Solutions For Canadian Income Taxation
Planning and Decision Making, 26th Edition
Buckwold
, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation,
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CHAPTER 1 v
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
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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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vbusiness decision making? v v
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
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an integral part of this decision.
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3. What are the fundamental variables of the income tax system that decision-makers should
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be 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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, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, 26 Ed.
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Instructor Solutions Manual Chapter One
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, Buckwold, Kitunen, Roman and Iqbal, Canadian Income Taxation, v v v v v v v v
Solutions to Review Questions
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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
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evaluated. In many cases, the choice of one alternative over the other may affect both the
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amount and the timing of future taxes on income generated from that activity. Therefore,
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the person making those decisions has a direct input into future after-tax cash flow.
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Obviously, decisions that reduce or postpone the payment of tax affect the ultimate
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return oninvestment and, in turn, the value of the enterprise. Including the tax variable as
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a part of 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 decision
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maker's ability to apply tax issues to their area of responsibility.
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Types of Income v v - Employment, Business, Property, Capital v v v
v gainsTaxable Entities v v - Individuals, Corporations, Trusts v v
Alternative Business v - Corporation, Proprietorship, Partnership, Limited v v v
Structures v partnership, Joint arrangement, Income trust v v v v
Tax Jurisdictions v - Federal, Provincial, Foreign v v
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 to decision-
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making requires each decision-maker to think "after-tax" for every decision at thetime the
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decision is being made, and, to consider alternative courses of action to minimizethe tax
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cost, in the same way that decisions are made regarding other types of costs.
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Failure to apply an after-tax approach at the time that decisions are made may
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provideinaccurate information for evaluation, and, result in a permanently inefficient tax
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structure.
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Instructor Solutions Manual Chapter One
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