Buckwold12e_ch13_Review - 1CHAPTER 13 THE...

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1CHAPTER 13 THE CANADIAN-CONTROLLED PRIVATE CORPORATION Review Questions 1. Explain why a Canadian corporation whose voting share capital is owned 50% by Canadian residents and 50% by non-residents is classified as a Canadian-controlled private corporation. 2. Canadian-controlled private corporations differ from public corporations in the rate of tax, the extent of double taxation, and the degree of secondary relationships with shareholders. Briefly describe these differences. 3. “A business that derives its income from selling personal services (plumbing repairs, for example) cannot be viewed as earning active business income.” Is this statement true? Explain. How is a personal services business different from an active business? 4. Why may a Canadian-controlled private corporation that earns business income of $100,000 in year 1 and $500,000 in year 2 (total: $600,000) pay less tax than a corporation earning $50,000 in year 1 and $550,000 in year 2 (total: $600,000)? 5. In question 4, what might the latter corporation be able to do to ensure that it pays the same amount of tax as the first corporation? If these options are, in fact, available, what other factors must be considered before a decision is made to take such actions? 6. “The use of the small-business deduction by a Canadian-controlled private corporation does not result in a tax saving; rather, it creates a tax deferral.” Explain. 7. Interest income and/or rental income earned by one Canadian-controlled private corporation may be treated as specified investment business income. At the same time, income from the same source(s) earned by another Canadian-controlled private corporation may be treated as active business income. Why is this? And to what extent will the rate of tax applied to that income be different for the two corporations? 8. Identify and briefly explain the mechanism that is used to reduce the incidence of double taxation when specified investment business income is distributed by a Canadian-controlled private corporation to its shareholders.
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9. Does double taxation occur when a Canadian-controlled private corporation earns capital gains and distributes those gains as dividends to individual shareholders? Explain. 10. “An investor can achieve a tax deferral on portfolio dividends received from public corporation shares if those shares are owned by his or her private corporation.” Is this statement true? Explain. 11. There are several advantages to deferring tax by utilizing the small- business deduction. Briefly state two of them. 12. A Canadian-controlled private corporation can obtain a tax deferral from the small-business deduction. Will the corporation’s owner always benefit from investing the extra cash flow that results, regardless of the type of return that may be received from the investment? Explain. 13.
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Buckwold12e_ch13_Review - 1CHAPTER 13 THE...

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