Byrd & Chen's Canadian Tax Principles 2022 - 2023 1st edition Volume 2 Solution Manual
Chapter 11 – Solutions to Assignment Problems Solution to AP 11-1 2019 Analysis
The required information can be calculated as follows:
ITA 3(a) Business Income $18,000 Taxable (Grossed Up) Dividends 2,360 $20,360 ITA 3(b) Taxable Capital Gains $ 600 Allowable Capital Losses (2,100) Nil ITA 3(c) $20,360 ITA 3(d) Unrestricted Farm Loss (See Note) (6,250) 2019 Net Income and Taxable Income $14,110
Note Ms. Breau’s farm losses are restricted as follows:
Total Farm Loss $10,000
Unrestricted Amount:
First $2,500 One-Half of $7,500 ($10,000 – $2,500)
($ 2,500)
(3,750)
(6,250)
2019 Restricted Farm Loss $ 3,750
As noted in the problem, none of the losses can be carried back before 2019. This would
leave the following 2019 loss carry over balances:
• 2019 Restricted Farm Loss $3,750 • 2019 Net Capital Loss [($2,100 (ITA 3(b)(ii)) – $600 (ITA 3)(b)(i))] $1,500
In this first year the taxable income is less than the required $15,000 to fully utilize available tax credits; however, there is no choice to limit any of the ITA 3 amounts to a smaller amount so as to achieve the $15,000 taxable income.
2020 Analysis
The required information can be calculated as follows:
ITA 3(a) Farm Income $ 2,000 Taxable (Grossed Up) Dividends 2,950 $4,950 ITA 3(b) Taxable Capital Gains Allowable Capital Losses
$ 1,000
Nil 1,000
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ITA 3(c) ITA 3(d) Non-Farming Business Loss 2020 Net Income 2019 Net Capital Loss
$5,950
(14,000)
Nil
($1,000)
2020 Taxable Income Nil
Since there are $1,000 of net taxable capital gains this year, and the problem states that Ms.Breau would like to deduct the maximum amount of net capital losses, the net capital loss of $1,000 is applied against the ITA 3(b) amount of $1,000, which effectively increases the 2020 non-capital loss.
The 2020 non-capital loss is calculated as follows:
Business Loss $14,000
Add: 2019 Net Capital Loss Deducted 1,000
ITA 3(c) Income (5,950) 2020 Non-Capital Loss $ 9,050
The entire 2020 non-capital loss could be carried back to 2019, but since Ms. Breau requires $15,000 in taxable income to fully utilize her tax credits, no carry back is contemplated.
There would be the following loss balances at the end of 2020:
• 2019 Restricted Farm Loss (Unchanged) $3,750 • 2019 Net Capital Loss ($1,500 – $1,000)] $ 500 • 2020 Non-Capital Loss $9,050
2021 Analysis
The required information can be calculated as follows:
ITA 3(a) Non-Farming Business Income $30,000 Farm Income 3,150 Taxable (Grossed Up) Dividends ITA 3(b)
3,963 $37,113
Taxable Capital Gains $ 2,000 Allowable Capital Losses Nil 2,000 2021 Net Income $39,113 2019 Restricted Farm Loss (Equal to Farm Income) (3,150) 2019 Net Capital Loss (Less than $2,000) (500) 2020 Non-Capital Loss Carry Forward (All) ( 9,050) 2021 Taxable Income $26,413
There would be the following loss balances at the end of 2021:
• 2019 Restricted Farm Loss ($3,750 – $3,150) $ 600
2022 Analysis The required information can be calculated as follows: 2 / 4
ITA 3(a) Taxable (Grossed Up) Dividends $ 6,450 ITA 3(b) Taxable Capital Gains $ 2,250 Allowable Capital Losses (7,250) Nil ITA 3(c) ITA 3(d) Non-Farming Business Loss
($19,000)
$ 6,450
Farm Loss (2,000) (21,000) 2022 Net Income and Taxable Income Nil
The 2022 non-capital loss can be calculated as follows:
Business Loss $19,000 ITA 3(c) Income (6,450) Non-Capital Loss $12,550 Farm Loss (Unrestricted) 2,000 2022 Non-capital loss $14,550
Although technically the farm loss is accounted for separately from the non-capital loss, since the farm loss is less than $2,500 it is treated as an unrestricted farm loss and can be applied against all types of income. Given the carry over rules are the same, we have treated this farm loss as part of the non-capital loss carry over although technically the 2022 non-capital loss would be $12,550 and the 2022 Farm loss would be $2,000. The preceding loss carry over of $14,550 is available for carry back three years to 2019.The 2022 net capital loss would be equal to $5,000 [ITA 3)(b)(ii) $7,250 – ITA 3(b)(i) of $2,250)]. $1,500 of the 2022 net capital loss can be applied to the 2021 year as there are $1,500 ($2,000 – $500) in net taxable capital gains remaining in 2021 as the basis for a carry back. This leaves a balance of $3,500 ($5,000 – $1,500).If both the $14,550 non-capital loss and the $1,500 net capital loss were carried back to 2021, the result would be a Taxable Income of $10,363, less than the $15,000 that is required to fully utilize Ms. Breau’s available tax credits. As the 2021 net capital loss can only be deducted to the extent of net taxable capital gains, it would be advisable to first claim the full amount of this loss. Based on this view, the deduction of the 2022 non-capital loss will be limited to $9,913 ($26,413 – $15,000 – $1,500), an amount that will provide for the full use of Ms. Breau’s 2021
tax credits:
2021 Taxable Income (As Reported) $26,413 2022 Non-Capital Loss ( 9,913) 2022 Net Capital Loss ( 1,500) 2021 Revised Taxable Income $15,000
These loss applications leave Ms. Breau with her required $15,000 in 2021 taxable income. The
following loss balances remain at the end of 2022:
• 2019 Restricted Farm Loss $ 600 • 2022 Net Capital Loss ($5,000 – $1,500)] $3,500 • 2022 Non-Capital Loss ($14,550 – $9,913) $4,637 3 / 4
Solution to AP 11-2 Before consideration of any loss carry overs, Lucinda would have 2021 taxable income as
follows:
Rental Income $ 91,450 Interest Income 38,275 Taxable Capital Gains 17,300 2021 Net Income and Taxable Income $147,025
The loss on Recovery Inc. qualifies as a Business Investment Loss (BIL) because it is a transaction to which ITA 50(1) applies. However, because of her use of the capital gains deduction in 2020, $156,000 of this amount would be disallowed as a result of ITA 39(9).
Given this, the ABIL would be calculated as follows:
Total Capital Loss $675,000 Reduced by previous Capital Gains Deduction (156,000)
BIL $519,000
Inclusion Rate 1/2
2022 ABIL $259,500
Lucinda’s 2022 taxable income is calculated as follows:
Income Under ITA 3(a) Rental Income $86,300 Interest Income 27,438 $113,738 Income Under ITA 3(b) Taxable Capital Gains
$18,620
Allowable Capital Loss [(1/2)($156,000)] (Note 1) (78,000) Nil Balance Under ITA 3(c) $113,738 Deduction Under ITA 3(d) ABIL (Note 2)
(259,500)
2022 Net Income and Taxable Income Nil
Note 1 The part of the capital loss of $675,000 that does not qualify as a BIL retains its character as a capital loss of $156,000. The allowable capital loss is therefore 50% of that amount or $78,000. As a result, there would be a 2022 net capital loss of $59,380 (ITA 3(b)(ii) $78,000 – ITA 3(b)(i)) $18,620). This 2022 net capital loss can be carried back to 2021 and applied to the extent of the net taxable capital gains of $17,300 in that year.
Note 2 As the ABIL was realized in 2022, it must be used to reduce net income for 2022. The 2022 non-capital loss would equal $145,762 (ITA 3(d) of $259,500 – ITA 3(c) of $113,738).
The amount that should be carried back to 2021 would be calculated as follows:
2021 Net Income (As Originally Calculated) $147,025 2022 Net Capital Loss (17,300) 2022 Non-Capital Loss (115,917)
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