Past Exams

This examination is based on the Canadian Income Tax Act with Regulations (CCH 92nd Edition). Round all calculations to the nearest dollar, except price per share. The following items, applicable to the 2011 taxation year, are provided for reference: Federal Income Tax Rates — 2011 2011 Taxable Income Up to $41,544 $41,545 – $83,088 $83,089 – $128,800 $128,801 and over Personal Tax Credits 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.Federal Marginal Tax Rate 15% 22% 26% 29% 2011 Single status — basic personal amount (paragraph 118(1)(c))………………………………………………………………………. $ 1,579 Spouse or common law partner amount (paragraph 118(1)(a)) ……………………………………………………………………… 1,579 Eligible dependant (paragraph 118(1)(b)) Same as for spouse or common-law partner in (2) above. Infirm dependants 18 years of age or older (paragraph 118(1)(d)) …………………………………………………………………. 42 The credit is reduced if dependant’s net income exceeds …………………………………………………………………………….. 6,076 Age amount — taxpayer is 65 years of age or over (subsection 118(2)) …………………………………………………………. 981 Child amount (paragraph 118(1)(b. 1) — each child under 18 320 Canada employment amount (paragraph 118(10) – lesser of 15% of employment income for the year and ………… 160 Medical expenses credit (subsection 118. (1)) The threshold is the lesser of 3% of net income and ……………………………………………………………………………. 2,052 Mental or physical impairment (subsection 118. 3(1)) ……………………………………………………………………………………. 1,101 Caregiver — parent/grandparent (maximum) (paragraph 118(1)(c. 1)) ……………………………………………………………. 642 14,624 The credit is reduced if dependant’s net income exceeds ……………………………………………………………………………..Education credit for each qualifying month — full-time (paragraph 118. 6(2)(a)) ………………………………………………. 60 Education credit for each qualifying month — part-time (paragraph 118. 6(2)(b)) ……………………………………………… 18 Textbook credit for each qualifying month — full-time (paragraph 118. 6(2. 1)(a))……………………………………………… 10 Textbook credit for each qualifying month — part-time (paragraph 118. 6(2. 1)(b)) ……………………………………………. 3 Continued… ETX1M12 ©CGA-Canada, 2012Page 1 of 8 Marks 30 Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each a. Which of the following institutions is responsible for the development and evaluation of taxation policy in Canada? ) 2) 3) 4) Canada Revenue Agency (CRA) Minister of National Revenue Department of Finance Tax Court of Canada b. Wong received $850 as a dividend from a U. S. corporation. This dividend is net of 15% withholding tax. What amount needs to be included in income? 1) 2) 3) 4) c. $ 850 $1,000 $1,225 $1,441 Which of the following statements is true? 1) 2) 3) 4) An attempt to deceive by omitting revenue is an example of tax avoidance. The basic concept behind tax planning arrangements involves the deferral of tax payments. Tax evasion is only enforced under civil law. The tax benefit that results from an avoidance transaction is allowed. . Abdul worked for a CCPC for the last 5 years. On January 1, 2009, he was granted an option to buy 100 shares of the company for $15 each when the market value was $14 each. He exercised his option on June 1, 2009, when the market price was $18 per share. He sold his shares at $20 per share on December 1, 2010. What will be Abdul’s employment income in 2009 based on this transaction? 1) 2) 3) 4) e. $ 0 $200 $400 $600 Which of the following properties gives rise to a capital loss on disposal? 1) 2) 3) 4) Eligible capital property Timber resource property Canadian resource properties Collection of stampsContinued… ETX1M12 ©CGA-Canada, 2012 Page 2 of 8 f. Martin disposed the following properties in 2011: Proceeds of Disposition Rare book Diamond ring Laptop computer $ 7,000 4,000 700 Adjusted Cost Base $ 1,000 800 1,500 Selling Expenses $ 2,000 — — What is the net taxable capital gain for 2011 from these transactions? 1) 2) 3) 4) $3,000 $3,500 $8,400 $9,200 g. Which of the following statements is true about non-capital losses carryovers incurred after 2005? 1) 2) 3) 4) They can be carried back to 3 years and carried forward to 20 years. They can be carried back to 3 years and carried forward to 10 years.They can be carried back to 7 years and carried forward to 20 years. They can be carried back to 3 years and carried forward indefinitely. h. Sacha owned two residential properties. He lived in both properties on a regular basis. He sold both properties on January 21, 2011. Date of Purchase City home Cottage 2003 2009 Cost $ 300,000 100,000 Selling Price $ 390,000 145,000 What will be his minimum total taxable capital gain on the disposition of the two residences? 1) 2) 3) 4) i. $ 5,000 $ 10,000 $ 20,000 $135,000 Which of the following is not a Division C deduction? ) 2) 3) 4) Employee stock option deduction Capital gain deduction Social assistance receipts RRSP deduction j. Which of the following types of income cannot be earned by a corporation? 1) 2) 3) 4) Active business income Specified investment business income Employment income Personal services business income k. John contributed $600 to a candidate for election to the House of Commons and $400 to a candidate for election to city hall. What is the maximum federal political tax credit he can claim? 1) 2) 3) 4) $400 $475 $558 $650 Continued… ETX1M12 ©CGA-Canada, 2012 Page 3 of 8 l. The following information is about AB Ltd. Taxable income Manufacturing and processing (M&P) profit Aggregate investment income Income subject to small business deduction What is the M&P profit deduction (assume a rate of 11. 5%)? 1) 2) 3) 4) $ 0 $13,800 $51,750 $57,500 $ 500,000 $ 450,000 $ 10,000 $ 330,000 m. Kamal moved to Canada on June 1, 2005, from a country that has no tax treaty with Canada. When he immigrated, he owned shares of a publicly listed company. He purchased these shares in 2001 at a cost of $1,000. The market value of these shares was $1,500 on June 1, 2005. Kamal sold these shares on June 1, 2011, for $2,000.What will be his taxable capital gain? 1) 2) 3) 4) $ 0 $ 250 $ 500 $ 1,000 n. Which of the following statements is not correct regarding the capital dividend account (CDA)? 1) The purpose of the CDA is to complete integration of corporate and personal income tax on capital gains and similar receipts. 2) The intent of the CDA is to ensure that the tax result to the shareholder is approximately the same as if the shareholder has earned or received the income directly. 3) Both public and private corporations can have a CDA. 4) Capital gains and receipts before January 1, 1972, cannot be part of a CDA. . In the year of immigration or emigration, some of the personal tax credits of the taxpayer are prorated. This calculation is based on the number of days that the individual stayed in Canada. Which of the following credits is not prorated? 1) 2) 3) 4) Age credit Basic personal credit Disability amount First-time home buyers credit Continued… ETX1M12 ©CGA-Canada, 2012 Page 4 of 8 45 Question 2 New Look Inc. , a Canadian-controlled private corporation (CCPC), operates a manufacturing business. Financial statements for the year ended December 31, 2011, reported a net income before taxes of $208,000.You have been retained to determine the corporation’s income tax liability and provide advice on other tax matters. You have gathered the information outlined in Exhibit 2-1. Required 30 a. Under Part I of the Income Tax Act, calculate New Look’s minimum net income for tax purposes and minimum taxable income for the 2011 taxation year. 13 b. Based on your answer to part (a), calculate the minimum Part I and Part IV federal income tax, and refundable dividend tax on hand (RDTOH) for the 2011 taxation year (ignore surtaxes and do not calculate the general rate reduction). . The integration of corporate and individual taxation is very important. What are the two major tools for integration used in the Income Tax Act for the individual shareholders of all taxable Canadian corporations? 2 EXHIBIT 2-1 NEW LOOK INC. 2011 Financial Information 1. New Look’s net income for tax purposes is summarized as follows: Income from operations Loss for the sale of assets Rental income Interest income Dividend income — GG Inc. $ 200,000 (15,000) 10,000 4,000 9,000 $ 208,000 2. New Look owns 9% of the outstanding shares of GG Inc. a CCPC. In 2011, GG earned active business income of $390,000 and received a dividend refund of $15,000 from its 2011 dividend. 3. A review of New Look’s 2010 corporate tax return provides the following information: Capital dividend account Cumulative eligible capital RDTOH Undepreciated capital cost: Class 1 Class 17 Class 43 $ 10,000 NIL NIL 150,000 25,000 60,000 4. On July 1, 2011, New Look purchased a franchise for $150,000 to operate a retail store. The franchise has a 5-year term plus two renewable 5-year option periods.On January 1, 2011, New Look sold one of its retail stores for $330,000 (land $100,000; building $200,000; and goodwill $30,000). This store was acquired in 2005 for $250,000 (land $90,000 and building $160,000). On January 1, 2011, New Look leased new office space and spent $30,000 to develop and renovate the office. This lease is for 5 years plus two 5-year renewable option periods. Continued… ETX1M12 ©CGA-Canada, 2012 Page 5 of 8 EXHIBIT 2-1 (Continued) 5. New Look’s income statement for the year ended December 31, 2011 included the following: Amortization Travelling cost to egotiate the franchise purchase Interest on late payment of tax instalment Reserve for possible sales return Payroll benefits Paving the parking lot of storage area Amount paid to a collection agency to recover delinquent accounts receivable Administrative expenses Legal expenses Development expenses $ 17,000 2,745 1,000 4,000 40,000 10,000 3,000 25,000 10,000 5,000 6. Administrative expenses included a $1,000 premium on life insurance for the company’s president (his spouse is beneficiary) and a $9,000 premium on group term life insurance for the employees. 7.Legal expenses included $2,000 for drafting the franchise agreement, $4,000 for drafting a buy/sell agreement among the shareholders, and a $4,000 annual audit fee. 8. Development expenses included $1,400 for the cost of software and $1,600 for small tools, each costing less than $200. 9. Travel expenses included a payment of $5,600 ($0. 56 per kilometre) to an employee as a car allowance. This employee used his personal car for business purposes. 10. The company paid $1,000 for the purchase of football game tickets for clients. 11. No dividend was declared in 2011.Continued… ETX1M12 ©CGA-Canada, 2012 Page 6 of 8 25 Question 3 Jane is employed by Bayshore Inc. , a CCPC in the paper manufacturing industry. She has requested your assistance in preparing her 2011 income tax return. Information regarding Jane’s financial activities for 2011 is outlined in Exhibit 3-1. Selected information from her 2010 return is provided in Exhibit 3-2. Required 19 a. Calculate Jane’s minimum net income for tax purposes in accordance with the format of Section 3 of the Income Tax Act, and her minimum taxable income for the 2011 taxation year. 6 b.Based on your answer to part (a), calculate Jane’s minimum federal income tax for the 2011 taxation year. Show all calculations. EXHIBIT 3-1 JANE 2011 Financial Information 1. In 2011, Jane’s salary from Bayshore was $70,000. From this salary, Bayshore deducted income tax of $13,000, and CPP and EI of $3,005. The company contributed $5,000 directly to Jane’s personal RRSP account. Bayshore also paid the $900 premium for private medical insurance. 2. On January 1, 2011, Jane borrowed $15,000 interest free from the company. She used $10,000 to buy an automobile for her spouse and $5,000 to purchase shares of ABC Public Limited.CRA’s prescribed rate for all 4 quarters of 2011 was 5%. This loan was still outstanding at the end of the year. 3. Jane attended a one-day sales convention related to her job. Bayshore paid the $1,000 cost of the convention. This cost included the price of lunch provided at the convention. 4. During the year, Jane used the company-provided automobile. She used the car for personal purposes and paid $4,000 to the company for the total operating cost for this year. The monthly lease cost of $850 was paid by the company. 5. In January 2011, Jane purchased a condominium for $160,000 for rental purposes.In 2011, she received rents of $11,000. The December rent of $1,000 was not received by the end of January. She incurred condominium fees and mortgage interest of $9,000. 6. Jane sold a bond in March 2011 for $20,400. This amount included $400 interest for the period of October 1, 2010 to March 31, 2011. Jane purchased this bond on October 1, 2010 for $19,000. 7. In November 2011, Jane received $1,145 on the maturity of a 2-year GIC. This amount included an initial investment of $1,000 invested at the rate of 7% per annum compounded for 2 years. 8.Jane had the following other receipts and disbursements in 2011: Income tax return fee paid by the employer Dividend received from a foreign public company — net of 10% withholding tax RRSP contribution to her spouse’s account Tax-free savings account (TFSA) contribution Safety deposit box fee Life insurance premiums $ 200 1,800 7,000 5,000 100 1,200 9. Jane is married and has one child (age 4). Her spouse had net income of $90,000 in 2011. During the year, the couple paid $8,000 for daycare expenses for the child. The child credit was claimed by Jane. Continued…ETX1M12 ©CGA-Canada, 2012 Page 7 of 8 EXHIBIT 3-2 E Select 2010 Can ted ntax Schedules e 1 00 END OF EXAMINATION E ETX1M12 ©CGA A-Canada, 201 12 Pa 8 of 8 age PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION TX1 Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 8 pages. There are 3 questions for a total of 100 marks. READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED. To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.Glossary of Assessment Terms Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Calculate Mathematically determine the amount or number, showing formulas used and steps taken. (Also Compute). Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned. Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question.Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Provide detail on the relevant characteristics, qualities, or events. Create an outcome (e. g. , a plan or program) that incorporates the relevant issues and information. Calculate or formulate a response that considers the relevant qualitative and quantitative factors. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram.In some cases, add a brief explanation or description. (Also Draw) This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient. ) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s).State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e. g. , a figure, diagram or concrete example. Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or conclusions.List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details. Prove Establish that something is true by citing evidence or giving clear logical reasons. Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario. Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another.Review Examine a subject critically, analyzing and commenting on the important statements to be made about it. State Clearly provide a position based on an evaluation, e. g. , Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate) Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. Trace In narrative form, describe progress, development, or historical events from some point of origin. Explain Compare Contrast Criticize Define Describe Design Determine Diagram Discuss EvaluateCGA-CANADA PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION March 2012 SUGGESTED SOLUTIONS Marks 30 Question 1 Note: 2 marks each Time: 3 Hours Sources/Calculations: a. 3) Topic 1. 1 (Level 1) b. 2) Topic 5. 3 (Level 1) c. 2) Topic 1. 3 (Level 1) d. 1) Topic 2. 5 (Level 1) e. f. 4) Topic 6. 2 (Level 1) 2) Topic 6. 4 (Level 1) 1/2 {[7,000 – (1,000 + 2,000)] + (4,000 – 1,000 deemed)} = $3,500 g. 1) Topic 7. 2 (Level 1) h. 1) Topic 6. 5 (Level 2) 1/2 {$90,000 – [(1 + 7) / 9 ? 90,000]} = $5,000 i. j. 4) Topic 7. 1 (Level 1) 3) Topic 8. 2 (Level 1) k. 1) Topic 7. (Level 1) ($400 ? 75%) + ($200 ? 50%) = $400 l. 2) Topic 8. 5 (Level 2) 11. 5% (450,000 – 330,000) = $13,800 m. 2) Topic 10. 1 (Level 1) ($2,000 – $1,500) ? 1/2 = $250 n. 3) Topic 9. 4 (Level 1) o. 4) Topic 10. 1 (Level 1) Continued… STX1M12 ©CGA-Canada, 2012 Page 1 of 4 45 30 Question 2 a. Minimum net income for tax purposes and taxable income Net income per financial statements Add (Deduct): Loss on sale of assets Taxable capital gains: Land — (1/2) (100,000 – 90,000) Building — (1/2) (200,000 – 160,000) CCA — Class 14 — (150,000 + 2,745 + 2,000) ? 184 / (365 ? ) CCA — Class 13 — Lesser of: 1/2 (1/5) (30,000) 1/2 (30,000) / (5 + 5) CCA — Class 17 — 8% (25,000) + 1/2 (8%) (10,000) CCA — Class 12 — 100% (1,600) + 100% (1/2) (1,400) CCA — Class 43 — 30% (60,000) CEC Income — 2/3 (3/4) (30,000) Recapture — Class 1 — (160,000 – 150,000) Amortization Interest on late payment of tax instalment Reserve for sale returns Paving parking lot — capital Life insurance on president Travel expenses to sign franchise agreement — capital Legal — shareholder agreement Software — capital Small tools — capital Allowance $5,600 – [($0. 2 ? 5,000 km) + ($0. 46 ? 5,000 km)] Sports tickets — 50% (1,000) Legal fee franchise — capital Net income for tax purposes Deduct: Taxable dividends Taxable income Note: The 2 marks for net income for tax purposes are reduced if items that should be excluded from the calculation are incorrectly included, such as payroll benefits, amount paid to collection agency, group term life insurance, and audit fee. $ 208,000 15,000 5,000 20,000 (15,602) $3,000 $1,500 (1) (1) (1) (2) (2) (2) (2) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (2) (1) (1) (2) (1) 1,500) (2,400) (2,300) (18,000) 15,000 10,000 17,000 1,000 4,000 10,000 1,000 2,745 4,000 1,400 1,600 700 500 2,000 279,143 (9,000) $ 270,143 Continued… STX1M12 ©CGA-Canada, 2012 Page 2 of 4 13 b. Federal tax Part I tax Basic rate — 38% ? $270,143 Abatement — 10% ? $270,143 $ 102,654 (27,014) 75,640 $ 231,143 270,143 500,000 (39,294) (1) Small business deduction (SBD) — 17% ? least of: Active business income 1 Taxable income Business limit 17% ? 231,143 Additional refundable tax on investment income — 62/3% ? esser of: Aggregate investment income — TCG (25,000) + Rent (10,000) + Interest (4,000) Taxable income less amount on which SBD is computed (270,143 – 231,143) 62/3% ? 39,000 1 (3) $ 39,000 39,000 2,600 $ 38,946 $ 279,143 (25,000) (10,000) (4,000) (9,000) $ 231,143 (3) Active business income: Net income for tax purposes Deduct: Taxable capital gain Rent Interest Dividends (2) Part IV tax (1) GG — not connected — 331/3% ? 9,000 RDTOH (1) Opening Part IV tax Refundable portion of Part I tax — least of: 262/3% ?Investment income (39,000 above) 262/3% ? Taxable income less amount on which SBD is computed (270,143 – 231,143) Part I tax $ 3,000 $ 0 3,000 $ 10,400 10,400 38,946 (2) 10,400 $ 13,400 2 c. The two main tools that apply to individual shareholders of all Canadian corporations are the gross-up of dividends and tax credit procedure. Continued… STX1M12 ©CGA-Canada, 2012 Page 3 of 4 25 19 Question 3 a. Net income for tax purposes and taxable income Section 3 (a) Employment income: Salary Benefit — contribution to RRSP Auto — standby charge — 2/3 (850 ? 2) Interest-free loan benefit — 5 % (15,000) Meals (convention) — (50 % ? 50 deemed) Tax return preparation fee Property income: Rental property — rents (11,000 + 1,000) Deduct — operating expenses CCA — Class 1 — 4% (1/2) (160,000) = 3,200; Limit Interest on bond GIC interest (145 – 70) Foreign dividend — (1,800 + 200) Deduct — Interest expense — 5% (5,000) Safety deposit fee Section 3 (b) $ 70,000 5,000 6,800 750 25 200 82,775 12,000 (9,000) 3,000 (3,000) 0 400 75 2,000 (250) (100) (350) 2,125 84,900 (1) (1) (1) (1) (1) 1) (1) (2) (1) (1) (1) (1) (1) (1) Taxable capital gains: Bond — 1/2 (20,000 – 19,000) Section 3 (c) 500 500 85,400 (1) (1) (2) Other deductions Childcare — least of 7,000; 8,000 actual; 2/3 (82,775) = 55,183 RRSP (Cantax) Net income for tax purposes and taxable income Note: 11,000 (7,000) (11,000) $ 67,400 The 2 marks for net income for tax purposes is reduced if items that should be excluded from the calculation are incorrectly included, such as private medical insurance, life insurance premium and TFSA contribution.The mark is also deducted if items are misclassified within Section 3 of the Income Tax Act. 6 (1) b. Federal tax $ 41,544 ? 15% 25,856 ? 22% $ 67,400 Tax credits $ 6,232 5,688 11,920 (1) (1) (1) (1) (1) Individual (15% ? 10,527) Child amount — (15% ? 2,131) Canada employment amount (15% ? 1,065) CPP and EI — (15% ? 3,005) Foreign tax credit (1,579) (320) (160) (451) (200) $ 9,210 100 END OF SOLUTIONS ©CGA-Canada, 2012 Page 4 of 4 STX1M12 CGA-CANADA PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION March 2012 EXAMINER’S COMMENTSGeneral Comments The overall examination results were satisfactory. Most students were able to complete the examination within the designated time period. Students had some difficulty with the multiple-choice questions. The majority of the students were very comfortable with the personal tax credit calculations but they had difficulty with determining employment income and property income. For the tax examination, it is very important that students show all their

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