Free CPA Canada Tax Practice Questions: Personal Tax

CPA Canada means Chartered Professional Accountants of Canada. Use this focused CPA Canada Taxation page as a short practice test for Personal Tax. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CPA Canada Taxation Elective questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CPA Canada Taxation Elective questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Personal Tax

Leah and Marcus are adult beneficiaries of a Canadian testamentary trust. The trust deed states that annual accounting income, excluding capital gains, must be paid or made payable 60% to Leah and 40% to Marcus by December 31. Capital gains are capital of the trust unless the trustee makes a separate capital distribution and a valid taxable capital gains designation.

For the year, before any deduction for amounts paid or payable to beneficiaries, the trust had:

• Net rental income: $42,000
• Interest income: $18,000
• Actual capital gain on portfolio securities: $80,000
• Taxable capital gain, using the provided 50% inclusion rate: $40,000

Before year-end, the trustee made the following valid resolutions and payments:

• Leah: $36,000 of accounting income was made payable.
• Marcus: $24,000 of accounting income was made payable.
• Leah: a $60,000 capital distribution was paid, and $30,000 of the trust’s taxable capital gains was validly designated to her.
• Marcus: a $15,000 capital encroachment from original trust capital was paid, with no income or taxable capital gain designation.
• The remaining taxable capital gain was retained in the trust.

What amount of taxable income from the trust must each beneficiary include for the year?

• A. Leah: $66,000; Marcus: $24,000
• B. Leah: $96,000; Marcus: $24,000
• C. Leah: $36,000; Marcus: $39,000
• D. Leah: $60,000; Marcus: $40,000

Best answer: A

What this tests: Personal Tax

Explanation: A beneficiary includes trust income that is paid or payable to them, including income with character preserved through a valid designation. Here, the trust deed separates annual accounting income from capital gains. The $60,000 of rental and interest income is accounting income and is payable 60% to Leah and 40% to Marcus, giving $36,000 and $24,000 respectively. Capital gains are not part of accounting income under the deed. However, the trustee validly designated $30,000 of taxable capital gains to Leah, so Leah also includes that amount. The remaining $10,000 taxable capital gain is retained in the trust, not included by Marcus or Leah. Marcus’s $15,000 capital encroachment has no income or taxable capital gain designation, so it is not included as trust income.

• Treating Leah’s full $60,000 capital distribution as taxable ignores that only the $30,000 taxable capital gain was designated to her.
• Allocating total trust taxable income 60/40 ignores the trust deed’s separate treatment of capital gains and the trustee’s specific designation.
• Adding Marcus’s $15,000 capital encroachment to income ignores that it was paid from original capital with no income designation.

Leah includes her $36,000 accounting income plus the $30,000 designated taxable capital gain, while Marcus includes only his $24,000 accounting income.

Question 2

Topic: Personal Tax

A CPA is reviewing a junior preparer’s draft T1 calculation for Priya, a resident individual with employment income only. Ignore provincial tax, refundable credits, and carryforwards. All amounts have been verified as eligible for Priya’s current-year return.

• RRSP contribution designated for deduction, within Priya’s deduction limit: $6,000
• Deductible child care expense amount after applicable limits: $4,000
• Eligible tuition amount claimed by Priya: $3,000
• Eligible medical expense amount after the required threshold: $1,200

The junior deducted all four amounts from employment income before calculating tax. Which correction should the CPA make?

• A. Deduct the RRSP contribution and child care expenses from income, and apply the tuition and medical amounts as non-refundable tax credits against tax otherwise payable.
• B. Deduct all four amounts from income because each amount represents a verified out-of-pocket cost paid by Priya.
• C. Apply all four amounts as non-refundable tax credits because they are personal amounts claimed on an individual return.
• D. Deduct the RRSP contribution, child care expenses, and tuition amount from income, and apply only the medical amount as a non-refundable tax credit.

Best answer: A

What this tests: Personal Tax

Explanation: A deduction reduces income before tax rates are applied, so its value depends on the taxpayer’s marginal tax rate and can affect net income or taxable income. An RRSP contribution within the taxpayer’s deduction limit and deductible child care expenses are deductions in the personal tax calculation. A credit is applied after tax otherwise payable is calculated. Tuition and eligible medical expenses are generally non-refundable tax credits, so they do not reduce employment income directly. Treating credits as deductions would understate taxable income and distort the tax calculation. The CPA should correct the schedule by keeping the income deductions separate from the credit section of the taxes payable calculation.

• Treating tuition as a deduction confuses a credit amount with an income reduction.
• Treating RRSP contributions and child care expenses as credits misses their role in computing income before tax.
• Treating every verified payment as a deduction ignores that the Act uses different mechanisms for different personal tax claims.

RRSP contributions and child care expenses are deductions, while tuition and eligible medical expenses reduce tax through the credit mechanism.

Question 3

Topic: Personal Tax

Amira, a CPA, is reviewing a junior-prepared personal tax schedule for Luca, a Canadian-resident employee. Luca is not self-employed. His employer requires him to maintain his provincial professional licence. The $1,200 annual licence dues were paid by Luca, were not reimbursed, and appear in box 44 of his T4. The following extract is from the draft T1 workpaper. Assume the taxable capital gains inclusion rate for the year is 50%.

Which review note correctly identifies the tax issue?

• A. Replace the $3,000 RRSP deduction with a federal non-refundable credit.
• B. Remove the eligible dividend gross-up because the dividend tax credit is already claimed.
• C. Reclassify the $450 bank savings interest as a capital gain because it arose from an investment account.
• D. Move the $1,200 professional licence dues from non-refundable credits to a deduction from income.

Best answer: D

What this tests: Personal Tax

Explanation: A personal tax schedule review should distinguish income sources, deductions, and credits. Luca’s salary is employment income. Bank savings interest is property income. Eligible dividends from a taxable Canadian corporation are generally grossed up and paired with the related dividend tax credit. An RRSP contribution is a deduction, not a credit. The schedule’s error is the treatment of the professional licence dues. Based on the facts, Luca paid unreimbursed annual professional dues required for his employment, and they are shown on his T4. The full $1,200 should be deducted from income rather than converted into a 15% non-refundable credit.

• Investment-account interest is still interest income, not a capital gain.
• RRSP contributions reduce income as deductions when properly claimable; they are not federal non-refundable credits.
• Eligible dividends use both a gross-up and a related dividend tax credit, so that treatment is not double counting.
• Claiming only 15% of the professional dues misclassifies a deduction as a credit.

The unreimbursed annual professional dues shown on the T4 are claimed as a deduction from income, not as a non-refundable tax credit.

Question 4

Topic: Personal Tax

A CPA is reviewing Marla’s 2025 T1 return after she received a late T3 slip from her late father’s estate. Marla is a Canadian resident. Her return was otherwise complete with tax payable of $29,600 before considering the T3 slip.

For any additional taxable income shown below, use Marla’s combined federal/provincial marginal tax rate of 38%. She has no unused losses, no capital gains exemption claim, no alternative minimum tax issue, and no additional credits affected by the change.

The estate is a resident estate. The executor confirms the income was paid or payable to Marla in 2025, deducted by the estate, and not taxed in the estate. No tax was withheld. Marla’s adjusted cost base of her estate capital interest before the distribution was $22,000.

What is the correct effect of the estate distribution on Marla’s 2025 tax payable?

• A. Increase tax payable by $4,940 by including $9,000 of other income and $4,000 of taxable capital gains.
• B. Increase tax payable by $11,400 by including the full $30,000 cash distribution in income.
• C. Increase tax payable by $3,420 by including only the $9,000 of other income.
• D. Make no change to tax payable because the receipt came from an inheritance.

Best answer: A

What this tests: Personal Tax

Explanation: A beneficiary is taxed on income of a trust or estate that is paid or payable to the beneficiary and deducted by the trust or estate. Amounts reported on the T3 as other income and taxable capital gains are included in the beneficiary’s income. The taxable capital gain amount on the T3 is already the taxable amount, so it is not reduced again. The capital distribution is not current income; it reduces Marla’s adjusted cost base of her estate capital interest. Because her ACB before the distribution was $22,000, the $17,000 reduction does not create a deemed capital gain. The increase in tax payable is therefore \((\$9,000 + \$4,000) \times 38\% = \$4,940\).

• Including the full $30,000 cash receipt incorrectly taxes a non-income capital distribution.
• Including only the other income ignores the T3 taxable capital gain allocation to Marla.
• Treating the whole amount as a non-taxable inheritance ignores that the estate deducted income paid or payable to the beneficiary.

The T3 income amounts are taxable to Marla, while the $17,000 capital distribution only reduces her estate interest ACB and does not create a current gain.

Question 5

Topic: Personal Tax

Priya died on March 1, 2025. Her estate is a graduated rate estate with a first taxation year ending February 28, 2026. The executor wants to minimize Priya’s terminal T1 taxable income and will make a valid election to carry back any eligible estate capital loss. Assume a 50% capital gains inclusion rate and no other capital gains or losses.

A graduated rate estate may elect to treat an eligible capital loss realized in its first taxation year as the deceased taxpayer’s capital loss in the year of death. What taxable capital gain should be reported on Priya’s terminal return after the valid election?

• A. $15,000 taxable capital gain
• B. $12,000 taxable capital gain
• C. $60,000 taxable capital gain
• D. $37,500 taxable capital gain

Best answer: A

What this tests: Personal Tax

Explanation: On death, Priya is deemed to dispose of her capital property at fair market value. The shares create a $120,000 capital gain ($210,000 - $90,000), and the mutual fund units create a $45,000 capital loss ($105,000 - $150,000), leaving a $75,000 net capital gain before any estate election. The estate’s ACB for the shares is their $210,000 FMV at death. The December 2025 sale has net proceeds of $165,000 ($168,000 - $3,000), creating a $45,000 estate capital loss in the estate’s first taxation year. A valid carryback election reduces Priya’s net capital gain to $30,000. At a 50% inclusion rate, the terminal return reports a $15,000 taxable capital gain.

• $37,500 ignores the eligible estate capital loss carryback and taxes only the $75,000 net gain at death.
• $12,000 also carries back the mutual fund loss from March 15, 2026, but that sale occurred after the estate’s first taxation year.
• $60,000 includes only the share gain at death and ignores the capital loss on the mutual fund units and the eligible estate loss carryback.

Priya’s net capital gain is $30,000 after the $45,000 eligible estate loss carryback, so the taxable capital gain is $15,000 at 50%.

Question 6

Topic: Personal Tax

Maya operates a profitable unincorporated IT consulting business in Ontario. She is considering incorporating on January 1. Her current personal marginal tax rate on additional business income is 49%. If incorporated, the business would be a Canadian-controlled private corporation earning active business income eligible for the small business deduction, with an assumed corporate tax rate of 12% on income left in the company.

Maya expects the business to earn $190,000 before any owner compensation next year. She needs $105,000 before personal tax for living costs and wants to leave the rest in the business for a major software platform investment in two years. Her spouse does not work in the business and will not own shares. Maya has no unused business losses and does not plan to sell the business soon.

Which interpretation best assesses the personal tax impact of incorporation for Maya?

• A. Incorporation will permanently reduce tax on all business profits because corporate tax replaces personal tax on shareholder withdrawals.
• B. Incorporation will make all $190,000 taxable to Maya personally because she controls the corporation.
• C. Incorporation can defer personal tax on profits left in the corporation, but Maya will personally report only salary, bonuses, and taxable dividends actually paid to her.
• D. Incorporation will let Maya split the retained business profits with her spouse because the business is family-owned.

Best answer: C

What this tests: Personal Tax

Explanation: A corporation is a separate taxpayer. After incorporation, Maya will no longer report the full business profit directly as self-employment income. The corporation will report the active business income and pay corporate tax. Maya will include amounts paid to her personally, such as salary, bonuses, or taxable dividends. Because she does not need all business profits for personal living costs, incorporation may create a tax deferral on the profits retained in the corporation for reinvestment. The benefit is generally a deferral, not a permanent elimination of tax, because additional personal tax can arise when corporate after-tax funds are later distributed. The facts also do not support income splitting with her spouse, who will not work in the business or own shares.

• Family ownership alone does not support income splitting; the spouse has no role or share ownership in the facts.
• Control of the corporation does not make all corporate income taxable to Maya personally.
• Corporate tax on retained earnings does not replace personal tax on salary or dividends paid to Maya.

The corporation becomes a separate taxpayer, so retained active business income may be taxed initially at the lower corporate rate until amounts are paid to Maya personally.

Question 7

Topic: Personal Tax

A CPA is reviewing a junior tax-planning note for Lina, a Canadian resident architect who operates as a sole proprietor. Lina expects net professional income of about $310,000 this year. Her spouse, Omar, has no employment income and helps with invoicing and appointment scheduling for about four hours per week. An outside bookkeeper quoted $18,000 per year for similar work.

Lina was reassessed two years ago for poorly supported vehicle and home-office claims. She told the CPA, “I do not want another fight with CRA. I will only use planning that I can document and explain.” Lina and Omar also need to preserve a $200,000 non-registered investment portfolio as a house down payment in 18 months.

The junior note recommends paying Omar a $90,000 salary, transferring the investment portfolio into Omar’s name to have the income taxed to him, and claiming all restaurant and travel costs as business development.

Which broader circumstance should most drive the advice?

• A. Omar’s low income should drive the plan, so income and investments should be shifted to him as aggressively as possible.
• B. The prior reassessment should drive the plan, so Lina should avoid all spouse compensation and discretionary expense claims.
• C. Lina’s low tolerance for reassessment, limited supporting facts, and short-term cash objective should drive conservative, supportable planning rather than maximum income shifting.
• D. The house purchase should drive the plan, so no personal tax planning should be considered until after the down payment is used.

Best answer: C

What this tests: Personal Tax

Explanation: Personal tax planning should be supportable and aligned with the taxpayer’s broader circumstances. Omar’s low income creates possible planning opportunities, but the facts do not support a $90,000 salary for four hours per week of administrative work, and a simple transfer of investments to a spouse can raise attribution concerns. Lina has clearly stated a low appetite for CRA disputes after a prior reassessment, and the portfolio has a near-term family purpose as a house down payment. Those facts should push the CPA toward defensible planning: reasonable compensation for actual services, proper documentation, careful review of investment attribution rules, and expense claims that can be substantiated. The lowest-tax plan is not the best plan if it is unsupported or inconsistent with the client’s risk tolerance and cash needs.

• A lower-income spouse is relevant, but it does not justify unreasonable salary amounts or ignoring attribution rules.
• A prior reassessment does not prohibit all planning; it increases the need for evidence and conservative support.
• The house down payment matters for liquidity and timing, but it does not make all tax planning inappropriate.

The advice should be shaped by Lina’s risk tolerance, documentation limits, and family cash needs, not merely by the lowest possible tax result.

Question 8

Topic: Personal Tax

A CPA is preparing Leo’s 2025 T1 return. Leo is a Canadian-resident individual and a partner in KL Design, a Canadian general partnership with a December 31 fiscal period. KL Design computed 2025 net business income for tax purposes of $240,000 before allocating income to the partners. The allocation agreement is considered reasonable and states that the following amounts are used only to allocate partnership income; they are not employment salaries or deductible interest paid by the partnership.

Leo withdrew $70,000 in cash during 2025. The withdrawals do not affect KL Design’s net business income or allocation formula.

What amount should Leo report as 2025 partnership business income on his personal tax return, ignoring CPP and instalments?

• A. $70,000, equal to Leo’s cash withdrawals during the year
• B. $68,600, calculated as $48,000 + $8,000 + 30% of $42,000
• C. $72,000, calculated as 30% of total partnership income
• D. $77,600, calculated as $48,000 + $8,000 + 30% of $72,000

Best answer: B

What this tests: Personal Tax

Explanation: A partnership computes income at the partnership level, but the partners include their allocated shares in their own returns for the fiscal period ending in the year. The allocation formula must be applied before considering cash drawings. KL Design’s fixed allocation amounts are $168,000 of salary allowances and $30,000 of capital interest allowances, for total fixed allocations of $198,000. The residual income is therefore $42,000 ($240,000 - $198,000). Leo’s allocation is his $48,000 salary allowance, his $8,000 capital interest allowance, and 30% of the $42,000 residual, or $12,600. His total partnership business income is $68,600. The $70,000 withdrawn is a cash draw, not the amount taxable as partnership income.

• $70,000 treats cash withdrawals as taxable income, but draws do not determine a partner’s income allocation.
• $72,000 ignores the fixed allocations required before the residual profit share is applied.
• $77,600 subtracts only the salary allowances before applying the residual percentage, so it misses the other partners’ capital interest allocations.

Leo includes his agreed fixed allocations plus his share of the residual partnership income after all fixed allocations are deducted.

Question 9

Topic: Personal Tax

Lana is in the top marginal tax bracket and owns 100% of LKC Design Ltd., a resident CCPC that earns almost all of its revenue from providing design services. She asks about 2026 income-splitting ideas for her family.

Planning facts:

• Marco, Lana’s spouse, has no other income. He recently started doing monthly payroll, billing, and collection calls for LKC from home. Expected time is about 12 hours per month. Comparable arm’s length pay is $30 to $35 per hour. No timesheets exist yet, but Marco can keep them going forward.
• Eva, their 20-year-old daughter, is a full-time university student. She does not work in the business, has contributed no capital, and will not assume any business risk.
• Lana proposes issuing dividend shares to Marco and Eva for nominal consideration and paying each $35,000 of dividends from LKC.
• Lana also has a $250,000 non-registered investment portfolio and is considering gifting it to Marco so the future investment income is reported by him.

Lana wants a supportable, low-risk tax plan. Which recommendation is most appropriate?

• A. Pay Marco dividends instead of salary because any work by a spouse makes corporate distributions excluded from income-splitting limits.
• B. Pay Marco a reasonable salary for actual services with payroll remittances and time records; do not implement the proposed dividends or outright portfolio gift on the current facts.
• C. Gift the investment portfolio to Marco because attribution applies only to family business income, not passive investment income.
• D. Issue dividend shares to Eva because she is an adult and the funds will be used for university costs.

Best answer: B

What this tests: Personal Tax

Explanation: The most supportable income-splitting opportunity is compensation for real work at a reasonable amount, supported by records and payroll compliance. Marco’s expected services support only a modest salary based on arm’s length hourly rates and actual hours. The proposed $35,000 dividends to Marco and Eva are high risk because the income comes from a related service business, Eva has no labour, capital, or risk, and Marco’s limited involvement does not support that level of corporate distribution. An outright gift of Lana’s investment portfolio to Marco would generally cause attribution of income back to Lana unless a properly structured exception, such as a prescribed-rate loan arrangement, is used. The recommendation should match relationship, source of income, business involvement, risk assumed, and available support.

• Eva being an adult does not by itself avoid TOSI when the dividend is from a related business and she has no contribution or risk.
• Marco’s limited services may support reasonable salary, not an unsupported $35,000 dividend.
• Spousal attribution can apply to passive investment income from gifted property, not only to family corporation income.

A reasonable, documented salary reflects actual services, while the proposed dividends are exposed to TOSI and the portfolio gift would trigger spousal attribution.

Question 10

Topic: Personal Tax

Jaspreet is a Canadian resident employee preparing her 2026 T1 return. She asks for the current-year tax and near-term chequing-account effect of an RRSP contribution. She has $18,000 of unused RRSP deduction room and will contribute and deduct $18,000 before the filing deadline using cash from chequing. Ignore investment growth and future RRSP withdrawals.

Her draft schedule before the RRSP deduction shows:

• Total federal and provincial tax payable before source deductions: $49,500
• Income tax withheld by employer: $47,000
• Filing settlement before RRSP deduction: $2,500 owing
• Combined marginal tax rate applicable to the full RRSP deduction: 40%
• No effect on income-tested credits or benefits

A draft planning note says the RRSP plan “saves $4,700 tax because it creates a $4,700 refund and improves cash flow by $4,700.” Compared with not making the contribution, which replacement conclusion is correct?

• A. Tax payable decreases by $18,000; the deduction offsets tax dollar-for-dollar, and chequing cash is unchanged because the RRSP remains her asset.
• B. Tax payable is unchanged; the RRSP only defers tax until withdrawal, and chequing cash is $18,000 lower after the contribution.
• C. Tax payable decreases by $7,200; the filing settlement improves by $7,200, and chequing cash is $10,800 lower after the contribution and refund.
• D. Tax payable decreases by $4,700; the refund is the tax saving, and chequing cash is $13,300 lower after the contribution and refund.

Best answer: C

What this tests: Personal Tax

Explanation: Tax payable is measured before considering source deductions or the final refund or balance owing. The RRSP deduction reduces taxable income, so the current-year tax payable reduction is $18,000 × 40% = $7,200. Before the RRSP deduction, Jaspreet would owe $2,500 because tax payable exceeded withholdings. After the deduction, tax payable becomes $42,300, so the $47,000 withheld produces a $4,700 refund. The filing settlement therefore improves by $7,200, not merely by the $4,700 refund. For chequing-account cash flow compared with not contributing, she pays $18,000 into the RRSP and improves the filing settlement by $7,200, leaving her near-term chequing cash $10,800 lower.

• Treating the $4,700 refund as the tax saving confuses the filing settlement with the tax payable reduction and ignores the $2,500 amount owing avoided.
• Treating the $18,000 deduction as a dollar-for-dollar tax saving confuses a deduction with a credit.
• Saying current tax payable is unchanged misses the immediate RRSP deduction; future withdrawal tax does not eliminate the current-year reduction.

The $18,000 deduction reduces tax payable by 40%, while the cash-flow comparison also includes the $18,000 contribution outflow.

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