Question

1. Which of the following statements regarding GAAR is true?

Multiple Choice

• The purpose of GAAR is to catch tax evaders.

• When an avoidance transaction takes place, the anti-avoidance rule is automatically applied in all circumstances.

• Canada Revenue Agency states that "A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes."

• Individuals who organize their affairs in order to pay as little tax as possible will automatically be subject to GAAR.

2. The CEO at Big Company Corporation has decided to sell a piece of capital equipment after the company's year-end in order to avoid paying capital gains tax this year. Which tax planning method will the CEO be using?

Multiple Choice

• Transferring income to another entity.

• Converting the nature of income from one type to another.

• Shifting income from one time period to another.

• This is a form of tax evasion and is not allowed.

3. Income tax is calculated for which of the following jurisdictional groups?

Multiple Choice

• Municipal, provincial, and federal

• Municipal, federal, and foreign

• Provincial, federal, and foreign

• Municipal, provincial, and foreign

4. Which of the following is not considered to be a separate entity for tax purposes in Canada?

Multiple Choice

• An individual

• A proprietorship

• A corporation

• A trust

Note- introduction to taxation

Answer 1

1. Canada Revenue Agency states that "A transaction will not be an avoidance transaction if the taxpayer establishes that it is undertaken primarily for bona fide business, investment or family purposes." option 3 .This option is correct regarding GAAR. The primary motive of GAAR is to detect any non-commercial tax benefit being availed by the taxpayer. But if the taxpayer proves that the transaction is undertaken primarily for bonafide business, investment or family purposes, the transaction will not be considered as an avoidance transaction. Hence, this statement is correct.

The purpose of GAAR is not to catch tax evaders, hence option 1 is incorrect.

Anti-avoidance rule is not applied automatically if the avoidance transaction takes place. hence option no. 2 is also incorrect.

GAAR is not applicable automatically to those who organize their affairs in order to pay as little tax as possible, hence, option4 is also incorrect.

2. Shifting income from one time period to another. This is the tax planning method being used by the CEO. By deciding the time of when to sell an asset, the income can be distributed among two periods, leading to minimizing the capital gain tax. Hence,this is the correct option.

The CEO is not converting the nature of the income, nor is he transferring income to the other entity. Also, this is not tax evasion. Hence, all other options are incorrect.

3. Provincial, federal, and foreign. These are the jurisdictional groups for which income tax is calculated.

Income tax is not calculated for municipal jurisdictions. Hence, all other options are incorrect.

4. A proprietorship is not considered a separate entity for tax purposes in Canada. The tax is determined by the proprietor's income and no separate tax needs to be filed for the proprietorship.

An individual, a corporation and a trust are considered separate entities for tax purpose in Canada, hence, these options are incorrect choice.