Midterm 1 - Intro

Question 1

What is Tax: Provide two general definitions of a tax

Provide a general definition of tax

Answer 1

“A compusorytransfer of money from private individuals or organizations to the government not paid in exchange for some specific good or benefit”

Question 2

What is Tax: Provide two general definitions of a tax

How does Hogg, Magee and Lidefine tax?

Answer 2

“a levy, enforceable by law imposed under the authority of a legislature, imposed by a public body and levied for a public purpose” from Kempe v R (2000)(TCC).

Question 3

What is Tax: Provide two general definitions of a tax

What are the two common features of the general definitions?

Answer 3

Common features are:

1) “compulsory” and “enforceable by law”
2) “transfer of money” and “levy”

Question 4

What is Tax: Show the difficulty in identifying a “tax” by reference to an example.

Answer 4

Fines: some things are more akin to penalties or fines intended to deter, as opposed to revenue-raising like taxes –> the definitions don’t separate fines and penalties; although the money-making function is SECONDARY

Question 5

Classification of Taxes: Identify and briefly describe ten different types of taxes

Income Tax

Answer 5

Income Tax: a tax on the INCOME of a TAX UNIT

Question 6

Classification of Taxes: Identify and briefly describe ten different types of taxes

Excise Tax (Excise Tax Act)

Answer 6

Generally: tax on the QUANTITY or VALUE of output of production

Sales tax: tax on SALE to the consumer

Value-added tax: tax on VALUE ADDED at particular stage of production (designed to tax OVERALL VALUE ADDED) e.g. GST

Question 7

Classification of Taxes: Identify and briefly describe ten different types of taxes

Wealth Tax

Answer 7

tax on the WEALTH of a particular taxation unit (e.g. capital gains, estate tax)

Question 8

Classification of Taxes: Identify and briefly describe ten different types of taxes

Tariffs (Customs Tariff Act)

Answer 8

tax levied on IMPORT of goods

Question 9

Classification of Taxes: Identify and briefly describe ten different types of taxes

Head Tax

Answer 9

tax at SET AMOUNT typically applied to INDIVIDUALS (e.g. Chinese Head Tax)

Question 10

Classification of Taxes: Identify and briefly describe ten different types of taxes

Property Tax

Answer 10

tax on REGULAR BASIS on the REAL PROPERTY owned by the taxpayer

Question 11

Classification of Taxes: Identify and briefly describe ten different types of taxes

Transfer Tax

Answer 11

tax on PARTICULAR TRANSACTIONS such as a property transfer tax

Question 12

Classification of Taxes: Identify and briefly describe ten different types of taxes

User Tax/Use Fees

Answer 12

Tax on individual USERS OF PARTICULAR SERVICES or FACILITIES (e.g. highway/bridge toll, incorporation fee, filing fee)

Question 13

Classification of Taxes: Identify and briefly describe ten different types of taxes

List the 10 types of taxes

Answer 13

1) Income Tax
2) Excise Tax (Sales Tax, Value-added tax)
3) Tariffs
4) Head Tax
5) Property Tax
6) Transfer Tax
7) User Tax

Question 14

**Roles of the Income Tax: IDENTIFY AND DESCRIBE THREE MAIN ROLES OF INCOME TAXES.

Answer 14

1) REVENUE- raise revenue; by far most important source of income (63%) for fed gov
2) REDISTRIBUTE- tax collected from higher income (high income -> high tax) and returned through social programs
3) REGULATION of Private Activity - i.e. use deductions to encourage certain activities or tax more for other activities

Question 15

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

List 7 primary sources

Answer 15

1. Income Tax Act***** - primary source
2. Income Tax Application Rules (ITARs)
   3 Income Tax Regulations
   4 Tax Treaties
   5 Case Law
   6 Provincial Income Tax Acts (NOT ON EXAM)
   7 Private Law

Question 16

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Describe Income Tax Act

Answer 16

current version is the Income Tax Act - enacted in December 23, 1971 and came into force on January 1, 1972

SEE OTHER FLASHCARDS FOR MORE DETAIL

Question 17

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

ITARs

Answer 17

Income Tax Application Rules

• enacted with 1971 Act
• Rules to help TRANSITION from OLD act to NEW act (still relevant for dispositions of property from before 1972)

Question 18

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Income Tax Regulations

Answer 18

Income Tax Regulations made under authority given to GOVERNOR IN COUNCIL under SECTION 221 of the Act

Question 19

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Tax Treaties

Answer 19

80+ Treaties

Primarily to AVOID DOUBLE TAXATION

OVERRIDES THE INCOME TAX ACT

Question 20

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Case Law

Answer 20

Set out in CANADIAN TAX CASES (C.T.C.) and Dominion Tax Cases (D.T.C.) - cited AHEAD of official report

Common issues include: 
RESIDENCE, 
income, 
business vs capital gain, 
EXPENSES, 
accounting principles
WHETHER LOSSES ARE FULLY DEDUCTIBLE

Question 21

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Provincial Income Tax Acts

Answer 21

NOT ON EXAM

- Provincial taxes COLLECTED by FEDERAL government (EXCEPT Quebec)

Question 22

Sources of Income Tax Law: ID & describe 7 primary sources of income tax law

Private Law

Answer 22

General law for issues such as WHEN A PERSON IS ENTITLED TO INCOME –> e.g. business law, employment law, contract law, partnership law

Question 23

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

List secondary sources

Answer 23

Administrative Publications FROM THE CANADA REVENUE AGENCY (CRA)
1. Forms 2. Guides 3. Information Circulars 4. Interpretation Bulletins 5. Income Tax Folios 6. Advance Income Tax Rulings 7 Private Publications

Private Publications (e.g. McCarthy’s)

Question 24

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law

Forms

Answer 24

e.g. T4, T1 tax forms

Question 25

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law Guides

Answer 25

E.g. General Income Tax and Benefit Guide

Question 26

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law Information Circulars

Answer 26

- began in 1970 - provide tax info to GENERAL PUBLIC - available from CRA offices and website

Question 27

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law Interpretation Bulletins

Answer 27

- began in 1970 - for ACCOUNTANTS AND LAWYERS - assessments conducted BASED ON INTERPRETATION BULLETINS - usually safe in relying on these; - PERSUASIVE but don't have force of law - NO ESTOPPEL for CRA (Stickel v MNR)

Question 28

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law Income Tax Folios

Answer 28

- began to REPLACE Interpretation Bulletins in 2013 | - NOT binding on CRA; NOT the law itself (but persuasive)

Question 29

Sources of Income Tax Law: ID & describe 8 secondary sources of income tax law Advance Income Tax Rulings

Answer 29

- began formally in 1979 - advance tax rulings AT REQUEST OF TAXPAYER; allows taxpayer to better plan for transaction - NOT binding on CRA (Woon v MNR)

Question 30

Interpretation: Approaches List the three approaches (and which is current)

Answer 30

1) Strict interpretation approach (OLD approach) 2) Modern Rule (CURRENT approach) 3) Textual, Contextual and Purposive Approach (EXPANSION on Modern Rule)

Question 31

Interpretation: Approaches Describe the two approaches

Answer 31

1) STRICT interpretation - words imposing tax construed STRICTLY - exemptions resolved AGAINST taxpayer - ambiguities on tax IN FAVOR of taxpayer 2) MODERN Rule - interpret statute IN ENTIRE CONTEXT and harmoniously with the SCHEME and OBJECT of the Act and INTENTION of Parliament

Question 32

Interpretation: Approaches Describe the Textual, Contextual and Purposive Approach and the Case it originates from

Answer 32

3) TEXTUAL, CONTEXTUAL and PURPOSIVE approach (Canada Trustco, 2005 SCC) - interpretation according to meaning HARMONIOUS with Act as a whole (PRECISE language = general meaning relied on - AMBIGUOUS = less emphasis on general meaning)

Question 33

Interpretation: DIFFICULTIES List the 7 difficulties in interpreting the Income Tax Act

Answer 33

1. SIZE of the Act 2. Lack of STATUTORY DEFINITIONS 3. COMPLEXITY of the Real World 4. Doctrine of SUPREMACY of the LEGISLATURE 5. Elusive LEGISLATIVE INTENT 6. PRECISION of Language 7. SINGLE Sentence

Question 34

Interpretation: MEANING of the Words How do you ascertain the meaning?

Answer 34

1. STATUTORY Definition 2. ORDINARY, Technical or Legal Meaning 3. CONTEXT 4. PURPOSE and INTENT Tips: Look for MAIN CLAUSE --> "AND" and "OR" ---> WORD PATTERNS (i.e. mathematical operations)

Question 35

Structure: Intro List the 5 Basic Question of Tax

Answer 35

1) WHO is the tax unit? 2) WHAT is the Tax Base? 3) WHEN is the tax to be paid? 4) HOW MUCH is taxed? (i.e. tax rates) 5) HOW are the taxes collected?

Question 36

Structure: WHO - the Tax Unit What section of the Income Tax Act defines the Tax Unit?

Answer 36

s. 2(1)

Question 37

Structure: WHO - the Tax Unit Who is taxed?

Answer 37

Every PERSON RESIDENT in Canada at ANY TIME in the TAXATION YEAR

Question 38

Structure: WHO - the Tax Unit How is a PERSON defined?

Answer 38

``` A person includes: - Individuals - a CORPORATION - a TRUST (s. 104(2)) DOES NOT include a partnership ```

Question 39

Structure: WHO - the Tax Unit What section includes a TRUST as a taxpayer?

Answer 39

s. 104(2) DEEMS a Trust as an "individual" and therefore a "person" and taxpayer

Question 40

Structure: WHO - the Tax Unit Do Residents pay only income from IN CANADA or OUTSIDE of Canada as well?

Answer 40

Residents pay income on WORLDWIDE INCOME (subject to Tax Treaties)

Question 41

Structure: WHO - the Tax Unit Can NON-RESIDENTS be taxed? Cite the SECTIONS

Answer 41

Yes s. 2(3) requires non-residents PAY TAX where person was EMPLOYED in Canada, CARRIED ON BUSINESS in Canada or DISPOSED of taxable Canadian property AT ANY TIME IN THE YEAR Part XIII is geared towards catching taxes on non-residents BEFORE the money leaves the country --> b/c hard to enforce otherwise

Question 42

Structure: WHO - the Tax Unit Does the Act tax FAMILIES as a Tax Unit?

Answer 42

NO But it DOES account for it through: - ATTRIBUTION Rules - Kiddie Tax - ROLLOVER of Capital Gains - Tax CREDITS for dependents - Transfers of credits between spouses - RRSP - MEANS-tested credits

Question 43

Structure: WHAT - the Tax BASE | - what sections set out the tax base?

Answer 43

SECTION 3 S. 2(1) provides for tax on TAXABLE INCOME s. 3 lays out WHAT IS INCLUDED IN INCOME

Question 44

Structure: The TAX BASE Is MEASUREMENT or definition of Income simple? Why or Why not?

Answer 44

NO - hence focus of the course Different methods to decide No simple formula MEASUREMENT isn't simple either -> different methods possible (all acceptable to accountants; not all acceptable to CRA)

Question 45

Structure: WHEN? Taxation Year What section sets out the taxation year? What is the taxation year defined as?

Answer 45

SECTION 249(1) s. 2(1) says tax shall be paid for each TAXATION YEAR s. 249(1) of the Act defines "taxation year" as the: - CALENDAR year for an individual - FISCAL year for a corporation (which the corporation can choose when to start/end)

Question 46

Structure: WHEN? The Taxation Year How DID the Act deal with the ARBITRARINESS of the Yearly Calculation/potential unfairness? How DOES the Act currently deal with the unfairness?

Answer 46

- Income does not fall neatly into taxation year --> can lead to UNFAIRNESS (class example of varied income vs. fixed income) - Act USED TO deal with this with an AVERAGING FORMULA --> this was REMOVED in 1988 with flattening tax rates - Act allows for LOSS CARRY-FORWARDS

Question 47

Structure: HOW MUCH? | FEDERAL Tax Rates (don't need to fully memorize)

Answer 47

``` FEDERAL Tax Rate - the federal tax rates for individuals for 2016 are: 0 to 45,282 15% 45,283 to 90,563 20.5% 90,564 to 140,388 26% 140,389 to 200,000 29% >200,000 33% ```

Question 48

Structure: HOW MUCH? | PROVINCIAL Tax Rate

Answer 48

``` PROVINCIAL Tax Rate - the B.C. individual tax rates are [see Income tax Act, R.S.B.C. 1996, c. 215, s. 4.1] (as of Jan 11, 2016): • 0 to 38,210 5.06% • 38,211 to 76,422 7.70% • 76,423 to 87,741 10.50% • 87,742 to 106,544 12.29% • 106,545 and up 14.07% ```

Question 49

Structure: HOW MUCH? | Describe CORPORATE Tax Rates in BC (and policy concerns)

Answer 49

FEDERAL starts at 38% but gives 10% ABATEMENT (s. 124(1)) to account for 10% PROVINCIAL tax Has ADDITIONAL REDUCTIONS (overall corporate tax rate in BC is 26%) POLICY CONCERNS: COMPETITIVENESS tax rate vs. distribution of wealth

Question 50

Structure: HOW MUCH? | What is the Small Business Deduction and the policy reason behind it?

Answer 50

There is a SMALL BUSINESS DEDUCTION for Canadian Controlled Private CORPORATIONS earning ACTIVE business Income - BC tax is 2.5% for first $500k (13.5% total prov/fed) - essentially acts as tax DEFERRAL - POLICY: to encourage investment in small businesses

Question 51

Structure: HOW MUCH? | What section of the Act provides for TAX CREDITS? Why is it used instead of deductions?

Answer 51

Tax Credits provided under SECTIONS 118 to 118.95 | Reason: FAIRER than deductions (switched to credits from deductions)

Question 52

Structure: HOW MUCH? | What is the ALTERNATIVE MINIMUM TAX? What is the Policy behind it and what SECTION governs it?

Answer 52

s. 127.5 and FORM - calculated by adding back exemptions to income, then deducting $40k (to make sure only applies to persons above $40k/yr income) then recalculate, compare and PAY HIGHER - POLICY: concern that WEALTHY individuals could significantly reduce tax --> the AMT primarily affects fairly high-income individuals

Question 53

Structure: Describe the TAX COLLECTION PROCEDURE including tax returns, payment, assessment, examinations, audits, reassessments, objections, appeals, burden of proof and settlement. Who Administers the Collection?

Answer 53

Canada Revenue Agency (CRA) - formerly Department of National Revenue, Revenue Canada, Canada Customs & Revenue Agency DoJ provides legal advice and services and LITIGATES in Tax Court, Fed Court, SCC on behalf of CRA

Question 54

Structure: Describe the TAX COLLECTION PROCEDURE including tax returns, payment, assessment, examinations, audits, reassessments, objections, appeals, burden of proof and settlement. Describe the tax assessment process

Answer 54

File tax return (s. 150) --> Assessment (s. 152(1)) -> Examinations (CRA compares filings) --> Audit (s. 231.1(1), (3); 231.2) ---> Reassessment from examination/audit (s. 152(4)) Tax return and/or Above steps --> Objection by taxpayer (s. 165(1), s. 166(2)) --> Appeal (formal, informal process)

Question 55

Structure: the PROCEDURE | (a) How is tax COLLECTED?

Answer 55

Collected by CRA - procedure started by filing of tax return by taxpayer - INDIVIDUALS must file if earning enough income (but may be ordered to by the Minister) - CORPORATIONS must file regardless (unless registered charity) - Return is on a PRESCRIBED FORM (T1 for Individuals, T2 for Corporations)

Question 56

Structure: The PROCEDURE | (b) How is tax PAID?

Answer 56

- taxpayer to provide ESTIMATE of tax payable (and payment) when filing the return (s. 151) 1) Employers WITHHOLD ESTIMATE from employees and REMIT to government (s. 153(1)); PENALTY under s. 227 for failing to 2) Provisions for payment by INSTALMENT (e.g. corporation has 6 months to pay)

Question 57

Structure: the PROCEDURE | (c) Describe the ASSESSMENT process

Answer 57

ITA ss. 152, 158, 161 + IT Reg 4301 1) Minister to assess return "with all due dispatch" upon filing of return --> CRA checks the ARITHMETIC + may request more information 2) Taxpayer may then be REFUNDED 3) Notice of Assessment mailed when complete 4) INTEREST must be paid on OVERDUE taxes

Question 58

Structure: the PROCEDURE | What is the interest rate paid by the TAXPAYER and CRA for overdue taxes?

Answer 58

``` CRA = treasury rate + 2% TAXPAYER = treasury rate + 4% ```

Question 59

Structure the PROCEDURE | (d) What is done in the EXAMINATION stage?

Answer 59

CRA will CHECK the filings and COMPARE between parties to CORRELATE the information/look for inconsistency

Question 60

Structure: the PROCEDURE | (e) Describe the AUDIT stage

Answer 60

ss. 231.1(1), (3), 231.2 - some returns will be AUDITED (based on CRA annual focus) - returns of SALARY and WAGE are VERY SELDOM AUDITED (corporations and trusts more often; but still less than 5% audited) - audits done WITHOUT WARRANT at place of business; NEED WARRANT for in dwelling home ---> auditor can demand information

Question 61

Structure: the PROCEDURE | (f) Describe the REASSESSMENT stage

Answer 61

ITA ss. 152(4), 162, 163 - further examination or audit may result in reassessment; TAXPAYER may also seek reassessment - can only reassess WITHIN THREE YEARS (unless waived by taxpayer) - s.152(4) - payment on reassessment includes INTEREST

Question 62

Structure: the Procedure | (g) Describe the OBJECTION stage

Answer 62

ss. 165(1), (2), 166.2(1) - can resolve objection BY DISCUSSION (most common) - FORMAL NOTICE of Objection - within 1 year or 90 days of notice of assessment; must include relevant facts (there's a FORM) --> taxpayer then given chance to make representations

Question 63

Structure: the Procedure | (h) Describe the APPEAL stage

Answer 63

Taxpayer can appeal to Tax Court of Canada (must notify of appeal within 90 days of decision on Notice of Objection) Alternative: can go through INFORMAL procedure or FORMAL procedure

Question 64

Structure: the Procedure | - Describe the Informal Procedure for appeal

Answer 64

INFORMAL procedure | - under $12k tax, amount of loss claimed

Question 65

Structure: the Procedure | - Describe the Formal/General Procedure for appeal

Answer 65

FORMAL procedure - amount: over $12k, loss over $24k, or taxpayer does not elect informal procedure - costs CAN be awarded; CANNOT be represented by non-lawyer; no time limit on decision - decision CAN be appealed to FCA and SCC

Question 66

Structure: the Procedure | (i) What is the BURDEN OF PROOF in a prosecution for tax EVASION?

Answer 66

tax evasion = CCC procedure ONUS (Johnson v MNR) = on the TAXPAYER to REBUT FACTS that the decision was based upon (BUT Minister has duty to DISCLOSE facts upon which the assessment was based) - Basis for onus: deemed under s. 152(8) & taxpayer has BEST EVIDENCE on the facts

Question 67

Structure: the Procedure | (i) What is the EXCEPTION to the burden of proof under ITA ss 152(4), (8) and 163?

Answer 67

1) Civil penalties --> onus is on MINISTER to justify the facts on which imposition of penalty was based (163(3)) 2) Reassessment outside 3 yr period for fraud or misrep --> onus on MINISTER to show misrep or fraud 3) Criminal offence under ss. 238 or 239 --> Crown to PROVE beyond reasonable doubt

Question 68

Structure: the Procedure | j) What is the SETTLEMENT procedure? Who is bound? Who is not bound? (cite cases

Answer 68

Minister/CRA is NOT bound by settlement (Cohen v the Queen) - unless CONSISTENT w/ the ACT perhaps (Galway v MNR) Taxpayer IS BOUND (Smerchanski v MNR)

Question 69

Structure: the Procedure | (k) what is a REMISSION order under s. 23(2) of the Financial Administration Act? When is it used?

Answer 69

Remission order = order of GOVERNOR IN COUNCIL to WAIVE a tax Rarely used; on recommendation of CRA/Treasury Board; essentially for HARDSHIP

Question 70

Structure: the Procedure | (i) What section of the ITA imposes duty of CONFIDENTIALITY? Example of EXCEPTIONS to that duty?

Answer 70

s. 241 = officials in service (or formerly) prohibited from releasing taxpayer information EXCEPTIONS: criminal proceedings; aggregate for gov policy; enforcement of laws

Question 71

Structure: Penalties, Investigation and Prosecution What provisions provide for CIVIL penalties? Give examples of some available, including the one most relevant for lawyers.

Answer 71

SECTIONS 162 and 163 - Most relevant for lawyers/accountants: misrepresentation of another person's tax matters BY A THIRD PARTY (s. 163.2) - IMPOSED by Minister/CRA in ASSESSMENT - eg late filing, failure to file, repeated failure to file tax return - failure to provide information -failure to report/false statement/omission

Question 72

Structure: Penalties, Investigation and Prosecution | What provisions provide for CRIMINAL PROSECUTIONS? What are the elements?

Answer 72

SECTIONS 238, 239 s. 238 - offence to fail to file a tax return or to fail to comply with other provisions of the act (STRICT liability offence) s. 239 - offence to FALSIFY records or EVADE compliance or payment (MENS REA element)

Question 73

Structure: Penalties, Investigation and Prosecution | What INVESTIGATORY powers does the CRA have?

Answer 73

CRA has investigatory powers under SECTIONS 231.1, 231.2, 231.3, 231.4 - s.231.4 allows INQUIRY by hearing officer appointed by Tax Court; can compel witnesses & testimony under oath - enter business W/O warrant (s. 231.1); home WITH warrant (231.2) - power to demand documents; judge can issue warrant if not complied with (s. 231.3)

Question 74

Terminology & Concepts: Terminology | Explain the Difference between Realization and Recognition under the Accrual Method & Cash Method

Answer 74

Gain/Loss Not RECOGNIZED (factored into tax return) until REALIZED Realization of Profit = when taxpayer has LEGAL RIGHT to be paid (accrual method) or when a gain has been RECEIVED (cash method) Realization of Expenses/Costs = when PAYABLE (accrual) or PAID (cash)

Question 75

Terminology & Concepts: Terminology | Explain the difference in treatment of costs and expenses.

Answer 75

Cost = money paid out; It cannot be deducted until it is an EXPENSE incurred in the tax period. --> therefore timing and purpose of the cost is key in its tax treatment/deductibility.

Question 76

Terminology & Concepts: Terminology | Explain what a CAPITAL expense is, as well as how it is deducted (if applicable).

Answer 76

Capital expense = cost incurred that will be used OVER TIME (i.e. for an asset, eg a car or rental property); value is normally deducted OVER TIME under the ITA Reason: The asset be used over a period of time and therefore the cost has not been used up within that tax year.

Question 77

Terminology & Concepts: Terminology | Explain what a CURRENT expense is, as well as how it is deducted (if applicable)

Answer 77

Capital expense = cost incurred that will be used up IN THAT TAX PERIOD; therefore it is DEDUCTIBLE for that period (e.g. car in inventory of dealership --> value deducted as soon as sold) Reason: cost incurred then used up within that taxation year

Question 78

Terminology & Concepts: Characterization | Explain how the CHARACTER of an amount or transaction is important to tax.

Answer 78

- Character important to how it is taxed - Amount or transaction only taxed (under the Income Tax Act) if it can be characterized as "INCOME FROM A SOURCE" --> e.g. windfall does not count - Character affects how the gain/loss is treated (e.g. capital gains vs. regular income)

Question 79

Terminology and Concepts: Timing | What is generally preferred in the TIMING of inclusion in income and deduction of expenses

Answer 79

Generally, the taxpayer will want to: - DEFER recognition of income - while recognizing losses SOONER Reason: $100 a year or two from now is different in value than $100 now

Question 80

Terminology and Concepts: Timing | What is the cash method used for under the ITA? What is the accrual method used for under the ITA?

Answer 80

Cash method: income from employment , office, property or farming - capital gains (or losses) recognized when property disposed of Accrual method: standard method for computing income and expenses from BUSINESS

Question 81

Terminology and Concepts: Time Value of Money/Tax Deferral | Why is it generally preferable to defer recognition of revenues and recognize expenses sooner?

Answer 81

Time value of money --> cash now = can collect interest = more valuable Inverse is that cash in future is worth LESS than cash today (due to potential to earn interest) Therefore: desirable to defer tax and invest (but remember; tax on interest earned)

Question 82

Terminology and Concepts: Time Value of Money | What is the meaning of the "PRESENT VALUE" of future cash flow? What is "discounting"? What is the "discount rate"?

Answer 82

Present value = amount that a future cash flow is worth today (e.g. $100 a year from now only worth $95 today) Discounting = process of determining present value of future cash flow (present value = discount value of future cash flow) Discount rate = interest rate used to calculate present value

Question 83

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate What is the MARGINAL tax rate?

Answer 83

MARGINAL tax rate = tax rate on NEXT $1 of income (e.g. $1 more --> into next tax bracket --> marginal rate = rate on next tax bracket)

Question 84

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate What is the AVERAGE tax rate? How is it calculated?

Answer 84

AVERAGE tax rate = TOTAL TAX divided by TOTAL INCOME

Question 85

Terminology and Concepts: Average Tax Rate and Marginal Tax Rate If you make $8000 income; and tax rate is 10% on first $5000 and 20% on next $5000, what is your MARGINAL tax rate and what is your AVERAGE tax rate?

Answer 85

MARGINAL = same bracket --> 20% AVERAGE = (((5000 * 0.1) + (3000 *0.2)) / 8000) *100 = 13.75%

Question 86

Which tax rates will apply to the current taxation year?

Answer 86

- The PROPOSED changes | - because, future rate changes will be RETROACTIVE