CHAPTER 1

TAXATION― ITS ROLE IN BUSINESS DECISION MAKING

Review Questions

1. If income tax is imposed after profits have been determined, why is taxation relevant to

business decision making?

2. Most business decisions involve the evaluation of alternative courses of action. For

example, a marketing manager may be responsible for choosing a strategy for

establishing sales in new geographical territories. Briefly explain how the tax factor can

be an integral part of this decision.

3. What are the fundamental variables of the income tax system that decision-makers

should be familiar with so that they can apply tax issues to their areas of responsibility?

4. What is an ―after-tax‖ approach to decision making?

Solutions to Review Questions

R1-1 Once profit is determined, the Income Tax Act determines the amount of income tax that

results. However, at all levels of management, alternative courses of action are evaluated.

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.

R1-2 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. 400-402.1].