Topic: 1.1 The Three Types of Firms
13) Canada Revenue Agency, CRA, allows an exemption from double taxation for certain flow through entities where all income produced by the business flows to the investors and virtually no earnings are retained within the business. These entities are called:
A) Canadian Federal Crown Corporations
B) Canadian Controlled Corporations
C) Income Trust Corporations
D) Foreign Controlled Corporations
Answer: C
Diff: 1 Type: MC
Topic: 1.1 The Three Types of Firms
14) In 2006, the Canadian government effectively neutralized the tax advantages that had existed for most income trusts, relative to firms set up as corporations. The advantages that existed for income trusts prior to these changes were that:
A) income trusts avoided double taxation in that the Canada Revenue Agency did not collect corporate taxes but rather collected only personal taxes from income trust unit holders
B) income trusts effectively afforded unlimited liability to unit holders while corporate shareholders could face unlimited liability
C) while double taxation existed for both income trusts and corporations, the net tax paid by income trust unit holders was in most cases less than that paid by corporate shareholders
D) the changes introduced in 2006 eliminated double taxation for corporations, thereby making the taxation of income trusts and corporations substantially equivalent
Answer: A
Explanation: The 2006 changes imposed new taxes on most income trusts to mirror the total tax revenue received from corporations. As a result with no material tax advantage, these firms reverted from income trusts back to a corporate structure. The exception were Real Estate Investment Trusts (REIT) which are exempted from the changes imposed on all other trusts.
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
15) One of the major characteristics of a limited liability partnership, LLP, in Canada is:
A) the limitation on a partner's liability is only in cases related to actions of negligence by other partners or those supervised by other partners
B) any partner will not be liable for his or her negligence at any time
C) any partners will be only liable for other partners' negligence
D) none of the above
Answer: A
Diff: 2 Type: MC
Topic: 1.1 The Three Types of Firms
16) You own 100 shares of a publicly traded Canadian Corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid?
A) $210
B) $300
C) $350
D) $500
Answer: A
Explanation: EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
17) You own 100 shares of a Canadian Income Trust Corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid?
A) $210
B) $300
C) $350
D) $500
Answer: C
Explanation: EPS × number of shares × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .30) = $350
Diff: 3 Type: MC
Topic: 1.1 The Three Types of Firms
18) You are a shareholder in a publicly owned corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to:
A) 15%
B) 35%
C) 45%
D) 50%
Answer: C
Explanation: First the corporation pays taxes. It earned $4 per share, but must pay $4 × .35 = $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the shareholders. However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount, leaving only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + 0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to 45%.