Fall 2023 Midterm Exam Guide for Course 4610 Students

1 UNIVERSITY OF WINDSOR COURSE 4610-91 FALL 2023 MID-TERM EXAM OCTOBER 17, 2023 PROFESSOR DONALD E. JONES CPA/CA/LPA/CMA/MBA/AMCT TOTAL TIME ALLOWED 90 minutes (7 PM to 8:30 PM) TOTAL MARKS 60 marks (21 questions) (10 pages) INSERT STUDENT NAME ___________________________ INSERT STUDENT ID NUMBER ___________________________ INSTRUCTIONS FOR THIS EXAM: 1-THE MIDTERM EXAM EXCEL ANSWER SHEET CONTAINING ALL YOUR ANSWERS MUST BE SUBMITTED FOR GRADING PURPOSES. HANDPRINTED OR HANDWRITTEN RESPONSES WILL NOT BE ACCEPTED. 2- ASSUME THE CAPITAL GAINS INCLUSION RATE WAS ALWAYS 50%. 3- SHOW ALL CALCULATIONS FOR ALL QUESTIONS WHERE RELEVANT. 4-UPLOAD YOUR EXAM TO BE RECEIVED BY THE INSTRUCTOR BY 8:35PM LATEST. EXAMS SHOULD BE UPLOADED TO djones@uwindsor.ca ONLY. EXAMS RECEIVED AFTER 8:35 PM WILL RECEIVE A PENALTY OF 1 MARK FOR EACH MINUTE LATE.

2 Questions 1 to 6 (2 marks each), Only one answer per question is allowed. Insert your answers on the MT exam answer sheet. 1.(2 marks) Adam Inc. is a taxable Canadian public corporation. In 2023, the company contributed $ 120,000 to a registered charity. In 2022, the company was unable to deduct $ 60,000 of similar donations. In 2022, the income of the corporation for tax purposes properly calculatedunder Division B consisted of $ 150,000 of active business income and $ 100,000 interest income before any deduction for charitable donations. Required: The maximum allowable charitable donation deduction for Adam Inc. in 2023 is: a) $ 240,000 b) $ 183,000 c) $ 180,000 d) $ 83,000 e) None of the above 2. (2 marks) The following data summarizes the operations of Kopy Kat Inc. for the year ended Dec. 31, 2022; Loss from an active business $ (10,000) Dividend income from taxable Canadian corporations 18,500 Taxable capital gains 9,250 Allowable capital losses (5,375) Donations paid to registered charities 3,500 The corporation had the following carry forward balances at the end of December 31, 2020: Donations made in 2018 to registered charities $ 2,050 Net capital losses which arose in 2004 6,000 Required: The company’s non-capital loss for income tax purposes for 2021 is: a) $ 18,500 b) $ 10,000 c) $ 23,500 d) $ 5,000 e)None of the abovev

3 3. (2 marks) Required: From which of the following accounts couuld dividends be paid from income taxed only at the lowest corporate income tax rate ? Answer: a) GRIP b) GRIA c) CDA d) LRIP e) none of the above 4. (2 marks) Linda, a resident of Canada, owns 100 % of the common shares of both Windsor Retail Ltd. (“WRL”) and Yellowknife Klosets Ltd. (“YKL”). Both corporations have a September 30 year- end. “YKL” had BOTH active business income AND taxable income of $ 84,000 for its 2023 taxation year. Barbara has decided to allocate to “YKL” as much of the small business limit as is needed to maximize the small business deduction for “YKL”, with the remaining balance of the available annual business limit allocation being made to “WRL”. Most but not all of “WRL” ’s income is from an active business carried on in Canada. The following information pertains to “WRL” for its 2023 taxation year: • Division B net income for tax purposes $ 220,000 • Net taxable capital gains 16,000 • Charitable donation contributions 10,000 • Recapture of CCA on sale of operating business assets 10,000 Required: The small business deduction for “WRL” for 2019 should be: a) $ 41,800 b) $ 39,900 c) $ 36,860 d) $ 30,400 e) None of the above

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4 5. (2 marks) Robin Ltd. is a corporation whose business is providing accounting services for a fee to Faith Ltd., a large, privately owned, arm’s length corporation. Shari and David are each 50% shareholders of Bobin Lrd. and the only employees of Robin Ltd. Prior to the incorporation of Robin Ltd., both Shari and David were employed by Faith Ltd. in the accounting department. Required: What type of income is Robin Ltd. earning for tax purposes? a) Active business income b) Personal services business income c) Specified investment business income d) Personal property business income e) None of the above 6. (2 marks) Jonathan owns 60% of Carweb.com Ltd., 70% of Taxman Inc. and 45% of Internet Housefind Ltd. The remaining shareholders in all three corporations are unrelated parties. Each of the three companies earns at least $ 500,000 of active business income. Required: What is the maximum amount of combined corporate business income that the three companies can claim on their corporation income tax returns as being eligible for the small business deduction, based on only the above information? a) $ 1,000,000 b) $ - 0 - c) $ 500,000 d) $ 1,500,000 e) None of the above

5 NOTE: For question 7 to 16. Insert “T” if the statement is true and “F” if the statement is false on the MT exam answer sheet. (2 MARKS FOR EACH QUESTION) 7 . Charitable donations paid in a taxation year are deductible for tax purposes by corporations to the extent of 75% of income for tax purposes under Division B. 8. Allowable business investment losses can be carried back three years and carried forward 20 years 9. Marmidan Inc. is a CCPC with active business income of $ 700,000 all earned from a manufacturing business in Canada in 2023. Based on this information, the company will not claim the manufacturing and profit deduction on any or all of its business income.. 10. Mr. X owns 51% of X Corporation. Mr. Y, who is Mr. X’s brother, owns 51% of Y Corporation. The remaining shares in both X and Y Corporation are owned by individuals who are unrelated to Mr. X and Mr. Y. Based on this information only, X Corporation is related with Y Corporation for income tax purposes. 11. Mr. X owns 51 % of X Corporation. Mr. Y, who is Mr. X’s son, owns 51 % of Y Corporation. Based on this information, X Corporation is associated with Y Corporation for income tax purposes. 12 . Mr. X owns 51 % of X Corporation. Mrs. X owns 51 % of Y Corporation. Mr. X and Mrs. X each own 50% of M Corporation. Based only on this information, the three corporations are associated for tax purposes. 13 . Mr. X has a 51% beneficiary interest in a family trust which owns 100% of ABC Ltd. Mr. X also personally owns 51% of MAR Corporation with other unrelated shareholders. Based only on this information, ABC Ltd. and MAR Corporation are not associated for tax purposes. 14. Eligible scientific research and development expenditures incurred in Canada by private companies are eligible for a 35% federal investment tax credit on certain expenditures . 15 . Investment tax credits claimed on equipment purchases reduce the relevant U.C.C. pool in the same year that the investment tax credit is used to reduce income tax payable. 16 . Chartco Inc., a Canadian public company, owns 100% of ABC Inc. which carries on a business solely in Canada. ABC Inc. does not have any stock listed on a stock exchange in the world. ABC Inc is eligible for the small business deduction on its active business income in an amount determined by Chartco Inc. and ABC Inc. annually not to exceed $ 500,000.

6 17. (6 marks) During the year ended December 31, 2023, Windsor Ltd., a non-resident controlled private corporation operating only in Windsor Ontario, has net income for tax purposes under Division B of $ 650,000, which amount includes $ 60,000 of dividends from taxable Canadian corporations, $ 40,000 of dividends from U.S. Corporations in which the company has an 15 % common share interest and $ 550,000 of manufacturing and processing profit. The company paid $ 100,000 of charitable donations during the 2023 year. The company wants to maximize any claim for the small business deduction as part of its tax strategy to minimize income taxes . Required: (show all calculations) Part a. (5 marks) 1. Calculate Windosr Ltd.’s federal taxable income for 2023. 2. Calculate Windsor Ltd.’s 2023 federal Part I tax payable. Part b.(1 mark) 3.Calculate Windsor Ltd.’s 2023 federal Part I tax payable assuming 40% of M&P profit was earned in a province or territory in Canada. Answer on the MT exam answer sheet.

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7 18. (5 marks) Hexco Ltd is a Canadian controlled private corporation with interest income of $ 80,000 and 100% of its active business income of $ 620,000 earned in Ontario for both 2022 and 2023. Hexco Ltd. has no associated corporations. Required: (show all calculations) 1.Calculate Hexco Ltd.’s federal income tax payable for 2023 under Part I of the Income Tax Act. Answer on the MT exam answer sheet

8 19. (6 marks) Trailblazer Inc., a public company, has its headquarters in Toronto, Ontario. The corporation carries on business in permanent establishments in Ontario and Nova Scotia. The following information was reported for the year ended December 31, 2023: Income from business operations in Ontario $ 500,000 Income from business operations in Nova Scotia 600,000 Canadian source interest income 20,000 Taxable capital gain 20,000 Taxable dividends from taxable Canadian corporations 10,000 The company deducted $ 120,000 for SR & ED expenses from its income from business operations in Ontario. No SR&ED expenses are expected in 2024. In 2023 the company made charitable donations of $ 90,000. The company has $ 104,000 on non-capital losses being carried forward from 2015 and net capital losses being carried forward from 2017 of $ 30,000. Required: 1.Calculate net income for tax purposes under Division B 2.Calculate taxable income for federal tax purposes 3.Calculate federal Part I tax payable. Answer on the MT exam answer sheet.

9 20. (5 marks) Wing Ltd. is a Canadian-controlled private corporation. Its refundable dividend tax on hand (RDTOH) accounts at December 31, 2022 was $ Nil. For its 2023 taxation year the following transactions occurred: a) The corporation received non-eligible Canadian taxable dividends of $ 30,000. b) The corporation received Canadian interest income of $ 40,000 c) The company received eligible Canadian taxable dividends of $ 20,000 d) The company paid taxable non-eligible dividends of $ 50,000 Required: (show all calculations) 1.Calculate the balances of Wing Ltd.’s eligible and non-eligible RDTOH accounts at its yearend date of December 31, 2023. 2. Calculate the 2023 dividend refunds for both RDTOH accounts for Wing Ltd. Answer on the MT exam answer sheet

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10 21. (6 marks) Answer the following questions in your own words on the MT exam answer sheet. a)(2 marks) Hackers Inc. is a non-associated CCPC that had $ 3,200,000 of SR&ED expenditures in 2023 and has no taxable income in the current or prior three years. Calculate the amount of cash refund Hackers Inc. can expect when filing its 2023 corporate income tax return ? Show all calculations b)(3 marks) Hesla Inc.has the following information for its 2023 tax year ended December 31, 2023. 60% of sales were earned and 50% of wages incurred in the Ontario permanent establishment 30% of sales were earned and 30% of wages incurred in the Nova Scotia permanent establishment 10% of sales were earned and 20% of wages incurred in the Dallas, Texas USA permanent establishment Assuming a taxable income of $ 1,500,000, calculate the federal tax abatement for the company for its 2023 taxation year. c)What is the purpose of the prescribed proxy amount election ? ( 1 mark)

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2023 Fall Midterm Exam 4610

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