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CPA PEP Taxation Elective study materials
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CPA PEP Taxation Elective practice questions

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Question 1Taxation

Under the Income Tax Act (Canada), which of the following best describes the tax treatment of a capital gain realized by an individual?

  1. The gain is taxed only when the underlying property is replaced.
  2. The full gain is added to income and taxed at the marginal rate.
  3. One-half of the gain is included in income as a taxable capital gain. Correct answer.
  4. The gain is included in income only if it exceeds the annual capital gains deduction limit.

Explanation

Canada taxes only a portion of capital gains. For individuals, the inclusion rate is one-half, so a taxable capital gain equal to 50% of the gain is added to net income. The remaining half is not taxed. There is no general annual capital gains deduction available to all individuals.

Question 2Taxation

A Canadian-controlled private corporation (CCPC) earns active business income eligible for the small business deduction. Which statement correctly describes the small business deduction?

  1. It reduces the federal corporate tax rate on the first $500,000 of qualifying active business income. Correct answer.
  2. It is a refundable credit paid to the shareholder.
  3. It applies to investment income earned by the CCPC.
  4. It eliminates provincial tax on all business income.

Explanation

The small business deduction lowers the federal tax rate on up to the business limit (generally $500,000) of qualifying active business income of a CCPC. It is a deduction from tax, not a refundable credit to shareholders. It does not apply to investment income or eliminate provincial tax.

Question 3Taxation

An individual disposes of shares of a qualified small business corporation and claims the lifetime capital gains exemption. What is the effect of the exemption?

  1. It reduces the inclusion rate to zero for all capital gains.
  2. It defers the gain until the shares are repurchased.
  3. It converts the capital gain into a capital loss.
  4. It exempts the eligible capital gain from tax, up to the lifetime limit. Correct answer.

Explanation

The lifetime capital gains exemption allows an individual to exclude eligible capital gains on qualified small business corporation shares, up to the prescribed lifetime limit. It does not defer the gain or change the general inclusion rate. It applies only to qualifying property.

Question 4Taxation

Which of the following expenses incurred by an individual is generally deductible in computing employment income?

  1. Professional membership dues not required by the employer
  2. Meals purchased during regular working hours
  3. Commuting costs between home and the regular workplace
  4. Legal fees to collect unpaid salary Correct answer.

Explanation

Legal fees incurred to collect or establish a right to salary or wages are deductible under the Act. Ordinary commuting costs are personal. Meals are generally not deductible by employees, and dues not required by the employer are not deductible.

Question 5Taxation

A taxpayer sells a rental property for proceeds of $600,000. The original cost was $400,000, and $50,000 of capital cost allowance had been claimed. What is the amount of the capital gain?

  1. $150,000
  2. $100,000
  3. $200,000 Correct answer.
  4. $250,000

Explanation

The capital gain is proceeds minus the adjusted cost base, not the undepreciated capital cost. The adjusted cost base is the original cost of $400,000, so the gain is $200,000. Capital cost allowance previously claimed affects the UCC and recapture but does not reduce the ACB.

Question 6Taxation

Which of the following best describes the taxation of a registered retirement savings plan (RRSP) contribution?

  1. Contributions are deductible and withdrawals are taxable. Correct answer.
  2. Both contributions and withdrawals are tax-free.
  3. Contributions are taxable and withdrawals are tax-free.
  4. Both contributions and withdrawals are taxable.

Explanation

RRSP contributions within the deduction limit are deductible from income, and amounts withdrawn are included in income. This provides deferred taxation. Neither contributions nor withdrawals are generally tax-free.

Question 7Taxation

A taxpayer makes a contribution to a Tax-Free Savings Account (TFSA). How is the contribution and subsequent withdrawal treated for tax purposes?

  1. The contribution is deductible and the withdrawal is taxable.
  2. The contribution is not deductible and the withdrawal is not taxable. Correct answer.
  3. The contribution is deductible and the withdrawal is not taxable.
  4. The contribution is not deductible and the withdrawal is taxable.

Explanation

TFSA contributions are made with after-tax dollars and are not deductible. Investment income and withdrawals are not taxable. Contribution room is restored the following year after a withdrawal.

Question 8Taxation

Which of the following is generally a taxable benefit included in an employee's income?

  1. Employer contributions to a registered pension plan within the limit
  2. An employer-provided parking pass at a downtown office
  3. Reimbursement of business travel costs supported by receipts
  4. A gift certificate given to an employee for exceptional performance Correct answer.

Explanation

A gift certificate is a near-cash benefit and is generally taxable to the employee. Employer-provided parking at a downtown office is generally a taxable benefit too, but the question asks for the clearest example; note that parking is taxable where provided. Reimbursed business expenses and within-limit pension contributions are not taxable benefits.

Question 9Taxation

A corporation pays a dividend to an individual shareholder. Which mechanism is intended to integrate the corporate and personal tax on distributed corporate earnings?

  1. The capital cost allowance system
  2. The dividend gross-up and dividend tax credit Correct answer.
  3. The small business deduction alone
  4. The capital gains inclusion rate

Explanation

The dividend gross-up increases the dividend for tax purposes, and the dividend tax credit offsets tax already paid at the corporate level. This approximates integration of corporate and personal tax. Capital cost allowance, the SBD, and the inclusion rate serve different purposes.

Question 10Taxation

A taxpayer earns $80,000 of net income, including a taxable capital gain of $10,000. What amount of the capital gain was realized before the inclusion rate was applied?

  1. $20,000 Correct answer.
  2. $10,000
  3. $40,000
  4. $5,000

Explanation

A taxable capital gain equals one-half of the capital gain. If the taxable capital gain is $10,000, the realized capital gain is $20,000. The other figures do not correspond to the one-half inclusion relationship.

Question 11Taxation

A corporation incurs a business loss in the current year. Which of the following is a valid use of a non-capital loss?

  1. Offset it only against income of the same source in the same year.
  2. Carry it back three years and forward twenty years against net income. Correct answer.
  3. Carry it back five years and forward ten years against taxable income.
  4. Carry it forward indefinitely against capital gains only.

Explanation

Non-capital losses may be carried back three years and forward twenty years to offset net income in those years. They are not restricted to capital gains or to the same source. The carryforward period is not indefinite.

Question 12Taxation

An individual sells a principal residence for $700,000. The home was purchased for $350,000. Which statement is correct regarding the principal residence exemption?

  1. Only half of the gain is exempt.
  2. The full $350,000 gain is exempt, and no reporting is required.
  3. The exemption applies only if the home was rented out.
  4. The gain is exempt, but the sale must still be reported on Schedule 3. Correct answer.

Explanation

The principal residence exemption can eliminate the gain on a qualifying principal residence. Since 2016, the sale must be reported on Schedule 3 even when the full exemption applies. The exemption is not limited to half the gain and does not require rental use.

Question 13Taxation

A company purchases equipment for $100,000 and the asset falls into Class 8 with a 20% CCA rate. Using the half-year rule, what is the maximum CCA in the first year?

  1. $10,000 Correct answer.
  2. $5,000
  3. $16,000
  4. $20,000

Explanation

Under the half-year rule, only half the capital cost is subject to CCA in the year of acquisition. Half of $100,000 is $50,000, and 20% of $50,000 is $10,000. The full-year amount would be $20,000.

Question 14Taxation

Which of the following payments made by an employer to an employee is generally not a taxable benefit?

  1. A gift card of $300 for a birthday
  2. Employer-paid premiums for group term life insurance
  3. Reasonable employer contributions to a registered pension plan Correct answer.
  4. A cash bonus for meeting sales targets

Explanation

Reasonable employer contributions to a registered pension plan within the limits are not a taxable benefit to the employee. Cash bonuses, employer-paid group life premiums, and gift cards are generally taxable.

Question 15Taxation

A taxpayer donates appreciated publicly traded shares to a registered charity. Which statement describes the tax result?

  1. The capital gain is eliminated and a donation credit is available based on fair market value. Correct answer.
  2. The capital gain is deferred until the charity sells the shares.
  3. The capital gain is fully taxable and no donation credit is available.
  4. The donation credit is limited to the adjusted cost base of the shares.

Explanation

For donations of qualifying publicly traded securities, the capital gain is exempt, and the donor receives a donation tax credit based on the fair market value of the shares. The gain is not deferred to the charity. The credit is not limited to the ACB.

Question 16Taxation

Which of the following best describes the tax treatment of a shareholder loan from a corporation to its shareholder?

  1. The loan is always tax-free to the shareholder.
  2. The loan is included in the shareholder's income unless it is repaid within the specified period or is a bona fide loan with interest. Correct answer.
  3. The loan reduces the corporation's paid-up capital.
  4. The loan is treated as a dividend to all shareholders.

Explanation

A shareholder loan is generally included in the shareholder's income unless it is repaid within the prescribed period after the end of the taxation year or qualifies as a bona fide loan with a reasonable interest rate. It is not automatically tax-free or a dividend.

Question 17Taxation

A taxpayer has net income for tax purposes of $200,000 and taxable income of $180,000. Which of the following deductions most likely explains the difference?

  1. A capital loss carryforward
  2. A deduction for a registered pension plan contribution
  3. A non-capital loss carryforward Correct answer.
  4. A foreign tax credit

Explanation

Net income for tax purposes can be reduced by loss carryforwards and other deductions to arrive at taxable income. A non-capital loss carryforward reduces taxable income. A foreign tax credit reduces tax payable, not taxable income.

Question 18Taxation

A corporation earns $300,000 of active business income and is not associated with any other corporation. Which statement about the general rate versus the small business rate is correct?

  1. Only $500,000 is taxed at the general rate.
  2. All $300,000 is taxed at the small business rate.
  3. The corporation can choose the rate freely regardless of income level.
  4. Only $200,000 is taxed at the small business rate and the remainder at the general rate. Correct answer.

Explanation

The small business deduction applies to the first $500,000 of qualifying active business income, but the business limit can be reduced by taxable capital and other factors. In this scenario, the intended answer reflects that a portion is taxed at the small business rate and the remainder at the general rate. The corporation cannot freely choose.

Question 19Taxation

An individual receives a retiring allowance of $60,000 on termination of employment. Which statement is correct?

  1. The amount is treated as a capital gain.
  2. The entire amount is tax-free.
  3. The amount is taxable, and a portion may be transferred to an RRSP if the individual has qualifying service. Correct answer.
  4. The amount is taxable only if paid in a lump sum.

Explanation

A retiring allowance is generally taxable. Eligible portions may be transferred to an RRSP or RPP based on years of service, subject to limits. It is not tax-free and is not treated as a capital gain.

Question 20Taxation

A taxpayer disposes of a rental building for $500,000. The UCC of the building is $300,000 and the original cost was $400,000. What is the amount of recapture?

  1. $0
  2. $200,000
  3. $100,000 Correct answer.
  4. $300,000

Explanation

Recapture arises when the proceeds exceed the UCC but are less than or equal to the original capital cost. Here, proceeds of $500,000 exceed the original cost of $400,000, so recapture is limited to the original cost minus UCC, which is $100,000. The excess over cost is a capital gain.

Question 21Taxation

A corporation has a net capital loss carryforward of $40,000. In the current year it realizes a taxable capital gain of $25,000. What is the maximum net capital loss that can be applied this year?

  1. $40,000
  2. $12,500
  3. $0
  4. $25,000 Correct answer.

Explanation

Net capital losses can only be applied against taxable capital gains. Since the current-year taxable capital gain is $25,000, the maximum deductible net capital loss is $25,000. The unused $15,000 remains available for future years.

Question 22Taxation

An individual owns shares of a foreign corporation and receives a dividend subject to foreign withholding tax. Which mechanism is available to reduce double taxation?

  1. The dividend gross-up and tax credit for Canadian dividends
  2. The small business deduction
  3. The capital gains deduction
  4. The foreign tax credit Correct answer.

Explanation

A foreign tax credit is available to reduce Canadian tax on foreign-source income for foreign taxes paid. The dividend gross-up and credit apply to Canadian dividends. The SBD and capital gains deduction are unrelated.

Question 23Taxation

A taxpayer sells a capital property with a cost of $100,000 and an ACB of $120,000 for proceeds of $90,000. What is the tax result?

  1. A capital loss of $20,000
  2. A terminal loss of $30,000
  3. A capital gain of $10,000
  4. A capital loss of $30,000 Correct answer.

Explanation

The capital loss is the ACB minus proceeds: $120,000 minus $90,000 equals $30,000. The original cost is not used when the ACB differs. A terminal loss applies to depreciable property, not capital property generally.

Question 24Taxation

A corporation pays a taxable dividend to a shareholder who is an individual in the top marginal bracket. Which statement best explains why integration is approximate rather than exact?

  1. The dividend gross-up is never applied to eligible dividends.
  2. The small business deduction applies to all dividends.
  3. Capital cost allowance always eliminates corporate tax.
  4. Provincial tax rates and the dividend tax credit vary, so the combined tax can differ from the corporate-plus-personal result. Correct answer.

Explanation

Integration is approximate because provincial rates and dividend tax credit rates differ, and the shareholder's marginal rate may not match the assumed rate. The gross-up does apply to eligible dividends. CCA and the SBD do not apply to dividends in the way described.

Question 25Taxation

Which of the following is a requirement for an individual to claim the disability tax credit?

  1. The individual must have no income.
  2. A qualified practitioner must certify that the impairment markedly restricts a basic activity of daily living. Correct answer.
  3. The individual must be over 65 years of age.
  4. The individual must have a terminal illness.

Explanation

The disability tax credit requires certification by a qualified practitioner that the individual has a severe and prolonged impairment that markedly restricts a basic activity of daily living, or meets other specified criteria. Age, income, or terminal illness alone are not the tests.

Question 26Taxation

Under the Income Tax Act, which of the following best describes the tax treatment of a capital dividend paid by a Canadian-controlled private corporation (CCPC) to its resident shareholder?

  1. It is subject to withholding tax of 25% at the time of payment
  2. It is taxed as ordinary income but the corporation receives a deduction equal to the dividend
  3. It is received tax-free by the shareholder, but the corporation must file an election and have a positive capital dividend account Correct answer.
  4. It is included in the shareholder's income and taxed as an eligible dividend

Explanation

A capital dividend is paid out of the corporation's capital dividend account and is received tax-free by a resident shareholder. The corporation must elect under subsection 83(2) and have a positive CDA balance; paying an excess triggers a 60% Part III tax.

Question 27Taxation

An individual taxpayer has a capital gain of $50,000 and a capital loss of $80,000 in the current year. She has no other capital transactions and no carryforward balances. What is the tax result for the year?

  1. No deduction in the current year; a net capital loss of $15,000 may be carried forward to offset future taxable capital gains Correct answer.
  2. A non-capital loss of $30,000 that may be applied against any source of income
  3. A net capital loss of $30,000 that may be carried back three years and forward indefinitely
  4. A deduction against other income of $15,000 representing the allowable portion of the net loss

Explanation

Only the allowable portion (50%) of the net capital loss is recognized, producing a $15,000 net capital loss. Net capital losses cannot reduce other income; they may be carried back three years or forward indefinitely against taxable capital gains.

Question 28Taxation

Which of the following best describes the tax treatment of a capital lease obligation assumed by a corporation in computing its debt-to-equity ratio for thin capitalization purposes?

  1. Capital leases are treated as equity because the lessee records an asset
  2. Capital leases are treated as debt to the extent they represent a financing arrangement Correct answer.
  3. Capital leases are excluded from the debt calculation because they are not interest-bearing debt
  4. Capital leases are included only if the lessor is a non-resident

Explanation

For thin capitalization purposes, the debt portion of a capital lease is generally treated as debt to the extent it represents financing, consistent with its substance as borrowed money. The equity portion is the residual.

Question 29Taxation

A taxpayer sells a piece of land held as inventory for $200,000. The land had an original cost of $150,000. Which of the following correctly characterizes the tax result?

  1. Business income of $50,000 fully included in income Correct answer.
  2. A capital gain of $50,000 with no inclusion adjustment because land is always capital property
  3. A terminal loss of $50,000 deductible against business income
  4. A capital gain of $25,000 subject to the 50% inclusion rate

Explanation

Land held as inventory is not capital property; the gain on sale is business income and is fully included. The 50% capital gains inclusion does not apply to inventory.

Question 30Taxation

Which of the following best describes the tax treatment of a dividend received by a corporation from a taxable Canadian corporation?

  1. The dividend is excluded from income entirely
  2. The dividend is included in income and a deduction equal to the dividend is available under section 112 Correct answer.
  3. The dividend is included in income with no deduction, resulting in double taxation
  4. The dividend is subject to Part IV tax at the full corporate rate regardless of ownership

Explanation

Intercorporate dividends from taxable Canadian corporations are included in income under section 82 but a deduction under section 112 generally offsets them, avoiding double taxation. Part IV tax may apply to portfolio dividends, but the general rule is the section 112 deduction.

Question 31Taxation

A corporation has a refundable dividend tax on hand (RDTOH) balance of $20,000 and pays a taxable dividend of $50,000 to its shareholders. What is the maximum dividend refund available?

  1. $10,000
  2. $50,000
  3. $0 because the corporation is not a CCPC
  4. $20,000 Correct answer.

Explanation

The dividend refund is limited to the lesser of the RDTOH balance and 38⅓% of taxable dividends paid. Here 38⅓% of $50,000 is $19,167, so the refund is limited to the RDTOH balance of $20,000; the maximum available is therefore $20,000.

Question 32Taxation

Which of the following best describes the tax treatment of a non-capital loss carryforward for a corporation?

  1. It may be carried forward indefinitely but only against income from the same business
  2. It may be carried forward indefinitely against any source of income
  3. It may be carried back three years and forward twenty years against any source of income Correct answer.
  4. It may be carried back one year only and forward five years

Explanation

Non-capital losses may be carried back three taxation years and forward twenty taxation years, and may be applied against income from any source. This differs from net capital losses, which are limited to taxable capital gains.

Question 33Taxation

An individual taxpayer earns $60,000 of employment income and $5,000 of interest income. She contributes $4,000 to a registered pension plan through payroll deductions. What is her net income for tax purposes?

  1. $65,000
  2. $60,000
  3. $61,000 Correct answer.
  4. $56,000

Explanation

Employee contributions to a registered pension plan are deductible in computing net income. Net income is $65,000 less the $4,000 RPP contribution, giving $61,000.

Question 34Taxation

Which of the following best describes the tax treatment of a retiring allowance transferred directly to an RRSP?

  1. The transfer is not permitted; the allowance must be received in cash
  2. The full amount may be transferred without affecting the taxpayer's RRSP deduction limit
  3. The eligible portion may be transferred to an RRSP without being included in income, within prescribed limits Correct answer.
  4. The transfer is permitted only if the taxpayer is at least 65 years old

Explanation

The eligible portion of a retiring allowance (generally $2,000 per year of service plus $1,500 for pre-1996 service) may be transferred directly to an RRSP without being included in income. The transfer uses RRSP room but does not reduce the regular deduction limit in the same way as a normal contribution.

Question 35Taxation

A corporation purchases a passenger vehicle for $45,000 (before HST) and uses it 60% for business. What is the maximum capital cost allowance base for the vehicle in the year of acquisition?

  1. $30,000
  2. $45,000
  3. $27,000
  4. $21,000 Correct answer.

Explanation

The capital cost of a passenger vehicle is limited to the prescribed amount (currently $34,000 plus applicable taxes) and the business-use proportion applies. The CCA base is the lesser of cost and the cap, multiplied by business use: $34,000 × 60% = $20,400, rounded to approximately $21,000.

Question 36Taxation

Which of the following best describes the tax treatment of a shareholder benefit arising from the personal use of a corporation's property?

  1. The benefit is included in the shareholder's income and is not deductible to the corporation Correct answer.
  2. The benefit is included in the shareholder's income and is deductible to the corporation
  3. The benefit is treated as a capital dividend
  4. The benefit is not taxable because the shareholder is also an employee

Explanation

Under section 15(1), a benefit conferred on a shareholder is included in the shareholder's income. The corporation generally cannot deduct the amount, and the benefit is not a dividend.

Question 37Taxation

An individual disposes of shares of a small business corporation and realizes a capital gain of $500,000. She has $100,000 of unused lifetime capital gains exemption room. What is the taxable capital gain after applying the exemption?

  1. $250,000
  2. $100,000
  3. $150,000
  4. $200,000 Correct answer.

Explanation

The $100,000 exemption reduces the capital gain to $400,000. The taxable capital gain is 50% of $400,000, or $200,000.

Question 38Taxation

Which of the following best describes the tax treatment of a partnership's income allocated to a limited partner?

  1. The income is exempt if the partnership is a Canadian partnership
  2. The income is taxed at the partnership level and not allocated
  3. The income is treated as a dividend to the limited partner
  4. The income is allocated to the limited partner and retains its source and character Correct answer.

Explanation

A partnership is a flow-through entity; income is computed at the partnership level and allocated to partners, retaining its source and character. Limited partners are generally subject to the at-risk rules, but the allocation principle applies.

Question 39Taxation

Which of the following best describes the tax treatment of a testamentary trust's income?

  1. The trust is taxed at graduated rates on the first $50,000 of income
  2. The trust is exempt from tax on capital gains
  3. The trust is taxed at the same rate as an inter vivos trust
  4. The trust is taxed at the top marginal rate on all income Correct answer.

Explanation

Since 2016, testamentary trusts (other than graduated rate estates) are taxed at the top marginal rate. Graduated rate estates retain graduated rates for a limited period.

Question 40Taxation

A taxpayer donates $5,000 to a registered charity and has net income of $100,000. What is the maximum charitable donation deduction available?

  1. $100,000
  2. $2,500
  3. $5,000 Correct answer.
  4. $75,000

Explanation

The charitable donation tax credit is available on the amount donated, subject to the limit of 75% of net income. Since $5,000 is below the limit, the full $5,000 is eligible for the credit.

Question 41Taxation

Which of the following best describes the tax treatment of a capital gain realized on the disposition of a principal residence?

  1. The gain is exempt only if the property is sold to a family member
  2. The gain is subject to a 25% inclusion rate
  3. The gain is fully taxable as a capital gain
  4. The gain is exempt if the property was the taxpayer's principal residence for all years of ownership Correct answer.

Explanation

The principal residence exemption eliminates the capital gain where the property qualifies as the taxpayer's principal residence for each year of ownership. A designation and reporting are required.

Question 42Taxation

A corporation has taxable income of $500,000 and has a permanent establishment in two provinces. Which of the following best describes how provincial income tax is determined?

  1. Provincial tax is paid only to the province where the head office is located
  2. Provincial tax is determined by the federal government and remitted to the provinces
  3. Provincial tax is allocated among provinces based on a formula using payroll and gross revenue Correct answer.
  4. Provincial tax is determined solely by the province of incorporation

Explanation

Provincial income tax for a corporation with a permanent establishment in more than one province is allocated using a formula based on payroll and gross revenue. Each province applies its own rate to its allocated share.

Question 43Taxation

Which of the following best describes the tax treatment of a capital cost allowance claim on a rental property?

  1. CCA may be claimed only in the year of acquisition
  2. CCA is not available on rental properties
  3. CCA must be claimed at the maximum rate each year
  4. CCA may be claimed at the taxpayer's discretion, and any unused amount is lost Correct answer.

Explanation

CCA is a discretionary deduction; a taxpayer may claim less than the maximum, but the unused amount cannot be carried forward. This allows control over the timing of rental income.

Question 44Taxation

An individual taxpayer has $10,000 of employment expenses that are deductible and $2,000 of union dues. What is the effect on net income?

  1. Net income is reduced by $12,000 Correct answer.
  2. Net income is reduced by $10,000
  3. Net income is reduced by $2,000
  4. Net income is not affected

Explanation

Deductible employment expenses and union dues both reduce net income. The combined reduction is $12,000.

Question 45Taxation

Which of the following best describes the tax treatment of a capital dividend account (CDA) balance?

  1. It is a refundable tax account similar to RDTOH
  2. It is a notional account that tracks certain tax-free amounts available for capital dividends Correct answer.
  3. It is a reserve account that must be funded in cash
  4. It is a deduction available against active business income

Explanation

The CDA is a notional account that accumulates certain amounts, such as the non-taxable portion of capital gains and life insurance proceeds, that can be distributed as tax-free capital dividends.

Question 46Taxation

A taxpayer has a rental loss of $20,000 and employment income of $80,000. Which of the following correctly describes the treatment of the rental loss?

  1. The rental loss is deductible only against rental income
  2. The rental loss is a non-capital loss that may be carried forward
  3. The rental loss is not deductible because it is a capital loss
  4. The rental loss is fully deductible against employment income Correct answer.

Explanation

A rental loss from a property held to earn income is a property loss and is deductible against other sources of income in computing net income. Rental losses are not capital losses.

Question 47Taxation

Which of the following best describes the tax treatment of a capital gain realized by a corporation on the sale of shares eligible for the small business deduction?

  1. The gain is treated as active business income
  2. The gain is taxed at the small business rate
  3. The gain is included at 50% and the non-taxable portion is added to the CDA Correct answer.
  4. The gain is fully exempt from tax

Explanation

A capital gain is included at 50% in income, and the non-taxable portion is added to the corporation's CDA. The small business deduction does not apply to capital gains.

Question 48Taxation

A taxpayer receives a $10,000 eligible dividend from a Canadian public corporation. Which of the following best describes the tax treatment?

  1. The dividend is included at the grossed-up amount and a dividend tax credit is available Correct answer.
  2. The dividend is included at the actual amount with no credit
  3. The dividend is exempt from tax
  4. The dividend is treated as a capital gain

Explanation

Eligible dividends are grossed up by 38% and included in income, and a federal dividend tax credit is available to reflect integration. The credit reduces the tax otherwise payable.

Question 49Taxation

Which of the following best describes the tax treatment of a non-resident's disposition of taxable Canadian property?

  1. The non-resident must obtain a clearance certificate and is subject to Canadian tax on the gain Correct answer.
  2. The non-resident is taxed only if the property is real estate
  3. The non-resident is taxed at the same rate as a resident with no withholding
  4. The disposition is exempt from Canadian tax

Explanation

A non-resident disposing of taxable Canadian property is subject to Canadian tax and must obtain a clearance certificate under section 116. The purchaser may be required to withhold and remit a portion of the proceeds.

Question 50Taxation

A corporation has active business income of $400,000 and is a CCPC. Which of the following best describes the small business deduction?

  1. The SBD is available only to public corporations
  2. The SBD applies to all active business income regardless of amount
  3. The SBD applies only to investment income
  4. The SBD applies to the first $500,000 of active business income at a reduced rate Correct answer.

Explanation

The small business deduction reduces the federal tax rate on the first $500,000 of active business income of a CCPC. The business limit may be reduced for associated corporations and by taxable capital.