, Buckwold, liKitunen, liRoman liand liIqbal, liCanadian liIncome liTaxation, li2023-2024 liEd.
CHAPTER 1 li
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING li li li li li li
Review Questions
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1. If income tax is imposed after profits have been determined, why is taxation relevant to
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business decision making?
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2. Most business decisions involve the evaluation of alternative courses of action. For
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example, a marketing manager may be responsible for choosing a strategy for
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establishing sales in new geographical territories. Briefly explain how the tax factor can be an
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integral part of this decision.
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3. What are the fundamental variables of the income tax system that decision-makers should be
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familiar with so that they can apply tax issues to their areas of responsibility?
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4. What is an “after-tax” approach to decision making?
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Copyright li© li2023 liMcGraw liHill liLtd. 1
Instructor liSolutions liManual liChapter liOne
, Buckwold, liKitunen, liRoman liand liIqbal, liCanadian liIncome liTaxation, li2023-2024 liEd.
Solutions to Review Questions li li li
R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that
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results. However, at all levels of management, alternative courses of action are evaluated.
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In many cases, the choice of one alternative over the other may affect both the amount and the
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timing of future taxes on income generated from that activity. Therefore, the person
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making those decisions has a direct input into future after-tax cash flow. Obviously,
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decisions that reduce or postpone the payment of tax affect the ultimate return on
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investment and, in turn, the value of the enterprise. Including the tax variable as a part of
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the formal decision process will ultimately lead to improved after-tax cash flow.
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R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
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establishing a formal presence in the new territory with a branch office or a separate
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corporation. The new territories may also cross provincial or international boundaries.
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Provincial income tax rates vary amongst the provinces. The amount of income that is
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subject to tax in the new province will be different for each of the three alternatives
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mentioned above. For example, with direct selling, none of the income is taxed in the new
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province, but with a separate corporation, all of the income is taxed in the new province.
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Because the tax cost is different in each case, taxation is a relevant part of the decision and
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must be included in any cost-benefit analysis that compares the three alternatives [Reg.
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400-402.1].
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R1-3 A basic understanding of the following variables will significantly strengthen a
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decision maker's ability to apply tax issues to their area of responsibility.
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Types of Income li li - Employment, Business, Property, Capital gains li li li li
li Taxable Entities li - Individuals, Corporations, Trusts li li
Alternative Business li - Corporation, Proprietorship, Partnership, Limited il li il
Structures li partnership, Joint arrangement, Income trust li li li li
Tax Jurisdictions li - Federal, Provincial, Foreign li li
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
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divestitures, or debt and equity restructuring, will impact the amount and timing of the tax
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cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or
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not the ultimate result of the decision is successful. An after-tax approach
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to decision-making requires each decision-maker to think "after-tax" for every decision
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at the time the decision is being made, and, to consider alternative courses of action to
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minimize the tax cost, in the same way that decisions are made regarding other types of
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costs. li
Failure to apply an after-tax approach at the time that decisions are made may provide
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inaccurate information for evaluation, and, result in a permanently inefficient tax structure.
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Copyright li© li2023 liMcGraw liHill liLtd. 2
Instructor liSolutions liManual liChapter liOne
, Buckwold, liKitunen, liRoman liand liIqbal, liCanadian liIncome liTaxation, li2023-2024 liEd.
CHAPTER 2 li
FUNDAMENTALS OF TAX PLANNING li li li
Review Questions
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1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
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2. What distinguishes tax evasion from tax avoidance and tax planning?
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3. Does Canada Revenue Agency deal with all tax avoidance activities in the same way?
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Explain.
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4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
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transactions. What are the general types of tax planning activities? Briefly explain how
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each of them may reduce or defer the tax cost.
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5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
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6. When corporate tax rates are 13% and tax rates for individuals are 40%, is it always better for
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the individual to transfer their business to a corporation?
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7. “As long as all of the income tax rules are known, a tax plan can be developed with
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certainty.” Is this statement true? Explain.
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8. What basic skills are required to develop a good tax plan?
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9. An entrepreneur is developing a new business venture and is planning to raise equity
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capital from individual investors. Their adviser indicates that the venture could be
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structured as a corporation (i.e., shares are issued to the investors) or as a limited
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partnership (i.e., partnership units are sold). Both structures provide limited liability for the
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investors. Should the entrepreneur consider the tax positions of the individual investors?
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Explain. W ithout dealing with specific tax rules, what general tax factors should an investor
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consider before making an investment?
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10. What is a tax avoidance transaction? li li li li li
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
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primarily for bona fide business, investment, or family purposes, the general anti-
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avoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.
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Copyright li© li2023 liMcGraw liHill liLtd. 1
liInstructor liSolutions liManual liChapter liTwo
