CPA Canada Core 1: Taxation

Use this page to isolate Taxation before returning to mixed CPA Canada Core 1 practice.

Topic snapshot

Sample questions

These questions are original Finance Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Taxation

Oriole Design Ltd. is a Canadian-controlled private corporation reporting under ASPE. Its bank requires year-end financial statements. The controller provided the following year-end notes:

Which conclusion is best supported for the corporate financial statements?

• A. Leave the $15,000 in corporate income tax expense because the payment was made from the corporate bank account.
• B. Accrue a corporate tax liability for the possible personal reassessment because the shareholder controls the corporation.
• C. Reclassify the $15,000 from corporate income tax expense to a shareholder receivable and do not recognize a corporate tax liability for the personal CRA review.
• D. Record a dividend expense for the $15,000 because the personal tax relates to dividends from the corporation.

Best answer: C

What this tests: Taxation

Explanation: A shareholder’s personal T1 review is not automatically a corporate reporting liability. The key is whether the corporation has its own obligation or whether a corporate transaction has been recorded incorrectly. Here, the CRA letter is addressed to the shareholder and relates to the shareholder’s personal dividend income. No notice has been issued to the corporation, so no corporate tax liability is supported. However, the corporation did pay cash and recorded the payment as its own income tax expense. Because the payment settled the shareholder’s personal tax instalment and the shareholder signed a collectible repayment note, the corporate financial statements should reverse the expense and record a shareholder receivable.

• Accruing a corporate tax liability confuses the shareholder’s personal tax exposure with the corporation’s obligations.
• Keeping the payment as corporate income tax expense relies on the bank account used, not on the underlying obligation.
• Recording a dividend expense is not supported because the facts indicate repayment through an enforceable note, not a declared or forgiven distribution.

The corporation has a receivable from the shareholder, while the CRA review concerns the shareholder’s personal tax return rather than a present obligation of the corporation.

Question 2

Topic: Taxation

Boreal Fabrication Ltd. reports under ASPE and uses the future income taxes method. Its controller is reviewing this tax-planning memo for the December 31, 2026 financial statements:

New production equipment was purchased and available for use on July 1, 2026 for $800,000.
Accounting depreciation: straight-line over 8 years, no residual value, starting when available for use.
Tax plan: claim first-year CCA of $360,000 in the 2026 tax return; taxable income is sufficient to use the claim.
Memo conclusion: The CCA claim only defers tax cash outflows and has no financial statement effect.
Enacted tax rate expected when differences reverse: 25%.

Which financial reporting implication should the controller not ignore?

• A. Record no future income tax amount because claiming CCA is only a tax return decision.
• B. Recognize a future income tax liability of $90,000.
• C. Recognize a future income tax asset of $77,500.
• D. Recognize a future income tax liability of $77,500.

Best answer: D

What this tests: Taxation

Explanation: Under the ASPE future income taxes method, tax planning that accelerates deductions can create a financial reporting effect. Boreal’s equipment carrying amount at year end is $750,000: cost of $800,000 less six months of depreciation of $50,000. Its tax base after the CCA claim is $440,000: cost of $800,000 less CCA of $360,000. Because the carrying amount exceeds the tax base by $310,000, Boreal has a taxable temporary difference. Applying the 25% enacted tax rate gives a future income tax liability of $77,500. The memo’s conclusion ignores this future tax consequence.

• The $90,000 liability applies the tax rate to the full CCA claim, rather than to the difference between carrying amount and tax base.
• A future income tax asset has the direction wrong; a lower tax base than carrying amount creates future taxable amounts.
• Recording no future tax amount ignores Boreal’s chosen ASPE future income taxes method.

The carrying amount is $750,000 and the tax base is $440,000, creating a $310,000 taxable temporary difference at 25%.

Question 3

Topic: Taxation

Orchid Ltd. reports under ASPE and is preparing its December 31, 2025 financial statements. The controller’s tax-compliance note states:

2025 T2 return not yet filed.
Estimated current Part I tax for 2025: $180,000.
Instalments remitted to CRA during 2025 per cash disbursements: $120,000.
No current income tax payable recorded because the remaining amount will be paid when the T2 is filed after year end.

Which evidence would best support the conclusion that Orchid should consider a current income tax payable at December 31, 2025?

• A. A cash forecast showing that Orchid expects to pay the remaining tax balance after year end.
• B. A year-end current tax provision schedule reconciled to CRA instalments remitted and the resulting unpaid balance.
• C. Management’s representation that no CRA notice of assessment has been received by December 31.
• D. The prior-year T2 return showing that Orchid paid its final balance only after filing last year.

Best answer: B

What this tests: Taxation

Explanation: A current income tax payable should be considered when the estimated current tax for the year exceeds instalments or other remittances made by year end. The fact that the T2 return will be filed and paid after year end affects settlement timing, not whether an obligation exists at the reporting date. The strongest support is a current tax provision schedule that ties the estimated tax expense to CRA remittances and calculates the unpaid amount. If instalment interest or penalties are material and estimable, those may also need separate consideration, but the key reporting impact here is the unrecorded current tax payable.

• A cash forecast supports payment timing and liquidity, not whether a tax liability existed at year end.
• No CRA notice of assessment is not decisive because current tax can be accrued before CRA assesses the return.
• The prior-year T2 return supports past filing behaviour, not the current-year tax payable.

This directly supports both the estimated current tax obligation and the amount already remitted, which determines the payable.

Question 4

Topic: Taxation

Maple Tools Inc., a Canadian-controlled private corporation reporting under ASPE, is finalizing its December 31, 2025 financial statements. The draft tax working paper shows:

• current income tax based on 2025 taxable income: $180,000
• income tax instalments paid during 2025 and recorded as income tax expense: $120,000
• income taxes payable recorded at year-end: $0

The company’s balance-due date for 2025 income tax is March 31, 2026, and management intends to remit any balance by that date. There are no temporary differences, tax credits, instalment interest, or penalties to consider. What is the best correction or adjustment?

• A. Leave the draft financial statements unchanged because the tax return has not been filed and CRA has not assessed the return.
• B. Record the unpaid $60,000 as a 2026 income tax expense when the balance is remitted.
• C. Record additional current income tax expense of $60,000 and income taxes payable of $60,000 at December 31, 2025, and remit the balance by March 31, 2026.
• D. Reclassify the $120,000 instalments as prepaid income taxes and disclose the remaining tax as a contingency.

Best answer: C

What this tests: Taxation

Explanation: Income tax expense should reflect the current tax payable for the fiscal year based on taxable income, not just the instalments paid in cash. The instalments are payments against the tax obligation. Maple’s 2025 current tax is $180,000, and $120,000 has already been paid, leaving $60,000 payable at December 31, 2025. The fact that the balance-due date is after year-end does not eliminate the liability because the tax arose from 2025 taxable income. Since the stem states that no instalment interest or penalties apply if paid by March 31, no additional penalty or interest accrual is required. The reporting implication is to increase current tax expense and recognize income taxes payable, while the tax compliance response is to remit the balance by the balance-due date.

• Waiting for a CRA assessment ignores accrual accounting; the obligation can be estimated from the tax working paper.
• Recording the balance in 2026 incorrectly treats the tax as a cash-basis expense rather than a 2025 obligation.
• Treating the instalments as prepaid and the remaining amount as a contingency misclassifies a determinable current tax liability.

The unpaid 2025 current tax is a year-end liability even though the remittance is due after year-end.

Question 5

Topic: Taxation

Maple Ridge Ltd., a private corporation reporting under ASPE, is preparing its December 31 financial statements. Its estimated current income tax for the year is $120,000, but it remitted only $70,000 of required instalments by year end due to cash flow issues. Before the financial statements are issued, management estimates CRA instalment interest and penalties of $3,500. Which financial reporting action is most appropriate?

• A. Disclose the missed instalments only, because tax interest and penalties are compliance matters rather than financial reporting amounts.
• B. Classify the unpaid $50,000 as a deferred income tax liability because the cash payment will occur after year end.
• C. Recognize a current income tax payable of $50,000 and accrue the $3,500 interest and penalties as an expense and liability.
• D. Recognize only the $70,000 instalments paid and wait for CRA to issue a notice of assessment before recording any additional amounts.

Best answer: C

What this tests: Taxation

Explanation: Corporate tax instalments are payments against current income tax, not the measure of tax expense. At year end, the entity should recognize current income tax based on estimated taxable income and record any unpaid balance as a current tax payable. Because management has estimated the CRA instalment interest and penalties before the financial statements are issued, those amounts are also liabilities and expenses if they are probable and reasonably estimable. The issue is not deferred tax; it is an unpaid current obligation arising from the year’s taxable income and missed remittances.

• Waiting for a CRA notice ignores that the obligation is already present and estimable.
• Calling the unpaid balance deferred tax confuses payment timing with temporary differences.
• Disclosure alone is insufficient when the unpaid tax and related charges meet recognition criteria.

The unpaid current tax and the estimable CRA charges are present obligations that should be recognized before the financial statements are issued.

Question 6

Topic: Taxation

Kepler Manufacturing Ltd., a private corporation applying ASPE, uses the future income taxes method. A short tax-planning memo says a transfer of equipment to a new wholly owned subsidiary was structured as a tax-deferred rollover, with no current income tax payable. The equipment remains reported at a carrying amount of $620,000, while the rollover election uses a tax cost of $350,000. The CFO proposes no tax-related financial statement entry because the tax memo says no cash tax is payable. Which evidence best supports the conclusion that a financial reporting implication should not be ignored?

• A. The signed rollover election and tax-basis continuity schedule showing the $350,000 tax cost compared with the $620,000 carrying amount
• B. The board resolution approving the transfer of the equipment to the new subsidiary
• C. A management representation stating that the transaction created no cash tax payable
• D. The CRA account statement showing no current balance owing for the taxation year

Best answer: A

What this tests: Taxation

Explanation: A tax-deferred rollover can eliminate or defer current tax payable, but it does not automatically eliminate financial reporting consequences. Because Kepler uses the future income taxes method, the relevant implication is whether the asset’s carrying amount differs from its tax basis. Here, the equipment’s carrying amount of $620,000 exceeds its tax cost of $350,000, creating a taxable temporary difference. The most persuasive support is the signed tax election together with a tax-basis continuity schedule, because those documents directly establish the tax basis to compare with the financial statement carrying amount.

• Board approval supports authorization of the transaction, not the tax basis or temporary difference.
• A CRA balance of nil supports no current tax payable, but not the absence of future income tax effects.
• Management’s representation is less reliable than the underlying tax election and schedule and only addresses cash tax.

This directly supports a taxable temporary difference that may require recognition of a future income tax liability under ASPE.

Question 7

Topic: Taxation

A private corporation reports under ASPE and is finalizing its current tax provision. Accounting income before tax already includes a full expense for $48,000 of routine client meals and entertainment costs. For tax purposes, management has confirmed that only 50% of these costs are deductible. Before this transaction, there are no other differences between accounting income and taxable income. The applicable corporate tax rate is 26%.

What should be done next to complete the tax analysis for this transaction?

• A. Add back $24,000 to taxable income and increase current tax expense and taxes payable by $6,240.
• B. Record a future tax asset of $6,240 because the disallowed portion will be deductible in a later year.
• C. Make no tax adjustment because the full $48,000 has already been recorded as an expense for accounting purposes.
• D. Deduct an additional $24,000 from taxable income and decrease current tax expense and taxes payable by $6,240.

Best answer: A

What this tests: Taxation

Explanation: The next step is to adjust accounting income to taxable income for the tax treatment of the routine transaction. The full $48,000 was expensed for accounting purposes, but only 50% is deductible for tax purposes. Therefore, $24,000 is a permanent non-deductible amount and must be added back in calculating taxable income. At a 26% tax rate, the current tax effect is $6,240. Because the non-deductible portion will not reverse in a future period, the adjustment affects current tax expense and taxes payable, not future income taxes.

• Deducting an additional amount reverses the direction of the adjustment; taxable income should increase, not decrease.
• Recording a future tax asset incorrectly treats a permanent difference as a temporary difference.
• Making no adjustment skips the required reconciliation from accounting income to taxable income.

Only the non-deductible 50% is added back, creating a current tax cost of $24,000 × 26% = $6,240.

Question 8

Topic: Taxation

Juniper Manufacturing Ltd., a private company, is preparing year-end financial statements under ASPE for its bank. During the year, the founder completed an estate freeze: the founder exchanged common shares for fixed-value preferred shares, and new voting common shares were issued to a discretionary family trust. At year-end, Juniper also has a $75,000 payable to the trust and paid consulting fees to the founder’s adult child. Management says the trust arrangement is a personal tax matter and should not affect the financial statements. What should be done next to complete the reporting analysis?

• A. Ignore the trust arrangement because a discretionary family trust is a separate taxpayer from Juniper.
• B. Consolidate the family trust into Juniper’s financial statements because the trust owns Juniper’s voting common shares.
• C. Calculate the founder’s personal tax payable from the estate freeze before preparing Juniper’s financial statements.
• D. Obtain the share records and trust deed to identify trustees, beneficiaries, rights, and related transactions before assessing control and related-party disclosure.

Best answer: D

What this tests: Taxation

Explanation: The next step is to gather source evidence about the ownership and trust arrangement because those facts can affect Juniper’s reporting, even if the arrangement was implemented for estate or personal tax planning. Under ASPE, the financial statements may need to reflect who controls the company and disclose related-party transactions, balances, and terms. The trust deed, share records, and minute book can identify the trustees, beneficiaries, voting rights, dividend rights, and whether the founder or family members influence Juniper. Those facts are relevant to the payable to the trust and consulting fees paid to the founder’s adult child. The CPA should not perform personal tax planning first or dismiss the trust as irrelevant without assessing its reporting implications.

• Treating the trust as irrelevant focuses on tax status and skips the ASPE reporting impact.
• Calculating the founder’s personal tax is premature because Juniper’s reporting issue is control and related-party disclosure.
• Consolidating the trust assumes a reporting outcome without first assessing the relationship and applicable ASPE criteria.

The trust and estate-freeze facts matter because they may affect who controls Juniper and which balances or transactions require ASPE related-party analysis.

Question 9

Topic: Taxation

Ridgeway Components Ltd., a Canadian private corporation reporting under ASPE, is preparing its December 31 financial statements. The tax working paper shows taxable income of $420,000 before a non-refundable corporate tax credit, an applicable corporate tax rate of 12%, a non-refundable tax credit of $8,000, and income tax instalments already remitted of $30,000. There are no loss carrybacks or future income tax effects to consider. What current income tax payable should Ridgeway report at year-end?

• A. $12,400
• B. $20,400
• C. $50,400
• D. $42,400

Best answer: A

What this tests: Taxation

Explanation: Current income tax payable is the unpaid amount owed to the tax authority at the reporting date. Start with taxable income, not accounting income, and apply the enacted tax rate: $420,000 × 12% = $50,400. Then reduce the tax otherwise payable by the non-refundable tax credit: $50,400 − $8,000 = $42,400. Instalments remitted during the year reduce the liability outstanding, not taxable income: $42,400 − $30,000 = $12,400. Therefore, Ridgeway should report a current income tax payable of $12,400.

• $20,400 ignores the non-refundable tax credit and deducts only instalments from gross tax.
• $42,400 is the current tax for the year after the credit, but before recognizing instalments already paid.
• $50,400 is gross tax before both the credit and instalment payments.

The current tax owing is $420,000 × 12% less the $8,000 credit and $30,000 instalments already paid.

Question 10

Topic: Taxation

Prairie Home Ltd. applies IFRS and recognizes deferred taxes. For the year ended December 31, 2025, the enacted corporate tax rate is 26%, and no tax rate change is expected. Amounts are in Canadian dollars.

Which reporting conclusion is best supported by this schedule?

• A. Recognize income tax expense of 139,100 because taxable income determines both tax payable and tax expense.
• B. Recognize a deferred tax liability of 14,300 for the warranty accrual because it increases taxable income in the current year.
• C. Recognize current tax payable of 139,100 and total income tax expense of 132,600, including a net deferred tax recovery of 6,500.
• D. Recognize income tax expense of 130,000 because accounting income before tax multiplied by the statutory rate determines tax expense.

Best answer: C

What this tests: Taxation

Explanation: A tax-provision schedule separates current tax payable from total income tax expense. Current tax payable is based on taxable income, so Prairie Home’s payable is 535,000 × 26% = 139,100. However, total income tax expense also reflects deferred tax effects from temporary differences. The warranty accrual creates a deferred tax asset because it is not deductible now but is expected to reduce taxable income later. CCA in excess of depreciation creates a deferred tax liability because it reduces taxable income now but increases taxable income later. The deferred tax asset increase of 14,300 exceeds the deferred tax liability increase of 7,800, creating a net deferred tax recovery of 6,500. Therefore, total income tax expense is 139,100 − 6,500 = 132,600.

• Using taxable income alone supports current tax payable, not total income tax expense under IFRS.
• Applying the statutory rate only to accounting income ignores the permanent difference and the deferred tax effects.
• Treating the warranty accrual as a deferred tax liability reverses the direction of the deductible temporary difference.

The schedule supports current tax payable of 139,100 less a net deferred tax recovery of 6,500, resulting in total income tax expense of 132,600.

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