Personal Finance 7Th Canadian Edition By Kapoor

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Sample Test

Chapter 03

Planning Your Tax Strategy

True / False Questions

1. The principal purpose of taxes is to control economic conditions.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

2. A province may impose a personal property tax.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-02 Illustrate how federal income taxes are computed by completing a federal income tax return.
Topic: 03-08 Income Tax Fundamentals

3. Real-estate property taxes are significant but not a major source of revenue for local governments.
FALSE

4. A tax on the value of automobiles, boats, or furniture can also be referred to as an investment tax.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-02 Illustrate how federal income taxes are computed by completing a federal income tax return.
Topic: 03-08 Income Tax Fundamentals

5. An estate tax is imposed on the value of an individual’s property at the time of his or her death.
FALSE

6. Taxable income is the total earnings of a person.
FALSE

7. There is a withholding on tax paid to Canadian residents on interest, dividends, rent and royalties.
FALSE

8. Income from a partnership is included under net business income.
TRUE

9. Deductions are amounts that a taxpayer is allowed to deduct from taxable income.
FALSE

10. There is no significant difference between a federal tax credit and a federal tax deduction.
FALSE

11. Most taxpayers have to file quarterly payments of estimated amounts owed for taxes.
FALSE

12. Tax assistance from an attorney is less common than using a tax service.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-04 Identify tax assistance sources.
Topic: 03-27 Tax Assistance and the Audit Process

13. A field audit requires that a taxpayer visit an auditing agent to clarify some aspect of his or her tax return.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-04 Identify tax assistance sources.
Topic: 03-27 Tax Assistance and the Audit Process

14. Several courses of appeal are available to taxpayers who disagree with a revenue service ruling on their tax return audit.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-04 Identify tax assistance sources.
Topic: 03-27 Tax Assistance and the Audit Process

15. Tax evasion refers to illegal actions to reduce one’s taxes.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-03 Select appropriate tax strategies for different financial and personal situations.
Topic: 03-17 Tax-Planning Strategies

16. If you are a self-employed individual, you do have to make both employee and employer contributions to the CPP or QPP.
TRUE

17. Tax-exempt income has a greater financial benefit than tax-deferred income.
TRUE

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-03 Select appropriate tax strategies for different financial and personal situations.
Topic: 03-17 Tax-Planning Strategies

18. A tax credit is an amount subtracted directly from the amount of taxes owed.
TRUE

19. Taxes are only considered in financial planning in April.
FALSE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

20. About one-third of each dollar you earn goes towards income taxes
TRUE

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

21. One of the legitimate methods to reduce one’s taxes is tax evasion
FALSE

22. One of the legitimate methods to reduce one’s taxes is tax avoidance
TRUE

23. Contributions to a Tax Free Savings Account are tax deductible
FALSE

Multiple Choice Questions

24. The main purpose of taxes is to
A.create jobs
B. reduce the chances of inflation.
C. generate revenue for funding government programs.
D. discourage use of certain goods and services.
E. decrease competition from foreign companies.

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

25. The use of legitimate methods to reduce one’s taxes is tax ____________.
A.evasion
B. avoidance
C. exemptions
D. deferred techniques
E. reductions

26. The ______________ property tax is based on the value of land and buildings.
A.personal
B. real estate
C. direct
D. proportional
E. regressive

27. An exemption affects a person’s tax situation by:
A.increasing the standard deduction.
B. increasing the taxpayer’s marginal tax rate.
C. decreasing itemized deductions.
D. reducing the taxpayer’s taxable income.
E. increasing tax-exempt income.

28. Taxable income is used to compute a person’s
A.exemptions.
B. income tax.
C. deductions.
D. tax credit.
E. exclusions.

29. Which of the following would result in a reduction of taxable income?
A.portfolio income
B. tax credits
C. union dues
D. business income
E. earned income

30. Money received by an individual for personal effort is ____________ income.
A.earned or employment investment
B. investment
C. portfolio
D. excluded
E. capital gains

31. Money received in the form of dividends or interest is ____________ income.
A.business income
B. earned or employment
C. excluded
D. capital gain
E. investment

32. Earnings from a limited partnership would be an example of ____________ income.
A.earned
B. investment
C. portfolio
D. net business income
E. excluded

33. Income that is not subject to income tax includes:
A.the GST/HST rebate.
B. the Canada child tax benefit
C. gifts.
D. lottery winnings.
E. GST/HST rebates, Canada Child Tax benefits, gifts, and lottery winnings are not subject to income tax.

34. Which of the following would be excluded from total income to obtain net income?
A.contributions to RPPs
B. mortgage interest
C. child support payments
D. foreign income exclusion
E. charitable contributions

35. Phillip Marnier had earnings from his salary of $40,000, interest on savings of $700, and a contribution to a registered retirement saving plan of $1,500. Phillip’s net income would be
A.$39,200.
B. $40,000.
C. $39,300.
D. $38,500.
E. $41,500.

36. Jack sold $20,000 worth of stocks that were purchased one year ago for $15,000. He is in a 22% tax bracket. Jack’s capital gains taxes are:
A.$500.
B. $550.
C. $1,100.
D. $2,500.
E. $4,400.

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 03-02 Illustrate how federal income taxes are computed by completing a federal income tax return.
Topic: 03-08 Income Tax Fundamentals

37. Reductions from gross income for such items as registered retirement account contributions and RESP payments will result in
A.business income
B. taxable income.
C. earned income.
D. net income.
E. total exclusions.

38. Winning the lottery affects a person’s tax situation by
A.increasing the standard deduction.
B. increasing the taxpayer’s marginal tax rate.
C. decreasing itemized deductions.
D. increasing tax-exempt income.
E. having no influence at all on taxable income.

39. Which of the following is a standard tax credit?
A.itemized deductions
B. withholding
C. an earned tax credit
D. the basic personal amount
E. capital gains

40. ____________ are expenses that a taxpayer is allowed to deduct from total income.
A.Exemptions
B. Exclusions
C. Deductions
D. Tax credits
E. Passive income

41. An expense that would be included in the deductions of a taxpayer is
A.travel to work.
B. life insurance premiums.
C. union and professional dues.
D. a driver’s license fee.
E. tuition fees.

42. The basic personal amount is
A.the standard deduction.
B. a tax credit.
C. an itemized deduction.
D. an exclusion.
E. an exemption.

43. A tax ____________ is an amount subtracted directly from the amount of taxes owed.
A.credit
B. exemption
C. deduction
D. exclusion
E. shelter

44. Which of the following is an example of a tax credit?
A.mortgage interest
B. amounts withheld for social insurance
C. individual retirement account contributions
D. caregiver and medical expenses
E. net business income

45. Most people pay federal income tax by
A.paying the total amount owed by April 15.
B. filing quarterly tax payments.
C. having amounts withheld from source.
D. earning tax credits for various deductions.
E. cashing in their saving.

46. Estimated quarterly tax installments must be made by those who
A.are employed in a foreign country.
B. receive dividends.
C. work for the government.
D. owe year-end taxes of over $2,000 for both the current year and either of the two preceding y years.
E. have been caught committing fraud.

47. Which of the following people is least likely to have to file a federal income tax return?
A.a person earning $8,750
B. a person earning $10, 750
C. a person earning less than $9,600
D. a person over age 65
E. a college student

48. A person with a total tax liability of $4,350 and withholding of federal taxes of $3,975 would:
A.receive a refund of $4,550.
B. owe $8,325.
C. owe $375.
D. receive a refund of $8,325.
E. receive a refund of $375.

49. The financial planning objective is to:
A.evade taxes.
B. minimize taxes.
C. maximize income.
D. maximize after-tax cash flows.
E. maximize tax credits.

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 03-03 Select appropriate tax strategies for different financial and personal situations.
Topic: 03-17 Tax-Planning Strategies

50. Jennifer made $2,000 worth of charitable donations. Her total income is $36,000 and she is in the 22% federal tax bracket. What is her charitable donations tax credit?
A.$320
B. $440
C. $552
D. $2,000
E. $5,760

51. Which type of tax expert would be of most value when you have a difference of opinion with the tax department?
A.an enrolled agent
B. a nationally-chartered tax preparer
C. a CA
D. a tax accountant
E. a tax attorney

Accessibility: Keyboard Navigation
Difficulty: Easy
Learning Objective: 03-04 Identify tax assistance sources.
Topic: 03-27 Tax Assistance and the Audit Process

52. Making use of legitimate methods to reduce one’s taxes is called tax ____________.
A.evasion
B. planning
C. exemptions
D. deferred techniques
E. reductions

53. An example of a non-refundable tax credit is
A.interest on a credit card or charge account.
B. certain job-related travel expenses.
C. the cost of commuting to work.
D. life insurance premiums.
E. student loan interest fees.

54. An example of a tax-exempt investment is
A.interest on Canada savings bonds.
B. dividends from corporate stock.
C. a gain on the sale of your home.
D. earnings from a mutual fund.
E. interest on corporate bonds.

55. Capital gains refer to
A.tax-exempt investments.
B. profits from the sale of an investment asset.
C. gains from the sale of capital assets
D. earnings from investments such as dividends or interest.
E. tax-deferred investments.

56. Sheira Harvey worked in Poland for part of the year and earned $50,000 while she was there. This income will not be included in her income for the year. This represents:
A.A deduction
B. An exclusion
C. An exemption
D. A tax credit
E. An increase of income

57. An RPP differs from an RRSP in that
A.earnings on the RPP are tax free after five years.
B. contributions may exceed $2,000 in the RRSP.
C. an RRSP is set up by an employer for an employee.
D. An RPP is set up by an employer for an employee.
E. funds are only to be used for education expenses

58. An RRSP, RPP, and IPP are examples of
A.tax-exempt retirement plans.
B. tax-deferred retirement plans.
C. capital gains.
D. self-employment insurance programs.
E. job-related expenses that are tax deductible.

59. “Grossed-up” Canadian dividends are multiplied by what amount in order to determine the level of taxable dividends?
A.15%
B. 18.97%
C. 45%
D. 50%
E. 60%

60. What is the maximum percentage of last year’s earned income that can be contributed to an RRSP?
A.15%
B. 18.
C. 45%
D. 50%
E. 60%

61. What is the maximum withdrawal amount allowed under the Home Buyers’ Plan?
A.$10,000
B. $20,000
C. $25,000
D. $50,000
E. $100,000

62. How many days after the end of the year are you allowed to still contribute to an RRSP and still claim it for the most recent take year?
A.15
B. 30
C. 45
D. 60
E. 90

63. Which of the following is a non-refundable tax credit?
A.Tuition and education amount
B. GST and PST paid on purchases
C. Moving expenses
D. Life insurance premiums
E. Basic personal amount

64. Jeffrey is a self-employed carpenter. He bills his clients $60,000 a year. Total business expenses amount to $10,000 a year. His only eligible income tax deduction is $5,000 for an RRSP contribution. If the first $36,000 of taxable income is taxed by the Federal Government at a rate of 15% and levels up to approximately $70,000 are taxed at 22%, what is his federal tax liability before considering tax credits?
A.$5,760
B. $6,750
C. $7,380
D. $9,900
E. $12,500

65. Identify the correct statements

I. Tax deductions are more valuable to a high income earner than tax credits.
II. RESPs are excellent income splitting vehicles for families with young children.
III. Students can deduct moving expenses when they move back home to take up a summer job.
A.I and II, only
B. II and III, only
C. I and III, only
D. I, II and III
E. I only

66. To help you cope with taxes, common goals related to tax planning include all the following except:
A.Knowing the current tax laws and regulations that affect you
B. Maintaining complete and appropriate tax records.
C. Making employment and purchase decisions that leave you with the greatest after-tax cash flows and net wealth
D. Making investment decisions that leave you with the greatest after-tax cash flows and net wealth
E. Minimizing taxes

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

67. Tax Freedom Day occurs:
A.the time in the year when your income has paid the portion of taxes imposed by all levels of government
B. there is no Tax Freedom Day
C. the time in the year when your income has paid the portion of taxes imposed by the federal government
D. the time in the year when your income has paid the portion of taxes imposed by the provincial government
E. Any time you do not pay GST or PST

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-01 Taxes and Financial Planning

68. Anne had earnings from her salary of $40,000 and a contribution to a registered retirement saving plan of $1,500. Anne’s’ net income would be
A.$39,250.
B. $40,000.
C. $39,300.
D. $38,500.
E. $41,500.

69. Chelsea had earnings from her salary of $50,000, interest on savings of $2,000, and a contribution to a registered retirement saving plan of $2,000. Chelsea’s net income would be
A.$50,000.
B. $48,000.
C. $52,000.
D. $46,000.
E. $49,500.

70. Richard sold $20,000 worth of stocks that were purchased one year ago for $18,000. He is in a 22% tax bracket. Jack’s capital gains taxes are:
A.$220.
B. $440.
C. $2,000.
D. $110.
E. there is no tax on capital gains.

71. Winning a $10,000 the lottery affects a person’s tax situation by
A.increasing the standard deduction by $10,000.
B. increasing the taxpayer’s marginal tax rate to 50%.
C. is taxed at the same rate as capital gains.
D. is not taxed.
E. is added to income and taxed accordingly.

72. A tax credit of $100 for a person in a 28 percent tax bracket would reduce a person’s taxes by
A.$100.
B. $28.
C. $72.
D. $50.
E. $35.

73. Tax records should be kept for a minimum of __________ rears from the date you receive your notice of assessment
A.you are not required to keep your tax records.
B. until age 65
C. three years for all records
D. six years for all records
E. three years, six years, or indefinitely, depending on the type of record

74. Beginning in 2009 Canadian residents 18 and older are allowed to contribute _________ per year to a Tax Free Savings Account:
A.$1,000
B. $2,000
C. $3,000
D. $4,000
E. $5,000

75. Contributing $2,000 to an RRSP changes the Tax Free Savings Account (TFSA) contribution by
A.reducing the limit by $1,000
B. reducing the limit by $2,000
C. reducing the limit by $3,000
D. does not reduce the TFSA contribution limit
E. Increases the TFSA limit by $2,000

76. The Tax Free Savings Account (TFSA) contribution limit
A.is fixed at $5,000/year
B. will increase at a rate of 10% per year
C. is indexed to the CPI and increases in multiples of $500
D. varies by an individual’s income
E. decreases with increased RRSP contributions in the same year

77. Tax Free Savings Accounts have all the following characteristics except
A. The contribution limit is $5,000 per annum regardless of any amounts contributed to an RRSP/RPP.
B. The $5,000 limit is indexed to the CPI and increases in multiples of $500.
C. Contributions to a TFSA are tax deductible
D. Any unused contribution room can be carried forward.
E. Amounts can be withdrawn at any time and any amounts withdrawn can be re-contributed in the same year if one still has contribution room left over.

78. In 2009, Glenn is allowed to contribute $5,000 to a TFSA. He contributes $2,000 for that year. If he withdraws $1,000 the same year from the TFSA account, the following year:
A.$3,000 contribution room is added to the 2010 TFSA limit
B. the TFSA limit for 2010 is unchanged
C. the TFSA limit for 2010 is reduced by $1,000
D. $4,000 contribution room is added to the 2010 TFSA limit
E. $1,000 is added to taxable income for 2010

79. A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person’s taxes by
A.$10.
B. $28.
C. $14.
D. $50.
E. $35.

80. Non-residents must file Canadian tax returns if they are present in Canada for hoe many days in one calendar year?
A.90
B. 60
C. 183
D. 240
E. 365

Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 03-01 Describe the importance of taxes for personal financial planning.
Topic: 03-06 Filing Your Federal and Provincial Income Tax Return

81. Your province of residency is determined by your residency on what date?
A.January 1
B. Your birthday
C. April 30
D. December 31
E. July 1

82. Remuneration received for personal effort, including salaries, wages, commissions, tips, bonuses, and taxable employee benefits is classified as what type of income?
A.Employment
B. Net business
C. Investment
D. Capital gains
E. Other

83. Income from an activity that is carried out for profit, including income from a sole proprietorship, partnership, corporation, or profession, after expenses are deducted.
A.Employment
B. Net business
C. Investment
D. Capital gains
E. Other

84. Income from property, includes income in the form of interest, dividends, and rental income net of expenses.
A.Employment
B. Net business
C. Investment
D. Capital gains
E. Other

85. Increases in the value of assets since their original purchase date such as: stocks, bonds, and real estate.
A.Employment
B. Net business
C. Investment
D. Capital gains
E. Other

86. Retirement income from corporate pension plans and RRSPs; payments from government plans such as the Canada Pension Plan, Employment Insurance, or Old Age Security; and spousal and certain child support payments.
A.Employment
B. Net business
C. Investment
D. Capital gains
E. Other

87. What is step 1 in computing taxable income and your tax liability?
A.Determine total income
B. Calculate net income
C. Calculating taxable income
D. Calculate federal taxes owing
E. Calculating Net Federal Taxes

88. What is step 2 in computing taxable income and your tax liability?
A.Determine total income
B. Calculate net income
C. Calculating taxable income
D. Calculate federal taxes owing
E. Calculating Net Federal Taxes

89. What is step 3 in computing taxable income and your tax liability?
A.Determine total income
B. Calculate net income
C. Calculating taxable income
D. Calculate federal taxes owing
E. Calculating Net Federal Taxes

90. What is step 4 in computing taxable income and your tax liability?
A.Determine total income
B. Calculate net income
C. Calculating taxable income
D. Calculate federal taxes owing
E. Calculating Net Federal Taxes

91. What is step 5 in computing taxable income and your tax liability?
A.Determine total income
B. Calculate net income
C. Calculating taxable income
D. Calculate federal taxes owing
E. Calculating Net Federal Taxes

92. What is the marginal federal tax rate as of 2016 for an income of $40,000
A.15%
B. 20.5%
C. 26%
D. 29%
E. 33%

93. What is the marginal federal tax rate as of 2016 for an income of $60,000
A.15%
B. 20.5%
C. 26%
D. 29%
E. 33%

94. What is the marginal federal tax rate as of 2016 for an income of $125,000
A.15%
B. 20.5%
C. 26%
D. 29%
E. 33%

95. What is the marginal federal tax rate as of 2016 for an income of $160,000
A.15%
B. 20.5%
C. 26%
D. 29%
E. 33%

96. What is the marginal federal tax rate as of 2016 for an income of $140,000
A.15%
B. 20.5%
C. 26%
D. 29%
E. 33%

97. What is the most common type of tax filing error, of those listed?
A.Mathematical errors, such as adding or subtracting amounts incorrectly.
B. Calculating and claiming provincial tax credits incorrectly.
C. Claiming GST/HST credits incorrectly by using incorrect spousal income amounts.
D. Claiming incorrect amounts as RRSP contributions.
E. Forgetting to claim the age amount, or claiming it incorrectly.

Accessibility: Keyboard Navigation
Difficulty: Hard
Learning Objective: 03-04 Identify tax assistance sources.
Topic: 03-27 Tax Assistance and the Audit Process

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