Buckwold6 Sm

CHAPTER 1

TAXATION―

MANAGEMENT'S FORGOTTEN RESPONSIBILITY

REVIEW QUESTION SOLUTIONS

1. Once profit is determined, the amount of income tax that results is determined arbitrarily by the Income Tax Act. However, at all levels of management, alternative courses of action are evaluated and decided upon. In many cases, the choice of one alternative over the other may affect both the amount and the timing of future taxes on income generated from that activity. Therefore, the person making those decisions has a direct input into future after-tax cash flow. Obviously decisions that reduce or postpone the payment of tax affect the ultimate return on investment and, in turn, the value of the enterprise. Including the tax variable as a part of the formal decision process will ultimately lead to improved after-tax cash flow.

2. Expansion can be achieved in new geographic areas through direct selling, or by establishing a formal presence in the new territory with a branch office or a separate corporation. The new territories may also cross provincial or international boundaries. Provincial income tax rates vary amongst the provinces. The amount of income that is subject to tax in the new province will be different for each of the three alternatives mentioned above. For example, with direct selling none of the income is taxed in the new province, but with a separate corporation all of the income is taxed in the new province. Because the tax cost is different in each case, taxation is a relevant part of the decision and must be included in any cost-benefit analysis that compares the three alternatives. (Reg 400-402.2)

3. Tax issues relating to a business are often delegated to outside professional advisors because of the decision- makers' perception that the tax laws are overly complex. This may prove to be unsatisfactory because, although the tax advisors can provide technical interpretation, they are often not in tune with the decision-making process and...