QUESTION ONE (13 marks) 1.

Balance of tax by April 30, 2012 (must have date and year) Tax return by June 15, 2012 (date and year) 2. Taxes owing for 2012 will be greater than $3,000 ($3,000 is the key point) And taxes owing for either 2011 or 2010 were greater than $3,000 3. February 28/29, 2012 (accept either 28th or 29th but also need year correct) 4. Interest is owing (mark for stating interest and not something like penalty) For 2 months/should have been paid by 3 months after year end (either) Rate is 2% prescribed rate (this is given on exam so needs to be correct) Plus an additional 4% (only need be stated no calculations are needed) 5. Penalty is owing (mark for stating penalty here) Equal to 5% of the tax owing (stated or tried to calculate) Interest is owing (stated as separate from penalty) For September 1 to the date of payment/for 4 months (only need to state) QUESTION TWO Statement to the effect that it is the corporate and personal tax that is being integrated (can also refer to the two tiers of tax that are paid on corporate income OR could also refer to the corporate tax plus the shareholder tax as long as the idea is there) Statement that integration is needed to avoid double tax Statement that integration is achieved by changing the taxation of dividends received by individual taxpayers from Canadian corporations (individuals and Canadian are key) (can also refer to gross-up and dividend tax credit or can also state that the personal tax rate on dividends is reduced below the personal tax rate on other income)

Example Pre-tax Corporate tax (this is key for getting a mark) Corporate after-tax funds Personal tax @33% non-eligible dividend rate on 84.5% 100.0% (15.5) 84.5 28.0

Total tax on income is 15.5 + 28 = 43.5 which is close to the 46% personal rate

QUESTION THREE C D C A QUESTION FOUR Part 1 Once profit is determined, the amount of income tax that results is determined by the Income Tax Act. However, at all levels of management, alternative courses of action are evaluated and decided upon. In many cases, the choice of one alternative over the other may affect both the amount and the timing of future taxes on income generated from that activity. Therefore, the person making those decisions has a direct input into future after-tax cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the ultimate return on investment and, in turn, the value of the enterprise. Including the tax variable as a part of the formal decision process will ultimately lead to improved after-tax cash flow. Part 2 The statement is not true. Paying tax later may be an advantage because it delays the tax cost and frees up cash for other purposes. However, the delay may result in a higher rate of tax in the future year compared to the current year. In such circumstances there is a trade off between the timing of the tax and the amount of tax payable. Part 3 Both tax planning and tax avoidance activities clearly present the full facts of each transaction, allowing them to be scrutinized by CRA. In comparison, tax evasion involves knowingly excluding or altering the facts with the intention to deceive. Failing to report an amount of revenue when it is known to exist or deducting a false expense are examples of tax evasion. Part 4 A corporation is a separate legal entity distinct from its owners - the shareholders. Consequently a corporation is taxed on its income earned in each taxation year. However, the after-tax corporate profits may be distributed as a dividend to the individual shareholder. Upon receipt of the dividend the individual shareholder has earned property income (return on the share capital) and is subject to tax consequences at that time [ITA 12(1)(j),(k)]. Alternatively, if the corporation does not distribute the after-tax profits but retains them for corporate use, the value of the shares owned by the shareholder will increase in value. If and when the shareholder disposes of the shares a capital gain may result due to the increased share value caused by the corporate earnings retained [ITA 40(1)(a)(i)]. Part 5 The special tax treatment can provide a benefit to either the employee, the employer, or be

shared by them. For example, a $2,000 salary increase for an employee would cost the employer (who is subject to a 25% tax rate) only $1,500 after-tax ($2,000 - 25% tax saving) and would provide an employee (in a 34% tax bracket) with an after-tax value of $1,320 ($2,000 tax cost of 34%). If the employer instead provided $2,000 of tax-free benefits, the employer's cost would remain at $1,500 after-tax, but the after-tax value to the employee would increase to $2,000 from $1,320. In this case, the full value of the tax treatment is passed on to the employee. Alternatively, the employer could provide the employee with $1,320 of tax-free benefits which is equivalent to a $2,000 fully taxable salary (above). The employer's after-tax cost is then only $911 ($1,320 - 25% tax saving) compared to $1,500 for a $2,000 salary. In this case, the preferential tax treatment is fully retained by the employer as a cost reduction. As a third alternative, the employer could provide tax-free benefits that are less than $2,000 but greater than $1,320 in which case both parties benefit from the special tax treatment.

QUESTION FIVE (14 marks) (a) $45,000 taxable in 2011 a. $5,000 taxable when received in 2012 (b) Not taxable per CRA administrative practice (c) $1,000 taxable (d) $25 - $10 = $15 per share x 2000 shares = $30,000 (no 50% impact for employment) (e) [2/3 x $850 x 12] x 4000/20,000 (f) $0.24 x 4000 km (g) $2,000 @ 2% for 7/12 months (h) $500 (i) $0 per statute