Taxation Midterm

Question 1

What are the basic forms of organizations?

Answer 1

Individuals/Sole proprietorships, Corporations, Trusts, Partnerships, Limited Partnerships & Joint Ventures

Question 2

What forms of organizations are taxable?

Answer 2

Individuals (T1), Corporations (T2), & Trusts (T3)

Question 3

Which forms of business require each partner/participant to report income?

Answer 3

Partnerships, Limited Partnerships & Joint Ventures

Question 4

What are the primary types of income for tax purposes for individuals/sole proprietorships?

Answer 4

Office or Employment (salary/wages), Business income, Property income (rent, dividend, royalties), Capital gain (sale of prop used to earn income), Other/Misc. (RRSP, pension, etc)

Question 5

_______ income can be treated as business income depending on the time/effort placed.

Answer 5

Property

Question 6

What type of income do corporations not earn?

Answer 6

Office or Employment (salary/wages) and Other/Misc. (RRSP, Pension, Alimony, Employment Insurance, etc.)

Question 7

What are the two important principles in terms of taxation and financial decision process?

Answer 7

1. Taxation is a controllable cost; tax is considered a cost of doing business and should be included in planning and controlled
2. Cash flow after tax; investors’ ROI = cash flow after tax

Question 8

Define the estimate tax rates for quick analysis.

Answer 8

Individuals = 50%

Corporations:
Income < $500k = 13%
Income > $500k = 27.5% (applies to the income amounts over 500k)

Question 9

The most significant form of taxation are (aka tax jurisdictions):

Answer 9

federal, provincial & foreign tax.

Question 10

Explain how the tax factor can be an integral part of decision making with respect to establishing sales in new geographical territories.

Answer 10

The amount of income that is subject to tax in the new province will be different for each of the three
alternatives:

1. Direct selling: none of the income is taxed in the new province. All income taxed in the home province
2. A small branch sales office and staffed with local personnel: Income will be split to new province, using an arbitrary formula (ratio of sales & wages) and taxed accordingly.
3. A separate corporation: all of the income is taxed in the new province.

Question 11

What’s the formula to determine the true cost of an 8% wages increase?

Answer 11

Think of the 8% as $8 increase in wages;

For the employer: $8.00 * 27% = $2.2 of tax savings
i.e. actual cost: $8 - $2.20 = $5.80 or 5.8% after tax

For the employee: $8.00 * 50% = $4 of tax savings
i.e. actual cost: $8 - $4 = $4 or 4% after tax