voluntary disposition where the taxpayer sells real property used in a business (only land or building), new ppty must be acquired with in 12 months of the end of taxation year

Can defer capital gains and recapture

• New ppty must have been acquired for similar use

Question 37

CCA - Available for use

Answer 37

the earlier of the time the depreciable
asset is put into use or the second
taxation year following the year of
acquisition.

Question 38

CCA - Assets that must be put into separate classes

Answer 38

Class 10.1 - Luxury personal vehicles with cost over 30K - limited to 30K
Class 1 - Rental Property costing more than 50K

Question 39

Replacement ppty - max capital gain deferral allowed

Answer 39

Lesser of:

1. Proceeds less original cost
2. Cost of replacement less original cost

Question 40

Replacement ppty - max recapture deferral allowed

Answer 40

Lesser of:

1. Capital gain less UCC of replacement ppty
2. Cost of the replacement ppty

Question 41

Replacement ppty - Election of additional deferral of capital gains

Answer 41

Available when replacement ppty is acquired within the required time periods.

Allows taxpayer to reallocate proceeds of disposition between land and building.

Question 42

Deferral of capital gains on disposition of small business investments - Conditions

Answer 42

Capital gains from a disposal of CCPC may be deferred to the extent that the proceeds are reinvested in replacement shares of another CCPC.

Conditions that must be met:

1. The individual must have owned the common shares throughout the 185-day period immediately preceding the sale
2. Replacement shares must be acquired within 120 days of the end of the year in which the orig shares were sold.

Question 43

Deferral of capital gains on disposition of small business investments - Calculation

Answer 43

Capital gain x (lesser of proceeds or cost of replace shares) / proceeds of disposal

Question 44

ITA 69 Sale of property to related parties

Answer 44

If actual proceeds are > FMV then
Deemed proceeds = Actual selling price
ACB to purchaser = FMV
Seller pays more tax (double taxation)

If actual proceeds are < FMV then
Deemed proceeds = FMV
ACB to purchaser = Actual selling price
Buyer pays more tax (double taxation)

If actual proceeds are NIL then
Deemed proceeds = FMV
ACB to purchaser = FMV

Question 45

Attribution rules for not-arm’s length property transfers - ITA 73

Answer 45

Attribution rules apply by default for all non-arms length property transfers (to family)

If Attribution applies all income/losses/gains remain with transferor except in the case of cap gains when the transferee is a minor.

Spouse: Income and capital gains are attributed to transferor
Minor: Income is attributed to transferor, capital gains are attributed to minor

There is option to elect out of ITA 73 if FMV was paid by a spouse (transferee).

If ITA 73 is elected out and FMV was paid by a spouse (transferee) then transferor will have gain or loss on the transfer and the transferee will have a future income/gains/losses.

Question 46

Eligible Dividends are paid from what income and what is the implications to shareholders?

Answer 46

Eligible dividends are presumed to be paid from a corporation’s active business income that’s been taxed at the general corporate rate, including from eligible portfolio dividends received by the corporation.

Shareholders who receive these dividends are entitled to the enhanced dividend tax credit

Question 47

Non-Eligible Dividends are paid from what income and what is the implications to shareholders?

Answer 47

Non-eligible dividends are generally paid from a corporation’s active business income that was taxed at the small business tax rate, including non-eligible dividends received by the corporation, or from its passive investment income.

Shareholders who receive these dividends are entitled to the ordinary dividend tax credit

Question 48

CCA rules for class 10.1

Answer 48

Class 10.1 at 30% with a capital cost limit of 30K

CCA at 50% of the regular rate is allowed in year of disposition of a Class 10.1 vehicle. The remaining balance of the disposed vehicle is zero’d out.

Recapture and terminal losses are not applicable to Class 10.1.

Each item should be in a separate CCA class

Question 49

ACB of a partnership

Answer 49

ACB opening balance
Add: partner share of income, capital gains, dividends, capital dividends, capital contributions
Deduct: Losses, capital losses, charitable and political donations, drawings
= Ending ACB

Question 50

Shareholder loan tax inclusion rules

Answer 50

Loans must be included in income unless any of the following conditions are met:

i. Shareholder is an employee of corporation and meets the exemptions for employees

ii. Loan is repaid within one taxation year after the year it was made (cannot be on two
consecutive fiscal balance sheets).

iii. Loan was made in the ordinary course of money-lending business.
iv. Loan is intercompany loan or made to non-resident.

Question 51

Tax exemption for shareholder loan

Answer 51

Shareholder/employee may be exempt if:

Not a specified employee
(owns less than 10% of the shares)

OR

Loan to specified employee for one of three reasons:

i. to acquire a dwelling for their own occupation
ii. to acquire newly issued treasury shares
iii. to acquire a motor vehicle for employment use

AND

The following two conditions are met:
bona fide repayment terms
loan by virtue of employment (all other employees are eligible for similar loans)

Question 52

Shareholder Benefits and Loans -Other considerations

Answer 52

1. If loan is not included in income, imputed interest must be included in shareholder’s income.
2. If loan is included in income, no imputed income is included in shareholder’s income.
3. Repayment of loan that has been included in income is eligible for deduction in the year it is repaid.

Question 53

General Anti-Avoidance Rule (GAAR)

Answer 53

All three must be met:

1. A tax benefit must arise as a result of the transaction or series of transactions.
2. The transaction or series of transactions is an avoidance transaction. It may be determined that the primary purpose is not to obtain a tax benefit. ei: business, family or investment purposes
3. The transaction or series of transactions is an abusive tax-avoidance arrangement.

Question 54

Determining if contract is contractor or employee

Answer 54

Explain what each tests is and give points for both contractor or employee and conclude at the end of all tests.

*Control - who decides the time, place and manner the work needs to be done.
*Ownership of tools - addresses who will supply the tools necessary to do the work
*Chance of profit/risk of loss - Does the individual face financial risk regarding an arrangement
*Integration - How dependent are you on the organization
Specific Results - project based on ongoing work

Question 55

HST Election on sale of assets

Answer 55

In the case where the following criteria is met HST can be eliminated through joint election:
• Is the recipient acquiring a business?
• Is the recipient acquiring all or substantially all (90%) of the assets that are necessary to running the business?
• Is the recipient a GST/HST registrant?

Question 56

Partnerships - Negative ACB rules

Answer 56

If a partner withdraw reduces the ACB to negative in first year, 1/2 of the negative is included as a TCG.

Otherwise at-risk rules apply and ACB cannot be reduced below 0

Question 57

Limited partnerships and at-risk rules

Answer 57

The two main criteria for considering a taxpayer to be a limited partner are:
• The taxpayer’s liability for the debts of the partnership is limited to the taxpayer’s investment in the partnership.
• The taxpayer does not participate in management of the partnership.

At-risk rules restrict the limited partner’s deductions and or tax credits to the ACB value of 0.

Question 58

Home office expense eligibility

Answer 58

Meet one of the following conditions:
It is your principal place of business
You use the space exclusively to earn business income and use it on a regular and ongoing basis to meet clients or customers

Question 59

CCA Classes

Answer 59

Class 1 (4%):  Residential buildings acquired after 1987
Class 1 (6%): Non-residential buildings acquired after 1987
Class 1 (10%): Manufacturing of processing buildings (at least 90%) after 2007
Class 3 (5%): Building acquired before 1988
Class 8 (20%): Furniture, office supplies, appliances,  tools > $500, machinery, equipment that is not for processing goods
Class 10 (30%):  vehicles < 30k 
Class 10.1 (30%): Vehicles > 30K (except limited seating)
Class 12 (100%): tools, instruments that cost <  $500
Class 14: Intangibles: Capital Cost of each property is whichever is less: 
1. Total CC of each / useful life
2. UCC as of end of tax year 
Class 14.1 (5%): Goodwill, Unlimited life intangibles 
Class 16 (40%): Taxis, car rentals, video game machines, freight trucks
Class 29: Machinery and equipment processing goods in Canada acquired between 2007 - 2016:  First year 25%; Second year 50%, third year 25%
Class 43 (30%): Machinery and equipment  processing goods in Canada that are not included in class 29 or 53
Class 43.1 (30%): Electrical charging stations for KW between 10KW-90KW, geothermal equipment
Class 43.2 (50%) Electrical charging stations over 90 KW
Class 46 (30%): Data network infrastructure & related software
Class 50  (55%): Computer hardware and software after March 2007
Class 52 (100%): Computer hardware and software acquired between Jan  2009 - Feb 2011)
Class 53 (50%): Machinery for manufacturing goods in Canada acquired between 2015-2026 
Class 54 (30%): Zero-emission vehicle otherwise included in class 10 or 10.1
Class 55 (40%): Zero-emission taxi or rental vehicle

Question 60

Accelerated Investment Incentive items that are 100% CCA

Answer 60

Class 53 Machinery and equipment for Manufacturers and Processors
Class 43.1 & 43.2 Clean Energy Investments

Question 61

Taxable benefits to employees

Answer 61

Damaged goods
-Whole amount would be taxable
employees able to have 500 in gifts non-taxable but they have to be given on special occasions which is not applicable to damaged goods.
- Measurement is generally FMV. Damaged goods difficult to measure
- Cannot pick a standard % reduction to FMV
-CRA may insist on a tracking system and require value to be assessed before giving to employee
-May have sales tax implications

Uniforms and safety equipment

• Are not a taxable benefit if the uniform is required while the employee carries out their duties or if the items are provide for safety reasons.
• employees would not use them outside of work

Health and safety courses
Because these courses will benefit the employer they are not a taxable benefit.

Free Pizza

• If is is provided for the convenience of the employer (provided so they could have a meeting during lunch break) then it is not a taxable benefit.
• If it is provided as a social event it is excluded from taxable benefits as long as it costs less than 150 per person.
• If it was provided as a regular subsidizing of meals for employees it would be considered a taxable benefit if they are not paying a reasonable amount to cover the cost of the food.

Gift cards
-Considered a near-cash benefit which is taxable regardless of the amount

Rewards

• Considered gifts since they are for special occasions (rewards)
• Limit of $500 per year, portion over 500 is taxable
• If they are given on the basis of job well done then they are considered performance pay and are a taxable benefit regardless of the amount.