Canadian Income Taxation, 20192020 22Th Edition By William Buckwold - Test Bank

Canadian Income Taxation, 20192020 22Th Edition By William Buckwold – Test Bank

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Sample Questions Are Posted Below

Chapter 05

Income from Business

Multiple Choice Questions

1. TriStar Industries was recently denied the deduction of the life insurance premiums on the life insurance policies of its key executives on its annual tax return. Which of the following general limitations to business profit determination best describes the reason for the Canada Revenue Agency’s decision?
   A.Exempt-income test
   B. Personal-expense test
   C. Insurance proceeds exemption
   D. Reserve test

Blooms: Apply
Topic: 05-05 General Limitations to Business Profit Determination

2. Which of the following expenses would be denied as a deduction as per the provisions of the Canadian Income Tax Act?
   A.Maintenance fees on a yacht at Yellow Yacht Leasing Inc.
   B. Legal and accounting fees incurred during the construction of a building.
   C. Advertising costs in a non-Canadian newspaper directed at an American market.
   D. Work space in a home used as a taxpayer’s principal place of business.

Blooms: Understand
Topic: 05-05 General Limitations to Business Profit Determination

3. Sam runs a proprietorship that generated $75,000 in profits in 20×0. Included in these profits are: a) $10,000 – amortization expense; b) $5,000 – reasonable bad debt expense; c) $55,000 – cost of goods sold (closing inventory at market value); and $8,000 – meals and entertainment with clients. Sam’s capital cost allowance has been accurately calculated at $8,500 for the year. How much is Sam’s business net income for tax purposes?
   A.$73,500
   B. $75,000
   C. $80,500
   D. $89,000

$75,000 + $10,000 + $4,000 – $8,500 = $80,500.

Blooms: Apply
Topic: 05-02 General Rules for Determining Business Income
Topic: 05-05 General Limitations to Business Profit Determination
Topic: 05-06 Exceptions to the General Rules
Topic: 05-12 Treatment of Reserves
Topic: 05-20 Summary, Conclusion, and Management Perspective

4. Joe invested in a piece of land seven years ago when real estate prices were rising in his area and land values were expected to double within five years. The land remained vacant and was only used in 20×0 when Joe was approached by a businessman to rent the land for two weeks for a local carnival for a fee of $1,000. It is now 20×2 and Joe has been offered a significant sum of money for his land in response to an advertisement he placed in a local newspaper. Based on Joe’s primary intention for the land, the gain on the sale would be classified as
   A.business income.
   B. property income.
   C. a capital gain.
   D. exempt income.

Joe’s intention at the time of acquisition was to earn a profit on the value of the land.

Blooms: Understand
Topic: 05-01 Business Income Defined

5. A taxpayer recognized a $40,000 loss in 20×5 from her small farm (which was a secondary activity to her full-time job as a dentist). What is the maximum deduction that would be allowed from the farm loss for the 20×5 tax year?
   A.$0
   B. $17,500.
   C. $21,250.
   D. $40,000.

2,500 + ½ ($40,000 – 2,500) = $21,250. However, the maximum loss allowed is $17,500.

Blooms: Apply
Topic: 05-14 Farming

Short Answer Questions

6. List the six general limitations to business profit determination and give an example for three of the items

(One example is given per item, however, students may choose others.)

1. Income-Earning Purpose Test
Example-Expenses for a taxpayer’s hobby are not deductible if the taxpayer does not have a reasonable expectation of profit from the hobby.
2. Capital Test
Example-Accumulated amortization for financial accounting purposes is not an allowable deduction as it is on account of capital. However, CCA is allowed, using the prescribed rates of the Income Tax Act.
3. Exempt-Income Test
Example-Premiums on a life insurance policy for a key employee are not deductible since the proceeds are not taxable income.
4. Reserve Test
Example-Warranty expense is not an allowable expense for income tax purposes.
5. Personal-Expense Test
Example-Interest on the mortgage of a principal residence is not an allowable expense as the home is for personal use.
6. Reasonableness Test
Example-$100 per hour paid to a small business owner’s child for wages when comparable wages are $10 per hour may very well be deemed to be unreasonable, and therefore, not an allowable expense.

Blooms: Apply
Blooms: Remember
Topic: 05-05 General Limitations to Business Profit Determination

7. Ken Gray runs a small proprietorship (Ken’s Fish) which specializes in fishing gear. He has provided you with the following financial information pertaining to his business:

(*All closing inventory is valued at market value.)

Required:

A) Calculate the net income for tax purposes for Ken’s Fish.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Ken had valued his inventory at cost.

1. A)

67. B) Omitted items:

    Advertising in an American newspaper is not deductible when the targeted market is Canadian. S.19
    Half of the meals and entertainment are not deductible. S 67.1
    Property taxes on vacant land is only deductible to the extent that income is earned. S.18(2), (3) The amount can be added to the cost base of the land.
    Recreational fees are not permitted as deductions. S.18(1)(l)
    The convention is not within the territorial scope of the organization hosting the conference, therefore, it is not an allowable deduction. S.20(10)

    C) The Income Tax Act requires that closing inventories be valued at either:

    1) the lower of cost or market value of each item, or
    2) the market value of all items of inventory.

    Ken would need to value his inventory as per these provisions, which could affect both cost of goods sold and net income for tax purposes.

Blooms: Analyze
Blooms: Apply
Topic: 05-02 General Rules for Determining Business Income
Topic: 05-05 General Limitations to Business Profit Determination
Topic: 05-06 Exceptions to the General Rules
Topic: 05-07 Specific Income Expense Exceptions
Topic: 05-08 Treatment of Inventories
Topic: 05-20 Summary, Conclusion, and Management Perspective

8. Alice Smith has provided you with the following information pertaining to her 20×0 taxes:

   · The financial statements for Alice’s dental practice report a net income of $110,000.
   · Amortization of $15,000 is reported in the expenses.
   · Capital cost allowance has been accurately calculated at $12,500 and has not been accounted for in the financial statements.

   Alice conducted scientific research and experimental development (SR&ED) in 20×0. $40,000 of her expenditures are qualified SR&ED activities. These costs are currently reported as capital items on the balance sheet.
   · Alice raises sheep on her land at her home in the country. She has a farming loss of $9,000 in 20×0.

   Required:

   Calculate Alice’s minimum net income for tax purposes for 20×0.

Blooms: Apply
Blooms: Understand
Topic: 05-02 General Rules for Determining Business Income
Topic: 05-05 General Limitations to Business Profit Determination
Topic: 05-06 Exceptions to the General Rules
Topic: 05-07 Specific Income Expense Exceptions
Topic: 05-10 Scientific Research and Experimental Development
Topic: 05-11 Professionals
Topic: 05-14 Farming

9. Determine whether the sale of the following items would be classified as a) income from capital for tax purposes, b) business income for tax purposes, or c) neither.

Blooms: Understand
Topic: 05-01 Business Income Defined

10. KM Ltd. is a Canadian-controlled private corporation, operating a small gift store in Vancouver. The company has a December 31st year-end. KM’s financial statements reported net income before taxes of $210,000 in 20×0.

    Financial information relating to 20×0 is as follows:

    Land adjacent to the gift shop was purchased with a $75,000 bank loan during the year to allow for an outdoor sales area during warm weather. Interest expense on the loan for the year was $9,600, and the appraisal fee to finance the loan was $1,000. Both the interest and the appraisal fee were expensed by KM in 20×0.

    The company hired a contractor to landscape the land. The $5,000 bill for the landscaping was paid in full during the year and capitalized on KM’s Balance Sheet.

    During the year, a new display case worth $2,000 was purchased and expensed on the books.

    Amortization expense of $21,000 was deducted during the year. Total CCA (following any adjustments) for the year was $16,000 and is not reflected in the financial statements.

    The following were also expensed during the year:

On December 30th, KM’s president announced a bonus to be paid to the company’s key employee in the amount of $5,000, which was expensed on the books that day. The employee will receive the bonus in 20×1 in equal payments of $2,500, to be issued on January 30th and July 30th.

Required:

Determine KM Ltd.’s net income for tax purposes for 20×0.

Blooms: Apply
Blooms: Remember
Topic: 05-02 General Rules for Determining Business Income
Topic: 05-05 General Limitations to Business Profit Determination
Topic: 05-06 Exceptions to the General Rules
Topic: 05-07 Specific Income Expense Exceptions
Topic: 05-13 Unpaid Remuneration