Chapter 1 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 1 (Introduction)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Question 15
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 Residence 20
16 Net Income For Tax Purposes 35
Total 100

Solution 1 (15 Marks)

Part A
A regressive tax is one that is assessed at higher effective rates for low-income individuals, as
compared to lower effective rates for high-income individuals.
While the basic GST rate is the same for all individuals without regard to their income level, lower
income individuals normally spend a higher percentage of their total income on this tax. Since the
sales tax is levied on the amounts spent, this means that the sales tax paid by lower income
individuals represents a larger percentage of their income. As a consequence, they are generally
considered to be regressive in nature.

Part B
The term “person” as used in the Income Tax Act refers to individuals, corporations, and trusts.
The term “person” in the GST legislation refers to anyone engaged in commercial activity. While
other answers are possible, a common example of an entity that could be subject to GST but not
income tax would be a partnership. Other answers (see text) are acceptable.

1 grading point for each highlighted item. Total 15

Your Mark = [(# of grading points ÷ 15)(15%)] = ___%

Questions 2 Through 7 (9 Marks)

2. False. Such children are only deemed residents if they are also dependants of the member
of the Canadian Armed Forces.
3. False. The corporation does not have to be incorporated in Canada to be a Canadian
resident.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 1 Solutions to Practice Exam Volume 1

4. True. Corporations and trusts are required to file income tax returns.
5. False. Partnerships are not required to file income tax returns.
6. True. Most authorities believe that progressive income tax rates encourage tax evasion.
7. True. Horizontal equity refers to individuals in the same economic position paying the same
amount of taxes.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Questions 8 Through 14 (21 Marks)

8. D. The individual has given up his Canadian citizenship in order to become a citizen of
another country.
9. C. Norad Inc. was incorporated in New York state on March 1, 1985, and, until the end of
1993, carried on business in Canada. At that time, all of the management and operations of
the company moved to the southern United States.
10. C. Joan Lyton, a Canadian citizen living in Tokyo, Japan
11. D. Regressive taxes are unfair to individuals with low incomes.
12. B. International Tax Treaties.
13. A. Individuals can choose to have a non-calendar fiscal year.
14. B. Non-residents must pay Canadian income taxes on capital gains arising on dispositions of
any Canadian property.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Solution 15 (20 Marks)

Case 1
Because he has an employment contract that requires him to return to Canada in two years, he will
be viewed as having retained Canadian residence status. Although he has severed his ties with
Canada, the requirement to return would show that he does not intend to permanently leave
Canada.
Mark will be subject to Canadian tax on his worldwide income during 2020.

Case 2
As she is exempt from taxation in Latvia because she is the spouse of a deemed Canadian resident,
Maxine would be a deemed resident of Canada for income tax purposes during 2020 [(ITA
250(1)(g)].
Maxine will be subject to Canadian tax on her worldwide income during 2020.

Case 3
As noted in S5-F1-C1, “Determining an Individual’s Residence Status”, commuting from the U.S.
for employment purposes does not make an individual a deemed resident under the sojourner rules.
Therefore, Susan would not be considered a Canadian resident for income tax purposes.
While Susan will be subject to Canadian tax on her Canadian employment income, she would not
be subject to Canadian tax on her U.S. savings account interest. As noted in the text, individuals
employed in Canada are not subject to the sojourner rule.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 1 Solutions to Practice Exam Volume 1

1 grading point for each highlighted item. Total 15

Your Mark = [(# of grading points ÷ 15)(15%)] = ___%
Question 16 (35 Marks)
Case A
The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $35,000
Income From Property 12,000 $47,000
Income Under ITA 3(b):
Taxable Capital Gains $42,000
Allowable Capital Losses ( 18,000) 24,000
Balance From ITA 3(a) And (b) $ 71,000
Subdivision e Deductions ( 4,000) 8
Balance From ITA 3(c) $67,000
Deduction Under ITA 3(d):
Business Loss ( 10,000)
Net Income For Tax Purposes (Division B Income) $ 57,000

Carry Overs At The End Of The Year

Ms. Rizk has no loss carry overs.

Case B
The Case B solution would be calculated as follows:
11
Income Under ITA 3(a):
Employment Income $33,000
Income From Property 14,000 $47,000
Income Under ITA 3(b):
Taxable Capital Gains $36,000
Allowable Capital Losses ( 42,000) Nil
Balance From ITA 3(a) And (b) $47,000
Subdivision e Deductions ( 7,000)
Balance From ITA 3(c) $40,000
Deduction Under ITA 3(d):
Business Loss ( 39,000)
Net Income For Tax Purposes (Division B Income) $ 1,000

Carry Overs At The End Of The Year

Unused allowable capital losses ($42,000 - $36,000) $6,000

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 1 Solutions to Practice Exam Volume 1

Case C
The Case C solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $16,000
Income From Business 22,000 $38,000
Income Under ITA 3(b):
Taxable Capital Gains $32,000
Allowable Capital Losses ( 69,000) Nil 11
Balance From ITA 3(a) and (b) $38,000
Subdivision e Deductions ( 5,000)
Balance From ITA 3(c) $33,000
Deduction Under ITA 3(d):
Property Loss ( 21,000)
Net Income For Tax Purposes (Division B Income) $12,000

Carry Overs At The End Of The Year

Unused allowable capital losses ($69,000 - $32,000) $37,000

Case D
The Case D solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $28,000
Income From Business 15,000 $43,000
Income Under ITA 3(b):
Taxable Capital Gains $21,000
Allowable Capital Losses ( 27,000) Nil 15
Balance From ITA 3(a) And (b) $43,000
Subdivision e Deductions ( 11,000)
Balance From ITA 3(c) $32,000
Deduction Under ITA 3(d):
Property Loss ( 36,000)
Net Income For Tax Purposes (Division B Income) Nil

As Ms. Rizk’s property loss exceeds the amount carried forward from ITA 3(c), her total Net
Income For Tax Purposes (Division B income) is nil.

Carry Overs At The End Of The Year

Unused allowable capital losses ($27,000 - $21,000) $6,000

Unused non-capital losses ($36,000 - $32,000) $4,000

1 grading point for each highlighted item. Total 45

Your Mark = [(# of grading points ÷ 45)(35%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 2 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 2 (Procedures And Administration)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Questions 20
2-7 True Or False 9
8 - 14 Multiple Choice 21
15 Instalments 50
Total 100

Solution 1 (20 Marks)

Part A
As listed in the text, an individual must file a tax return if, in the year, the individual:
• has Tax Payable;
• is requested by the CRA to file a tax return;
• has disposed of a capital property,
• has realized a taxable capital gain;
• his spouse or common-law partner have elected to split pension income;
• has to contribute to the Canada Pension Plan; or
• has to pay Employment Insurance premiums. 13
For living individuals, the normal filing date is April 30 of the following calendar year.
However, if the individual or his spouse or common-law partner have business income, the date is
extended to June 15 of the following calendar year.
For individuals who die prior to their normal filing date, the required date is the later of:
• the normal filing date or
• six months after the date of death.

NOTE There are other situations that could be listed that would require a return to be filed.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 2 Solutions to Practice Exam Volume 1

Part B
The procedures can be outlined as follows:
• The first step would be to contact the CRA to discuss the changes contained in the
reassessment.
• If informal discussions do not resolve the issue, the next step would be a notice of
objection. This must be filed the later of:
• one year after the due date for the return (April 30, 2021) or
• 90 days after the January 10 date of the Notice of Reassessment. (This would 11
be April 10, 2021.)
• If there is an adverse decision on the notice of objection, Jane can appeal to the
Tax Court Of Canada. This has to be done within 90 days of receiving the decision
on the notice of objection. She can use the informal procedure or the general
procedure.
• Provided she has used the general procedure, a further appeal can be made to the
Federal Court Of Appeal. This must be done within 30 days of receiving the Tax
Court Of Canada decision.

Your Mark = [(# of grading points ÷ 24)(20%)] = ___%

Solutions 2 Through 7 (9 Marks)

2. True. As the payments are documented and recurring, amounts withheld by the
employer can be reduced.
3. False. This individual has until six months after the date of death, which would be
June 29, 2021.
4. True. The penalty would be 5 percent, plus 1 percent for the month of May. Only
complete months count in determining this penalty.
5. False. Only Canadian controlled private corporations that claim the small business
deduction have three months. Other corporations have only two months.
6. True.
7. False. The rate is 2 percent higher.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. C. June 15, 2021
9. A. An individual is required to file an income tax return if her only source of income
is business income, even if no tax is payable.
10. C. $504 [($5,600)(5% + 4%)].
11. D. The return would be due on March 31, 2021, six months after the taxation year
end.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 2 Solutions to Practice Exam Volume 1

12. A. October 31, 2020, two months after the year end.
13. C. The notice of objection must be filed the later of one year after the due date for
the return (April 30, 2022) or 90 days after the date of the notice of assessment
(August 10, 2021).
14. A. If the informal procedure has been used in the Tax Court Of Canada, no further
appeal is allowed.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Solution 15 (50 Marks)

Case One
1. The net tax owing for the years 2018 through 2020 would be calculated as follows:

2018 $5,682 ($56,742 - $51,060)

2019 $6,620 ($22,785 - $16,165)
2020 $3,985 ($64,457 - $60,472)

As the net tax owing for the current year and one of the two preceding years exceeds
$3,000, instalment payments are required. 31
2. The three acceptable alternatives would be as follows:
• Quarterly instalments of $996.25 ($3,985 ÷ 4) based on the current year estimate.
• Quarterly instalments of $1,655.00 ($6,620 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $1,420.50 ($5,682 ÷ 4), followed by two quarterly
instalments of $1,889.50 {[$6,620 - (2)($1,420.50)] ÷ 2]}, for a total of $6,620.

3. The best alternative would be quarterly instalments of $996.25 based on the current
year estimate.
The instalments would be due on March 15, June 15, September 15, and December 15,
2020.

Case Two
1. The net tax owing for the years 2018 through 2020 would be calculated as follows:

2018 $3,316 ($56,742 - $53,426)

2019 Nil ($22,785 - $23,486)
2020 $5,031 ($64,457 - $59,426) 11
As the net tax owing for the current year and one of the two preceding years exceeds
$3,000, instalment payments are required.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 2 Solutions to Practice Exam Volume 1

2. The three acceptable alternatives would be as follows:

• Quarterly instalments of $1,257.75 ($5,031 ÷ 4) based on the current year
estimate.
• Quarterly instalments of Nil.
• Two quarterly instalments of $829.00 ($3,316 ÷ 4) based on the second 15
preceding year.
No further instalments would be required as the net tax owing in the preceding
year is nil.

3. As the net tax owing for 2019 was nil, using this year as the instalment base would
be the best alternative.
The instalments would be due on March 15, June 15, September 15, and
December 15, 2020, if instalments were paid.

Case Three
1. The net tax owing for the years 2018 through 2020 would be calculated as follows:

2018 Nil ($56,742 - $57,101)

2019 $3,302 ($22,785 - $19,483)
2020 $6,409 ($64,457 - $58,048)

As the net tax owing for the current year and one of the two preceding years exceeds
$3,000, instalment payments are required. 29
2. The three acceptable alternatives would be as follows:
• Quarterly instalments of $1,602.25 ($6,409 ÷ 4) based on the current year
estimate.
• Quarterly instalments of $825.50 ($3,302 ÷ 4) based on the first preceding
year.
• As there was no net tax owing in 2018, the first two quarterly instalments would
be nil, followed by two quarterly instalments of $1,651 [($3,302 - Nil) ÷ 2].

3. The best alternative would be the one used by the CRA in its quarterly Instalment
Reminders as it provides some tax deferral. No instalments would be required on
March 15 or June 15. The two instalments of $1,651 would be required on
September 15 and December 15, 2020.

Case Four
1. As the corporation’s Tax Payable for both the current and the preceding year
exceeds $3,000, instalments are required.
2. The three acceptable alternatives would be as follows:
• Monthly instalments of $5,371.42 ($64,457 ÷ 12) based on the current year 23
estimate.
• Monthly instalments of $1,898.75 ($22,785 ÷ 12) based on the first preceding
year.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 2 Solutions to Practice Exam Volume 1

• Two monthly instalments of $4,728.50 ($56,742 ÷ 12) based on the second

preceding year, followed by 10 monthly instalments of $1,332.80 {[($ 22,785 -
(2)($4,728.50)] ÷ 10}, a total of $22,785.
3. The best alternative would be monthly instalments of $1,898.75, a total of $22,785.
The instalments would be due on the last day of each month, beginning in
January 2020.

Case Five
1. As the corporation’s Tax Payable for both the current and the preceding year exceeds
$3,000, instalments are required. As the corporation qualifies as a small CCPC, the
instalments will be quarterly.
2. The three acceptable alternatives would be as follows:
• Quarterly instalments of $16,114.25 ($64,457 ÷ 4) based on the current year
estimate.
• Quarterly instalments of $17,890.00 ($71,560 ÷ 4) based on the preceding year. 23
• One quarterly instalment of $14,185.50 ($56,742 ÷ 4), followed by three
quarterly instalments of $19,124.83 [($71,560 - $14,185.50) ÷ 3], a total of
$71,560.
3. The best alternative would be four quarterly instalments of $16,114.25, for a total of
$64,457.
The instalments are due on March 31, June 30, September 30, and December 31, 2020.

Summary Of Maximum Grading Points Available

Case 1 = 31
Case 2 = 26 (11 + 15)
Case 3 = 29
Case 4 = 23
Case 5 = 23
Total = 132

Your Mark = [(# of grading points ÷ 132)(50%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 3 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 3 (Employment Income)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Question 12
2 Essay Question 8
3-8 True Or False 9
9 - 15 Multiple Choice 21
16 Employment Income 20
17 Exercises 30
Total 100

Solution 1 (12 Marks)

Case A
The employer would deduct it in the year ending September 30, 2020.
The employee would include it in income in the year ending December 31, 2021.

Case B
As the bonus was not paid within 180 days of the company’s year end, it cannot be deducted
until it is paid. This would occur in the year ending September 30, 2022.
The employee would include it in income in the year ending December 31, 2021.

Case C
In this case, the bonus is paid more than three years after the end of the calendar year in which
the services were rendered. This makes it a salary deferral arrangement. The company will
deduct the bonus in the year ending September 30, 2020.
The employee must include it in income in the year ending December 31, 2020.

1 grading point for each highlighted item. Total 12

Your Mark = [(# of grading points ÷ 12)(12%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 3 Solutions to Practice Exam Volume 1

Solution 2 (8 Marks)
There are a great many items that could be listed here. The description of various taxable and
non-taxable benefits begins at Paragraph 3-53 of the text.

1 grading point for each correct item you list. Total 4

Your Mark = [(# of grading points ÷ 4)(8%)] = ___%

Solutions 3 Through 8 (9 Marks)

3. True. One of the advantages of being classified as a self-employed contractor is that you
have a larger range of available tax deductions.
4. False. Acquiring one’s tools is an indication that you are an independent contractor.
5. False. The $200 excess over $500 will have to be included in Gerri’s income.
6. False. The standby charge may be reduced if the employee uses the car more than 50
percent for employment-related activities.
7. True. To be considered reasonable, an allowance paid to an employee for using his
automobile in employment-related activities must be based on kilometres of use.
8. False. Such reimbursements are limited to the first $15,000, plus one-half of any excess.
One-half of any amount in excess of $15,000 is considered a taxable benefit.

1 grading point for each correct answer. Total 4

Your Mark = [(# of grading points ÷ 4)(9%)] = ___%

Solutions 9 Through 15 (21 Marks)

11.
9. C. The ability to pay income tax in quarterly instalments A - no reduction
12,927 + 4,480 = 17,407
10. B. A $450 gift certificate that can be used at a local clothing store. B - 50% operating costs
(11,280)(1.5) = $16,920
11. C. Standby charge = $11,280 [($58,760)(2%)(11)(16,000 ÷ 18,337)] D. 12 (not 11) months
Operating cost benefit = $4,480 [($0.28)(16,000)] 12,305 + 4,480 = 16,785
Total benefit = $15,760 ($11,280 + $4,480)

12. C. An allowance of $600 per month to compensate the employee for using his personal
automobile for employment-related activities.

13. B. [(1/4)(4%)($100,000) + (1/4)(3%)($100,000) + (1/4)(2%)($100,000)]

- [(3/4)(1%)($100,000)] = $1,500

14. A. Interest on the mortgage

15. D. $12,000. Under ITA 8(1)(f) he could have deducted $23,500 [(1/2)($23,000) + $12,000)].
However, this is limited by his commission income received of $9,000 ($16,000 - $7,000). He
would maximize his deduction by using ITA 8(1)(h) to deduct the hotel and airline costs of
$12,000.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 3 Solutions to Practice Exam Volume 1

Solution 16 (20 Marks)

The calculation of Ms. Marsh’s net employment income would be as follows:

Salary $40,500
Reimbursement Of Travel Costs Nil
Reimbursement Of Tuition Fees Nil
Fees As Director 1,200
Registered Pension Plan Contribution ( 1,400)
Net Employment Income $40,300

Notes:
1. As the reimbursement of employment-related travel costs appears to be based on actual
expenditures, it is not a taxable benefit and can be left out of all income calculations. Since
the reimbursement is not taxable, the cost of employment-related travel is not deductible.

2. As the course was work related, there is no taxable benefit for the employer reimbursed
tuition fees. However, the tuition fees will not be eligible for a credit against taxes payable.

3. The dividends will be included in income, but not as a component of employment income.
Rather they are income from property.

4. Income taxes withheld cannot be deducted in calculating employment income.

5. The premiums for group medical insurance and the dental expenses will qualify as medical
expenses and will be eligible for treatment as a credit against taxes payable. However, they
cannot be deducted in the calculation of employment income.

6. The employer’s contribution to the registered pension plan is not a taxable benefit.

7. Charitable donations will generate a credit against an individual’s taxes payable. However,
they cannot be deducted in the calculation of employment income.

8. The life insurance premiums and the costs of travel to and from work are not deductible
expenses. Since Ms. Marsh has not moved to a new work location, the costs of moving to a
larger apartment are not deductible.

1 grading point for each highlighted item. Total 15

Your Mark = [(# of grading points ÷ 15)(20%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 3 Solutions to Practice Exam Volume 1

Question 17 (30 Marks)

A. Rounded to the nearest whole number, 265 days results in nine months of availability. His
personal use is 7,500 kilometres (35,000 - 27,500). As Mr. Badry’s employment-related use
is more than 50 percent, he is eligible for a reduction in the full standby charge. He is also
eligible for the alternative one-half of the standby charge calculation of the operating cost
benefit. Given these factors, the standby charge would be calculated as follows:
Standby Charge [(2/3) ($565) (9) (7,500 ÷ 15,003*] $1,695
Operating Cost Benefit - Lesser Of:
• [(7,500) ($0.28)] = $2,100
• [(1/2) ($1,695)] = $848 848
Total Taxable Benefit $2,543

*[(9)(1,667)]

10 grading points for Part A.

B. As the car allowance is not based on kilometres, Mr. Sotomeyer will have to include the
$12,000 allowance that was received from his employer in his employment income. He can
deduct the employment-related portion of his actual automobile costs against this amount.
This would be $4,740 [($11,460)(19,960/48,260)]. The net inclusion would be $7,260
($12,000 - $4,740).

6 grading points for Part B.

C. As her employer contributes to the plan, and the contributions do not create a taxable benefit,
the $7,400 in benefits received during the year will be included in her employment income.
This will be reduced by the $960 ($460 + $500) in non-deductible contributions that she
made during 2019 and 2020, leaving a net inclusion of $6,440 ($7,400 - $960).

6 grading points for Part C.

D. The effect of these transactions would be calculated as follows:

Employment Income [(1,500)($28 - $21)] $10,500

Taxable Capital Gain [(1/2) (1,500) ($31 - $28)] 2,250
Increase In Net Income For Tax Purposes $12,750
Deduction Under ITA 110(1)(d) [(1/2)($10,500)] ( 5,250)
Increase In Taxable Income $ 7,500

11 grading points for Part D.

1 grading point for each highlighted item. Total 33.

Your Mark = [(# of grading points ÷ 33)(30%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 4 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 4 (Tax Payable For Individuals)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Questions 10
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 Personal Tax Credits 10
16 Charitable Donations Tax Credit 15
17 Medical Expenses Tax Credit 20
18 Tuition Tax Credit 15
Total 100

Solution 1 (10 Marks)

A. Disability tax credit and tuition tax credit can be transferred to a parent.

B. The three qualifying types could be selected from the following:

• periodic payments from a Registered Pension Plan (RPP);
• an annuity payment out of a Registered Retirement Savings Plan (RRSP);
• a payment out of a Registered Retirement Income Fund (RRIF);
• an annuity payment from a Deferred Profit Sharing Plan (DPSP); and
• the interest component of other annuities.

1 grading point for each correct answer. Total 5

Maximum for B = 3
Your Mark = [(# of grading points ÷ 5)(10%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 4 Solutions to Practice Exam Volume 1

Solution 2 Through 7 (9 Marks)

2. True.
3. False. IT-513R specifies that only one spouse can claim the spousal tax credit.
4. True.
5. False. They can be claimed, but must be reduced by the lesser of $2,397 or 3 percent of the
dependant’s Net Income For Tax Purposes.
6. False. Charitable donations are limited to 75 percent of the taxpayer’s Net Income For Tax
Purposes.
7. True.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solution 8 Through 14 (21 Marks)

8. C. Eligible medical expenses
#11 - 15% of
9. D. Provincial taxes are calculated as a percentage of federal Tax Payable.
A = 13,229+8,576
10. D. Tax credits are deducted in the determination of Taxable Income. = $3,271

11. C. The maximum credits are calculated as follows:

Basic Personal $13,229
B=38,744 - 2,273
Spousal Including Infirm Amount
- 7,637
($13,229 + $2,273 - $6,200) 9,302
= 4,325
Transfer Of Age From Spouse 7,637
Transfer Of Disability From Spouse 8,576 D=38,744 - 2,273
Total Credit Base $38,744 - 8,576
Rate 15% =4,184

Maximum Credit $ 5,812

12. B. If the individual is a parent or grandparent, they do not have to be under 18.
13. B. A payment from the Canada Pension Plan.
14. A. The goods and services tax credit.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 4 Solutions to Practice Exam Volume 1

Solution 15 (10 Marks)

Her tax credits would be as follows:
Basic Personal Amount $13,229
Amount For Eligible Dependant - Daughter
($13,229 - $4,300) 8,929
Canada Caregiver Amount - Son 7,276
Credit Base $29,434
Rate 15%
Total Credits $ 4,415

Since Ms. Borat claims her daughter for the eligible dependant credit, her son cannot qualify for this
credit. This means that she can claim the Canada caregiver amount for him.

1 grading point for each highlighted item. Total 5

Your Mark = [(# of grading points ÷ 5)(10%)] = ___%

Solution 16 (15 Marks)

The credit base for 2020 would be limited to $69,000 [(75%)($92,000)]. However, he chooses to
claim $23,000, leaving a carry forward of $87,000 ($110,000 - $23,000). As none of his income is
taxed at 33 percent, this rate will not be applicable to the calculation of the charitable donations tax
credit. The resulting credit would be:
$200 At 15 Percent $ 30
$22,800 ($23,000 - $200) At 29 Percent 6,612
Total Credit $6,642

As his income for 2021 is unchanged from 2020, the limit would be the same $69,000
[(75%)($92,000)]. Charitable donations can be carried forward for up to five years. As a result, the
final year to claim any unused portion of his 2020 donation would be 2025.

1 grading point for each highlighted item. Total 12

Your Mark = [(# of grading points ÷ 12)(15%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 4 Solutions to Practice Exam Volume 1

Solution 17 (20 Marks)

The required calculation is as follows:
Amount B Expenses For Kevin And Spouse $2,842
Amount C
Reduced By The Lesser Of:
• [(3%)($117,000)] = $3,510
• 2019 Threshold Amount = $2,397 ( 2,397)
Subtotal $ 445
Amount D
Son’s Medical Expenses $8,200
Reduced By The Lesser Of:
• $2,397
• [(3%)($7,200)] = $216 ( 216) 7,984
Allowable Amount Of Medical Expenses $8,429

Amount A The Appropriate Rate 15%

Medical Expense Tax Credit $1,264

1 grading point for each highlighted item. Total 11

Your Mark = [(# of grading points ÷ 11)(20%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 4 Solutions to Practice Exam Volume 1

Solution 18 (15 Marks)

The available tuition credit for the year could be calculated as follows:
Tuition Amount For The Current Year $ 7,350
Rate 15%
Tuition Credit For The Current Year $ 1,103
Carry Forward Tuition Credit 675
Total Available Tuition Credits $ 1,778

Alternative Calculation

Tuition Amount For The Current Year $ 7,350

Carry Forward Amount 4,500
Total Available Tuition Amounts $11,850
Rate 15%
Total Available Tuition Credits $ 1,778

David’s Tax Payable before deducting his tuition credits would be $2,936 [(15%)($32,800 -
$13,229)]. This would be sufficient to absorb all of the $1,778 in tuition credits, leaving no carry
forward to subsequent years.

1 grading point for each highlighted item. Total 7

Your Mark = [(# of grading points ÷ 7)(15%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 5 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 5 (CCA)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Question 10

2-7 True Or False 9

8 - 14 Multiple Choice 21

15 CCA Exercises 45

16 Class 14.1 Calculations 15

Total 100

Solution 1 (10 Marks)

The conditions for each outcome would be as follows:

No Immediate Tax Consequences This would be the case if:

(1) the proceeds of disposition were less than the capital cost of the individual asset,
(2) there was a positive balance in the CCA class at the end of the taxation year, and 6
(3) there were other assets remaining in the CCA class.

Capital Gain A capital gain would arise if the proceeds of disposition were greater than
the capital cost of the asset disposed of. 3
Recapture Of CCA Recapture would occur if, after deducting the lesser of the proceeds of
disposition and the capital cost of the individual asset, there was a negative balance in the
CCA class and a negative balance was still present at the end of the taxation year.
6
Terminal Loss A terminal loss would occur if, after deducting the lesser of the proceeds of
disposition and the capital cost of the individual asset, there was a positive balance in the 6
CCA class but no assets were left in the class.

1 grading point for each highlighted item. Total 21

Your Mark = [(# of grading points ÷ 21)(10%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 5 Solutions to Practice Exam Volume 1

Solutions 2 Through 7 (9 Marks)

2. True. The method specified in the Income Tax Regulations must be used to determine the
CCA that can be deducted in each taxation year.
3. False. GST, HST, and PST are only included to the extent that they are not refunded as
input tax credits.
4. False. This is not an election. Such rental properties MUST be allocated to a separate CCA
class.
5. True. The AccII provisions do not apply to assets acquired from a non-arm’s length person.
6. False. The maximum Class 8 CCA would be $510 [(1.5)(20%)($20,000)(31 ÷ 365)].
7. True. In situations where an enterprise chooses not to take maximum CCA, the amount that
is taken should be deducted from the CCA classes with the lowest rates.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. D. Net book value and capital cost
9. C. Equipment that is used 100 percent for manufacturing activity
10. D. The AccII provisions do not apply when eligible acquisitions are less than the amounts
deducted for disposals.
11. A. $668.49 [(150%)($32,000 ÷ 12)(61/365)]
12. B. $9,692 [($126,000 ÷ 13)]
13. C. Class 14
14. C. The cost of an unlimited life franchise will be added to the class.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 5 Solutions to Practice Exam Volume 1

Solution 15 (45 Marks)

Part A
The required CCA calculations for 2020 would be as follows:
On 2016 Improvements ($76,000 ÷ 10) $ 7,600
On 2020 Improvements [(150%)($42,000 ÷ 6)] 10,500
2020 CCA $18,100
11
The required CCA calculations for 2020 would be as follows:
On 2016 Improvements ($76,000 ÷ 10) $ 7,600
On 2020 Improvements ($42,000 ÷ 6) 7,000
2021 CCA $14,600

Part B
The required calculations are as follows:
January 1, 2020, UCC $500,000
Acquisitions During The Year 75,000
AccII Adjustment [(100%)($75,000)] 75,000
CCA Base $650,000
8
2020 CCA [(50%)($650,000)] ( 325,000)
AccII Adjustment Reversal ( 75,000)
January 1, 2021, UCC $250,000

Part C
The required information would be calculated as follows:
UCC Of The Class At The Beginning Of The Year $41,200
Add: Acquisitions During The Year Nil
Deduct: Dispositions During The Year - Lesser Of:
• Capital Cost = $46,000
• Proceeds Of Disposition = $43,500 ( 43,500)
8
Add: AccII Adjustment* Nil *Mark is
Negative Ending Balance ($ 2,300) given if no
Recapture Of CCA 2,300 AccII
January 1, 2021, UCC Balance Nil Adjustment
is made.
*The AccII Adjustment is only made when the net amount is positive.

The effect would be an addition to business income of $2,300 in recaptured CCA. Note that,
unlike terminal losses, the fact that there is still an asset in the class is irrelevant.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 5 Solutions to Practice Exam Volume 1

Part D
The required information would be calculated as follows:
UCC Of The Class At The Beginning Of The Year $41,200
Add: Acquisitions During The Year Nil
Deduct: Dispositions During The Year - Lesser Of:
• Capital Cost = $92,000
8
• Proceeds Of Disposition = $31,000 ( 31,000) *Mark is
Add: AccII Adjustment* Nil given if no
Ending Balance With No Remaining Assets $10,200 AccII
Terminal Loss ( 10,200) Adjustment
is made.
January 1, 2021, UCC Balance Nil

As there is a positive balance in Class 8 at the end of the year, but no remaining assets, there
would be a terminal loss of $10,200. This loss is deducted in the calculation of net business
income.
Your Mark = [(# of grading points ÷ 35)(45%)] = ___%

Solution 16 (15 Marks)

For the year ending December 31, 2020, the maximum CCA, as well as the UCC balance for
January 1, 2021, for Domtex's Class 14.1 would be as calculated as follows:
January 1, 2020, Balance Nil
2020 Additions ($144,000 + $169,500) $313,500
AccII Adjustment [(50%)($313,500)] 156,750 9
CCA Base $470,250
2020 CCA [(5%)($470,250)] ( 23,513)
AccII Adjustment Reversal ( 156,750)
January 1, 2021, UCC $289,987

The results for 2021 would be as follows:

January 1, 2021, UCC $289,987
Disposition - Lesser Of:
Capital Cost Of Goodwill = $144,000
Proceeds Of Disposition = $153,000 ( 144,000)
CCA Base $145,987 11
2021 CCA [(5%)($145,987)] ( 7,299)
January 1, 2022, UCC $138,688

Proceeds Of Disposition $153,000

Capital Cost Of Goodwill ( 144,000)
Capital Gain $ 9,000
Inclusion Rate 1/2
Taxable Capital Gain $ 4,500

While Domtex would still have a goodwill account, the capital cost would be nil. There would be
maximum CCA of $7,299 and a taxable capital gain of $4,500 resulting in a net decrease in Net
Income For Tax Purposes of $2,799.
1 grading point for each highlighted item. Total 20
Your Mark = [(# of grading points ÷ 20)(15%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 6 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 6 (Business Income)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark
1 Essay Question 9
2-7 True Or False 9
8 - 14 Multiple Choice 21
15 Reserves 12
16 Inventory Valuation 12
17 Business Income Reconciliation 37
Total 100

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 6 Solutions to Practice Exam Volume 1

Solution 1 (9 Marks)
The text discusses six criteria for making this distinction, any three of which would satisfy the
requirements of the question. The six are as follows:

• Intent Did the individual intend to hold the asset to produce income or, alternatively, to
resell at a profit?

• Length Of The Ownership Period The longer the period of ownership, the more likely it is
that the taxpayer’s intent was to hold the asset to produce income.

• Number And Frequency Of Transactions A large number of closely spaced transactions

in a given period of time would be an indication that the investor was in the business of
dealing in this type of asset, not holding it to produce income.

• Relationship To The Taxpayer’s Business If the transaction is related to the taxpayer’s

business, this may be sufficient to disqualify any gain or loss from capital gains treatment.
For example, a gain on a mortgage transaction might be considered business income to a
real estate broker.

• Supplemental Work On The Property Additional work on the property, directed at

enhancing its value or marketability, would indicate an adventure in the nature of trade
resulting in business income.

• Nature Of The Assets The conventional accounting distinction between fixed assets and
working capital has been used in some cases to determine whether income was business or
capital in nature. Also, whether the asset is capable of producing income would be a
consideration.

2 grading point for each of 3 correct answers. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 2 Through 7 (9 Marks)

2. True. If the drill press was used to produce income, the disposition would produce a
capital gain. If it was sold by a dealer in drill presses, the result would be business income.
3. True.
4. False. The payments cannot exceed an amount that is specified by the Income Tax
Regulations.
5. False. While it may not be desirable to deduct CCA on a principal residence, it is not
prohibited.
6. False. There are a number of exceptions to the 50 percent rule (e.g., meal costs incurred
by long-haul truck drivers).
7. False. Unless a joint election is made, the loss will be treated as a capital loss.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 6 Solutions to Practice Exam Volume 1

Solutions 8 Through 14 (21 Marks)

8. D. Business income of $19,000 ($154,000 - $123,000 - $12,000)
9. B. Gift certificates not yet redeemed and not yet expired as at January 31, 2020: 800 @
$15 per certificate = $12,000
10. D. Life insurance on the proprietor’s life would not be deductible unless the interest on the
loan was deductible and the creditor required the insurance.
11. D. After CCA of $13,500 [($30,000)(30%)(1.5)] for the first year, the Class 10.1 UCC is
$16,500 ($30,000 - $4,500). The maximum automobile related deduction is $4,950
[($16,500)(30%) + (365)($10) + $6,300].
12. B. Home office costs that are not deductible in a given year can be carried forward
indefinitely and deducted against income generated from the same business.
13. A. Inventories must be determined using either market or lower of cost and market. Cost is
not acceptable.
14. B. Hobby farmers cannot deduct any farm losses.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Solution 15 (12 Marks)

The total inclusion would be calculated as follows:
Cash Sales $105,000
Accounts Receivable 52,000
Reserve For Undelivered Goods ( 12,000)
Reserve For Doubtful Debts ( 1,700)
Total Increase $143,300

1 grading point for each highlighted item. Total 4

Your Mark = [(# of grading points ÷ 4)(12%)] = ___%

Solution 16 (12 Marks)

Inventories can be valued at either market or lower of cost and market. They cannot be valued
at cost.
If market is used, the two values that could be used are as follows:
• Market based on Net Realizable Value $133,000
• Market based on Replacement Cost 102,000
If lower of cost and market is used, there are several possibilities:
• Lower of Net Realizable Value and FIFO Cost $112,000
• Lower of Net Realizable Value and Average Cost 106,000
• Lower of Replacement Cost and FIFO Cost 102,000
• Lower Replacement Cost and Average Cost 102,000

1 grading point for each highlighted item. Total 6

Your Mark = [(# of grading points ÷ 6)(12%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 6 Solutions to Practice Exam Volume 1

Solution 17 (37 Marks)

The minimum net business income of London Supplies would be calculated as follows:
Accounting Income $ 87,000
Additions:
Amortization Expense $33,200
Reserve For Inventory Obsolescence 8,500
Business Meals - Non-Deductible 50 Percent 6,000
Charitable Donations (Note 1) 2,300
Cost Of Advertising On A U.S. Radio
Station To The Canadian Market (Note 2) 3,500
Unused Advertising Circulars
[(1/2)($6,200)] (Note 3) 3,100
Appraisal Costs On Land To Be Sold (Note 4) 2,100 58,700
$145,700
Deductions:
Landscaping Costs ($ 5,300)
CCA ( 43,500) ( 48,800)
Net Business Income $ 96,900

Note 1 Donations to charities cannot be deducted in the calculation of net business

income. They will be the basis for a tax credit in the calculation of Tax Payable for Mr.
Forthwell.
Note 2 In general, when a Canadian enterprise places advertising directed at the
Canadian market in foreign print or broadcast media, the costs of the advertising are
not deductible. ITA 19.01 exempts certain foreign periodicals from this rule. However,
the rule is still applicable to foreign broadcast media.
Note 3 As noted in ITA 10(4)(b), items such as advertising circulars would be viewed
as a form of inventory. As we do not have information on the market value for these
items, they would have to be valued at cost.
Note 4 The appraisal costs on land to be sold must be added to the cost of the asset.

Other Items Further explanation related to the items not included in the preceding calculation
of net business income are as follows:
Reserve For Doubtful Debts This reserve is deductible as it is specifically provided
for in the Income Tax Act. [ITA 20(1)(l)]
Loss From Theft Losses of this type are considered to be deductible as a normal
cost of doing business.
Cost Of Sponsoring Local Hockey Team This would appear to be a legitimate
advertising expense.
Mortgage Interest The interest would be deductible as the building is a capital
asset of the business.
Damages As the damages relate to a transaction that produces business income,
they are considered a business expense.
Fees Paid To Son Since the fees paid to John’s son are reasonable when
compared to those charged by a non-arm’s length party, they are deductible.

1 grading point for each highlighted item. Total 16

Your Mark = [(# of grading points ÷ 16)(37%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 7 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 7 (Property Income)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Question 10
2-7 True Or False 9
8 - 14 Multiple Choice 21
15 Alternative Investments 25
16 Income Trusts, Mutual Funds, and
Foreign Source Income 35
Total 100

Solution 1 (10 Marks)

Part A
The two special rules are:

• Each rental property with a cost that is greater than $50,000 must be included in a separate
CCA Class. 7

• Taxpayers are not allowed to either create or increase a net rental loss through the
deduction of CCA.

Part B
The full $10,000 will have to be included in the investor’s Net Income For Tax Purposes. He will 10
be entitled to a tax credit of only $1,500 as, on non-business income, the credit is limited
to 15 percent.
The remaining $2,500 ($4,000 - $1,500) can be deducted in the determination of Net Income For
Tax Purposes.

1 grading point for each highlighted item. Total 17

Your Mark = [(# of grading points ÷ 17)(10%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 7 Solutions to Practice Exam Volume 1

Solutions 2 Through 7 (9 Marks)

2. True. To be classified as interest for tax purposes, payments must be calculated on a
principal sum and must be compensation for the use of that principal sum.
3. False. In some cases, only one-half of the loss will be deductible.
4. True. Both corporations and partnerships must calculate deductible interest using the full
accrual method.
5. False. It is the purpose of the debt that determines interest deductibility. For example, if an
individual mortgages his principal residence and uses the proceeds to invest in dividend
paying securities, the interest would be deductible.
6. False. Only those rental buildings with a cost in excess of $50,000 must be allocated to a
separate Class 1.
7. True. The gross up and tax credit procedures for eligible dividends are based on the
assumption of a 27.54 percent combined corporate tax rate.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. C. Jerri will have to recognize Nil in 2020, and $25,000 in 2021.
9. A. The corporation will be able to deduct $40,000 in each of the years 1 through 5, and will
have a $25,000 capital loss in year 5, only one-half of which will be deductible. As the bonds
were sold for less than 97 percent of their maturity value, the discount will be treated as a
capital loss.
10. C. CCA is limited to the combined net rental income on the two properties of $17,000
($43,000 - $26,000).
11. D. The amount would be calculated as follows:
Dividends Received $24,000
Gross Up Of 38 percent 9,120
Taxable Dividends $33,120
Tax Rate (29% + 14%) 43%
Tax Before Credit $14,242
Dividend Tax Credit [(6/11 + 27%)($9,120)] ( 7,437)
Tax Payable On Dividend $ 6,805

After Tax Retention ($24,000 - $6,805) $17,195

12. B. The federal dividend tax credit is not always equal to 6/11 of the gross up.
13. B. The $12,000 distribution would result in 76.92 additional units ($12,000 ÷ 156). Given
this, the adjusted cost base of the units would be $150.43 [($150,000 + $12,000) ÷ (1,000 +
76.92)].
14. D. While the tax credit is limited to $1,800 [(15%)($12,000)], the additional $1,800 of
withholding can be deducted. This leaves an increase in Net Income For Tax Purposes of
$10,200 ($12,000 - $1,800).

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 7 Solutions to Practice Exam Volume 1

Solution 15 (25 Marks)

Guaranteed Investment Certificate
If the $50,000 is invested in the guaranteed investment certificate, the after tax retention would
be as follows:

Interest Earned [(6%)($50,000)] $3,000

Taxes [(29% + 14%)($3,000)] ( 1,290) 7
After Tax Retention ($3,000 - $1,290) $1,710

Common Stock Purchase

If the $50,000 is invested in the common stock and the common stock is sold for $55 per share,
the after tax retention would be as follows:
Dividends Received [(1,000)($1.00)] $1,000
Gross Up [(38%)($1,000) 380
Taxable Dividends $1,380
Capital Gain [(1,000)($55 - $50)] $5,000
Inclusion Rate 1/2
Taxable Capital Gain 2,500
Taxable Income $3,880 17

Tax [(29% + 14%)($3,880)] $1,668

Dividend Tax Credit [(6/11 + 25%)($380)] ( 302)
Tax Payable $1,366

After Tax Return ($1,000 + $5,000 - $1,366) $4,634

1 grading point for each highlighted item. Total 24

Your Mark = [(# of grading points ÷ 24)(25%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 7 Solutions to Practice Exam Volume 1

Solution 16 (35 Marks)

The amount of Taxable Income and Tax Payable resulting from the investments would be
calculated as follows:

Foreign Term Deposit

Foreign Interest [(7%)(€500,000)($1.50)] (Note) $52,500
Excess Withholding
[(20% - 15%)(7%)(€500,000)($1.50)] ( 2,625) $49,875

REIT
Golden Mountain Distribution [($8.75)(1,200)] $10,500
Return Of Capital [($3.25)(1,200)] ( 3,900) 6,600 30
Blackman Mutual Fund
Blackman Eligible Dividends [($0.70)(8,500)] $ 5,950
Dividend Gross Up [(38%)($5,950)] 2,261 8,211
Taxable Capital Gain [(1/2)($0.80)(8,500)] 3,400
Blackman Interest [($0.60)(8,500)] 5,100
Taxable Income $73,186
Tax Rate (29% + 13%) 42%
Tax Before Credits $30,738
Dividend Tax Credit [($2,261)(6/11 + 21%)] ( 1,708)
Foreign Tax Credit [(15%)(7%)(€500,000)($1.50)] (Note) ( 7,875)
Tax Payable $21,155

Note - Foreign Source Property Income As required, 100 percent of the foreign
interest is included in Net Income For Tax Purposes. However, for individuals, the
credit against Tax Payable that is provided under ITA 126(1) is limited to a maximum
of 15 percent of the foreign source non-business income. Since the withheld amount
exceeds 15 percent, the excess is deducted and does not qualify for treatment as a
foreign tax credit.

Adjusted Cost Base - Golden Mountain

The reinvestment of the $10,500 [($8.75)(1,200)] distribution at $100 per unit would acquire an 8
additional 105 units ($10,500 ÷ $100). After recognizing these changes, the adjusted cost base
per unit would be as follows:
$89.66 [($110,400 + $10,500 - $3,900) ÷ (1,200 + 105)]

Adjusted Cost Base - Blackman

The reinvestment of the $17,850 [($2.10)(8,500)] distribution at $20 per unit would acquire an 7
additional 892.5 units ($17,850 ÷ $20). After recognizing these changes, the adjusted cost base
per unit would be as follows:
$22.71 [($195,500 + $17,850) ÷ (8,500 + 892.5)]

1 grading point for each highlighted item. Total 45

Your Mark = [(# of grading points ÷ 45)(35%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 8 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 8 (Capital Gains)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Questions 10
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 Involuntary Dispositions 35
16 Principal Residence Rules 25
Total 100

Solution 1 (10 Marks)

A. The Glossary to your text defines personal use property as “any property that is owned by the
Taxpayer and used primarily for his enjoyment, or for the enjoyment of one or more
individuals related to the taxpayer.”

B. Listed personal property is certain specified items of personal use property. The included
items are works of art, jewelry, rare books, stamps, and coins (this is not required).

C. In calculating the capital gain or loss on personal use property, the $1,000 floor rule is used.
The proceeds are deemed to be the greater of $1,000 and the actual proceeds and the
adjusted cost base is deemed to be the greater of $1,000 and the actual adjusted cost base.
One-half of any gain, i.e., the taxable capital gain, on personal use property must be included
in the individual’s Net Income For Tax Purposes. Losses are not deductible.
The only difference in treatment for listed personal property is that allowable capital losses on
listed personal property can be deducted against taxable capital gains on listed personal
property.

1 grading point for each highlighted item. Total 22

Your Mark = [(# of grading points ÷ 22)(10%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 8 Solutions to Practice Exam Volume 1

Solutions 2 Through 7 (9 Marks)

2. True. The deficiency will have to be included in income if it occurs at any time during the
year, not just at the end of the year.
3. True. When shares of stock are sold, their adjusted cost base must be determined on the
basis of the average cost of the shares acquired.
4. False. While such warranty costs are deducted as a capital loss, they cannot be deducted
until the taxation year in which the warranty costs are incurred.
5. False. This rule only applies when the transfer is from personal use to business use. If the
transfer was from business use to personal use, there would be no CCA deducted.
6. True. When a property is converted from a rental property to a principal residence, the
taxpayer can elect to have property designated as his principal residence for up to four years
prior to the time it stopped being used as a rental property.
7. True. If an individual holding an option to acquire a capital property exercises that option,
the cost of the option will be added to the adjusted cost base of the acquired asset.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. B. An allowable capital loss of $1,500 [(40%)(500)(1/2)($25 - $10)]
9. B. If a principal residence is converted to a rental property, an individual can elect not to
have a deemed disposition and can continue to designate the property as his principal
residence for up to four years after the change in use.
10. C. When an individual sells shares in a Canadian small business corporation, any resulting
capital gain can be deferred if the proceeds are reinvested in shares of another Canadian
small business corporation. Both corporations must be eligible small business corporations.
11. A. $5,450 [(4%)(1/2)($272,500)]. The $272,500 is equal to the cost of the building of
$225,000 ($275,000 - $50,000), plus one-half of the difference between its fair market value
and its cost [(1/2)($320,000 - $225,000)].
12. D. A taxable capital gain of $12,500 [(1/2)($175,000 - $150,000)]. There will be no deemed
disposition of the rental property.
13. D. $37,193 [($187,000 - $122,000)($107,000 ÷ $187,000)]. As more than 20 percent of the
proceeds is collected in each of the first two years, the reserve will be based on the
uncollected proceeds of $107,000.
14. B. If the option expires without being exercised, he will have an allowable capital loss of
$2,500.

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 8 Solutions to Practice Exam Volume 1

Solution 15 (35 Marks)

Part A
The 2020 tax consequences of the involuntary disposition would include both a taxable capital
gain and recapture. The amounts would be calculated as follows:
Proceeds Of Disposition (Insurance Proceeds) $300,000
Less: Capital Cost ( 250,000)
Capital Gain $ 50,000
Inclusion Rate 1/2
Taxable Capital Gain $ 25,000

UCC Balance $175,000

Lesser Of:
• Cost = $250,000
• Proceeds Of Disposition = $300,000 ( 250,000)
Negative Closing UCC Balance = Recapture ($ 75,000)
Recapture 75,000
January 1, 2021, UCC Nil

For 2020, there is no CCA claim. Instead, there is $75,000 in recaptured CCA that must be taken
into income. As a result, there is a total of $100,000 ($75,000 + $25,000) that will be added to
Leblanc Ltd.’s 2020 Net Income For Tax Purposes.

Part B
After the asset is replaced in 2021, an election can be made under ITA 44(1), and an amended
return can be filed for 2020. In the amended return, the taxable capital gain will be nil, the lesser
of the amount calculated in Part A ($50,000) and the following:
Proceeds Of Disposition (Insurance Proceeds) $300,000
Less: Cost Of Replacement Property ( 500,000)
Excess, If Any Nil

Using the ITA 13(4) election, a new recapture figure can be calculated as follows:

January 1, 2020, UCC Balance $175,000

Deduction:
Lesser Of:
• Proceeds Of Disposition = $300,000
• Capital Cost = $250,000 $250,000
Reduced By The Lesser Of:
• Normal Recapture = $75,000
• Replacement Cost = $500,000 ( 75,000) ( 175,000)
Recapture Of 2020 CCA (Amended) Nil

Part C
Assuming that Leblanc Ltd. makes the appropriate tax minimizing elections under ITA 13(4) and
44(1), the CCA claim for 2021 would be calculated as follows:

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Chapter 8 Solutions to Practice Exam Volume 1

January 1, 2021, UCC Nil

Add: Cost Of Replacement Property $500,000
Less: Reduction For Gain Reversed Under ITA 44(1) ( 50,000)
Deemed Cost (See Note) $450,000
Less: Recapture Reversed Under ITA 13(4) ( 75,000)
UCC (See Note) $375,000
AccII Adjustment [(50%)($375,000)] 187,500
CCA Base $562,500
CCA Rate - Class 8 20%
CCA Claim $112,500

Note As a check, you will note that the deemed capital cost of the new building
is $450,000, the capital cost of the old building plus the additional $200,000
($500,000 - $300,000) in funds needed to acquire the replacement building.
In a similar calculation, the UCC for the new building is equal to the UCC of the old
building of $175,000, again plus the $200,000 in additional funds required for the
replacement building.

1 grading point for each highlighted item. Total 30

Your Mark = [(# of grading points ÷ 30)(25%)] = ___%

Solution 16 (25 Marks)

The capital gains on the two properties would be calculated as follows:
City Home Cottage
Proceeds Of Disposition $528,000 $330,000
Adjusted Cost Base ( 264,000) ( 36,000)
Real Estate Commissions ( 32,000) ( 16,000)
Capital Gain $232,000 $278,000

During the period 2004 through 2020 (17 years), the cottage experienced the larger capital gain
as shown in the preceding table. To minimize the total capital gain, it should be designated the
principal residence for 16 years. This will completely eliminate the capital gain as the exemption
formula adds an additional year. This will leave one year for the city home to be designated his
principal residence.
Given this approach, the exemptions would be as follows:
City Home Cottage
Capital Gains Before Exemptions $232,000 $278,000
Exemption:
City Home [$232,000][(1 + 1) ÷ 17] ( 27,294)
Cottage [$278,000][(16 + 1) ÷17] ( 278,000)
Capital Gain $204,706 Nil

This gives a total capital gain of $204,706 on the two properties and a taxable capital gain of
$102,353 [(1/2)($204,706)].
1 grading point for each highlighted item. Total 17
Your Mark = [(# of grading points ÷ 17)(15%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 9 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 9 (Other Income and Deductions)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark

1 Essay Question 10
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 Moving Costs 25
16 Income Attribution 35
Total 100

Solution 1 (10 Marks)

First, she must elect out of the spousal rollover [(ITA 73(1)]. This will be accomplished by
including the gain on the shares in her income tax return.
In addition, the spouse must provide consideration for the shares that is equal to their fair market
value. The consideration must either be provided out of the spouse’s own funds or by a debt
obligation that pays interest at the prescribed rate or higher.
If income attribution applies, the consequences would be that any income earned by the property
while it is in the hands of the spouse would be attributed back to the individual.
In addition, if the spouse disposes of the property, any gain on the sale would be attributed back
to the individual.

1 grading point for each highlighted item. Total 14

Your Mark = [(# of grading points ÷ 14)(10%)] = ___%

Solutions 2 Through 7 (9 Marks)

2. True. Workers’ Compensation payments are included in Net Income For Tax Purposes,
but deducted in the determination of Taxable Income.
3. False. They can also be deducted against business income and scholarships.
4. True. Child care costs can be deducted by the higher income spouse when the lower
income spouse is confined to prison for not less than two weeks in the year.

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Chapter 9 Solutions to Practice Exam Volume 1

5. False. The disability does not have to be severe and prolonged.

6. True. Spousal support is deductible to the payor and taxable to the recipient.
7. False. While dividend income is attributed back to the individual, capital gains would
not be.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. B. Contributions to Registered Education Savings Plans provide a deduction for the
contributor.
9. B. The limit depends on the age and health of the child and can be $5,000, $8,000, or
$11,000.
10. B. The amount of $1,300 would be the $5,500 [(10)($550)] paid, less the required child
support payments for the year of $4,200 [(12)($350)].
11. A. Earnings on assets that are held in the plan accumulate on a tax free basis.
12. D. Contributions to the plan are supplemented by Canada Education Savings Grants.
13. B. The income attribution rules do not apply to earnings on assets held in the plan.
14. D. $6,656 [(138%)($1,200) + (1/2)($30,000 - $20,000)]

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Solution 15 (25 Marks)

The allowable moving expenses can be calculated as follows:
Expenses Of First Trip After Acquiring New Residence
Hotel (3 Nights At $90) $ 270
Food (3 Days At $51) 153 $ 423
Selling Costs Of Old Residence ($9,000 + $1,500) 10,500
Acquisition Cost Of New Residence ($1,750 + $1,100) 2,850
Expenses Of Travel To Ottawa
Airfare $1,250
Hotel (10 Nights At $225) 2,250
Food (10 Days, 5 People At $51 Flat Rate) 2,550 6,050
Moving Company Fees 4,500
Car Moving Fees 900
Total Allowable Expenses $25,223
Employment Income In New Location ( 8,000)
Carry Forward $17,223

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Chapter 9 Solutions to Practice Exam Volume 1

Notes:
1. With respect to the first trip, only the costs for the three days after the acquisition of the new
residence would be allowed. Neither the airfare nor the car rental costs are deductible by
Mr. Tully.

2. The limit of 15 days’ expenses for meals and lodging near the old or new homes would not
be exceeded in this situation as there are only 13 days in total.

3. The property taxes on the old home to the date of sale would not be deductible.

4. The storage costs are deductible.

5. The fact that Mr. Tully started work for the new employer fairly late in the current year acts to
limit the amount that he can deduct. However, the unused balance of $17,223 can be carried
forward.

1 grading point for each highlighted item. Total 20

Your Mark = [(# of grading points ÷ 20)(25%)] = ___%

Solution 16 (35 Marks)

Mrs. Morris At Transfer
With respect to the shares given to Martha, Mrs. Morris will be required to recognize a gain at the
time of transfer as follows:
Fair Market Value At Transfer Date [(5,000)($20)] $100,000
Adjusted Cost Base [(5,000)($15)] ( 75,000)
Capital Gain $ 25,000
Inclusion Rate 1/2
Taxable Capital Gain For Mrs. Morris $ 12,500

Since Mrs. Morris did not elect out of Section 73 on the transfer to Mr. Morris, the shares are
transferred at her adjusted cost base and no gain will be recognized when the shares are
transferred.

Mrs. Morris - Dividends

There will be attribution of the dividend income, both on the shares given to her husband and to
her daughter Martha. The taxable amount will be $13,800 [(10,000)($1.00)(138%)].

Mrs. Morris - Sale By Husband And Daughter

As Mrs. Morris did not elect out of the ITA 73(1) rollover, the income attribution rules will apply on
the sale of shares by Mr. Morris. The attributed income will be calculated as follows:
Proceeds To Mr. Morris [(5,000)($22)] $110,000
Adjusted Cost Base [(5,000)($15)] ( 75,000)
Capital Gain $ 35,000
Inclusion Rate 1/2
Taxable Capital Gain Attributed To Mrs. Morris $ 17,500

As there is no attribution of capital gains on shares transferred to a related minor, the sale of
Martha’s shares will have no effect on Mrs. Morris.

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 9 Solutions to Practice Exam Volume 1

Mr. Morris At Transfer

As Mrs. Morris did not elect out of the rollover, the gift will have no effect on the income of Mr.
Morris. The adjusted cost base to Mr. Morris will be $75,000 [(1/2)($150,000)].

Mr. Morris - Dividends

As Mrs. Morris did not elect out of the rollover, the dividends will be attributed back to her. They
will not be included in the income of Mr. Morris.

Mr. Morris At Sale

As Mrs. Morris did not elect out of the rollover, the capital gains will be attributed back to her.
They will not be included in the income of Mr. Morris.

Martha Morris At Transfer

The gift of shares from her mother will have no immediate effect on her income. However, her
adjusted cost base for the shares will be the fair market value of $100,000 [(5,000)($20)].

Martha Morris - Dividends

As all of the dividends are attributed back to her mother, they will not be included in Martha’s
income.

Martha At Sale
The capital gain that accrued subsequent to the transfer of the shares will be allocated to Martha.
The amount is calculated as follows:

Proceeds Of Disposition [(5,000)($26)] $130,000

Adjusted Cost Base [(5,000)($20)] ( 100,000)
Capital Gain $ 30,000
Inclusion Rate 1/2
Taxable Capital Gain For Martha $ 15,000

1 grading point for each highlighted item. Total 40

Your Mark = [(# of grading points ÷ 40)(35%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 10 Solutions to Practice Exam Volume 1

Practice Exam Solution

Chapter 10 (Retirement Savings)

Examination Summary
The marks you have received on each question can be added in the final column.

Total Your
Question Type Of Question Or Subject Marks Mark
1 Essay Questions 10
2-7 True Or False Questions 9
8 - 14 Multiple Choice Questions 21
15 RRSP Contributions 40
16 Chapter 10 Exercises 20
Total 100

Solution 1 (10 Marks)

A. The required five items could be selected from the following:
• Employment income computed without the deduction of RPP contributions
• Taxable (deductible) support payments
• Net business income (loss)
• Net rental income (loss)
• Royalties, provided the taxpayer is the author, inventor, or composer
• Income (loss) earned as an active partner
• CPP disability benefits
• Supplementary unemployment benefits
• Research grants, net of related expenditures
• Employment Insurance benefits

1 grading point for each correct answer to a maximum of 5. If more

than 5 listed, deduct 1 grading point for each extra item.

B. A spousal RRSP is an RRSP to which the registrant’s spouse has made a contribution. If the
registrant’s spouse has made a contribution in either the current year or in the two preceding
years, the withdrawal (to the extent of all contributions made by the spouse) will be taxed in
the hands of the spouse.

1 grading point for each highlighted item. Total 8

Your Mark = [(# of grading points ÷ 13)(10%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 10 Solutions to Practice Exam Volume 1

Solutions 2 Through 7 (9 Marks)

2. False. If the taxpayer is in a lower tax bracket when payments or withdrawals are made,
the use of RPP and RRSP arrangements can result in tax reduction.
3. True. All withdrawals from an RRSPs are treated as ordinary income.
4. False. An individual can transfer his RRSP assets to a RRIF at any age.
5. False. Amounts earned on profit sharing plan balances are subject to tax within the plan.
6. True. Only employers can establish and make contributions to a DPSP.
7. False. This would be a salary deferral arrangement and, while the employer can deduct the
compensation when it is earned, the employee will have to include it in income at that time. It
cannot be deferred until it is received.

1 grading point for each correct answer. Total 6

Your Mark = [(# of grading points ÷ 6)(9%)] = ___%

Solutions 8 Through 14 (21 Marks)

8. B. The employer’s contributions to such plans must be treated as a taxable benefit by
employees.
9. C. Shares of a private company owned by the registrant
10. C. Royalties on a purchased copyright
11. A. The maximum withdrawal is $35,000 per individual.
12. D. The departure will automatically result in the collapse of the individual’s RRSP, with the
fair market value of the assets in the plan being included in the individual’s Net Income For
Tax Purposes in the year of departure.
13. C. $30,469 [$975,000 ÷ (90 - 58)]
14. C. A lump sum withdrawal from an RRIF

1 grading point for each correct answer. Total 7

Your Mark = [(# of grading points ÷ 7)(21%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 10 Solutions to Practice Exam Volume 1

Solution 15 (40 Marks)

Part A
Mr. Sparks’ Net Income For Tax Purposes would be calculated as follows:

Income Under ITA 3(a):

Net Employment Income $60,000
Income From Property 6,000 $66,000
Income Under ITA 3(b):
Taxable Capital Gains $ 7,500
9
Allowable Capital Losses (Maximum) ( 10,500) Nil
Balance From ITA 3(a) And (b) $66,000
Subdivision e Deductions ( 3,000)
Balance From ITA 3(c) $63,000
Deductions Under ITA 3(d):
Business Loss ( 16,000)
Net Income For Tax Purposes $47,000

Mr. Sparks’ Net Income For Tax Purposes is $47,000 and he has a net capital loss carry over of
$3,000 ($7,500 - $10,500).

Part B - Case 1
Mr. Sparks’ earned income would be calculated as follows:
Net Employment Income $60,000
Add Back RPP Contributions 1,000
Business Loss ( 16,000)
2019 Earned Income $45,000

Given this, his maximum deductible RRSP contribution would be calculated as follows: 11
Unused Deduction Room Carried Forward From 2019 Nil
Annual Addition - Lesser Of:
• 2020 RRSP dollar limit = $27,230
• 18% of 2019 Earned Income of $45,000 = $8,100 $8,100
Less 2019 PA ($1,000 + $1,500) ( 2,500)
Maximum Deductible RRSP Contribution $5,600

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 10 Solutions to Practice Exam Volume 1

Part B - Case 2
Mr. Sparks’ earned income would be calculated as follows:
Net Employment Income $60,000
Business Loss ( 16,000)
2019 Earned Income $44,000

Given this, his maximum deductible RRSP contribution would be calculated as follows: 9
Unused Deduction Room Carried Forward From 2019 Nil
Annual Addition - Lesser Of:
• 2020 RRSP dollar limit = $27,230
• 18% of 2019 Earned Income of $44,000 = $7,920 $7,920
Less 2019 PA ( 1,500)
Maximum Deductible RRSP Contribution $6,420

Part B - Case 3
Mr. Sparks’ earned income would be calculated as follows:
Net Employment Income $ 60,000
Business Loss ( 16,000)
Net Rental Income 140,000
201- Earned Income $184,000

Given this, his maximum deductible RRSP contribution would be calculated as follows:
9
Unused Deduction Room Carried Forward From 2019 Nil
Annual Addition - Lesser Of:
• 2020 RRSP dollar limit = $27,230
• 18% of 2019 Earned Income of $184,000 = $33,120 $27,230
Less 2019 PA Nil
2020 RRSP Deduction Limit $27,230
Less 2020 Contribution to Spousal RRSP ( 1,500)
Maximum Deductible RRSP Contribution $25,730

1 grading point for each highlighted item. Total 40

Your Mark = [(# of grading points ÷ 40)(40%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)

Chapter 10 Solutions to Practice Exam Volume 1

Question 16 (20 Marks)

Part A
The required information is as follows:

Funds Invested Inside RRSP

Deductible Contribution $15,000
Dividends Received [(4)(4%)($15,000)] 2,400
Balance After Five Years $17,400
Tax Payable On Withdrawal [(43%)($17,400)] ( 7,482)
23
Available For Vacation - RRSP $ 9,918

Funds Invested Inside TFSA

Initial Investment [($15,000)(1 - .43)] $8,550
Dividends Received [(4)(4%)($8,550)] 1,368
Available For Vacation - TFSA $9,918

Invested Outside RRSP And TFSA

Initial Investment [($15,000)(1 - .43)] $8,550
After Tax Dividends [(4)(4%)($8,550)(1 - .27)] 999
Available For Vacation - Outside Both Plans $9,549

The after tax funds from both the RRSP and TFSA are equal and $369 ($9,918 - $9,549) greater
than the after tax funds from investing outside of both plans. Since the goal is to remove the
funds in four years, it would be more advantageous to use the TFSA as withdrawals are added
back to the TFSA contribution room. In addition, with the assumption that Bab’s tax rate stays the
same, the RRSP contribution will not result in the withdrawal being taxed at a lower rate.

Part B
As a spousal contribution was made in 2018, one of the two years prior to 2020, income
attribution will apply. However, it will only apply to the extent of the $10,000 contribution made by
Mrs. Trump. This means that $10,000 of the withdrawal will be taxed in the hands of Mrs. Trump,
6
with the remaining $5,000 taxed in the hands of Mr. Trump.

Part C
The pension adjustment will be calculated as follows:
Employer’s RPP Contribution $3,200
Employer’s DPSP Contribution 700
Employee’s RPP Contribution 3,200
4
PA For The Current Year $7,100

1 grading point for each highlighted item. Total 33

Your Mark = [(# of grading points ÷ 33)(20%)] = ___%

Canadian Tax Principles - Practice Exam Solution (2020/2021)