Test Bank for Byrd & Chen's Canadian Tax Principles, 2024|2025 Edition Vol 2 by Gary Donell
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Taxation
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Taxation
Test Bank for Byrd & Chen's Canadian Tax Principles, 2024|2025 Edition Vol 2 by Gary Donell, Clarence Byrd, Ida Chen. Volume 2 (Chap 11 to 21) are included in this document however Complete chapters (Chap 1 to 21) are included in Package deal of this document.
11 Taxable Income and Tax Payable ...
Chapter 1 to 10 are included in
Package Deal of this document
Byrd and Chen's Canadian Tax Principles, 2024-2025 (Donell)
Chapter 11 Taxable Income and Tax Payable for Individuals Revisited
11.1 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments," for example a court ordered termination
benefit. What tax policy objective is served by this provision?
Answer: Such lump-sum payments often reflect compensation for services rendered over several years.
The fact that it is received in a single year can result in significant portions of it being subject to income
tax rates higher than would have been the case had it been received over the several years during which
it was earned. The deduction of such amounts provides the basis for an alternative income tax payable
calculation which aJempts to adjust the amount paid to the amount that would have been paid if the
amount had actually been received over several years. The objective of such provisions is fairness or
equity by an aJempt to overcome the inherent penalty built into the graduated rate system with respect
to lump sum amounts that relate to numerous years.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that
the ITA provides for the types of losses that it identifies.
Answer: The carryover periods for the various types of losses identified in the Income Tax Act and
covered in the textbook up to Chapter 11 are as follows:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years
back.
• Net Capital Loss: Unlimited forward and 3 years back
• Listed Personal Property Losses: 7 years forward and 3 years back.
• Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss
with unlimited carry forward in year 11.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry
forward, but only against the partnership income to which they relate.
Type: ES
Topic: Loss carry overs - general concepts
3) When a business has several types of loss carryovers, why is it necessary to keep separate balances for
each type?
Answer: There are two reasons for having to track each type of loss carry forward separately. First,
different types of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for
capital losses). Second, some types of losses are streamed meaning that they can only be applied against
the equivalent type of income (e.g., capital losses can only be carried over and applied against net taxable
capital gains).
Type: ES
Topic: Loss carry overs - general concepts
1
,4) Tax advisors will normally recommend that loss carryovers not be used to reduce taxable income to nil
for an individual. What is the basis for this recommendation?
Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and
cannot be carried over to other years. This means that, unless an individual taxpayer has sufficient
taxable income and federal income tax payable, the value of these annual non-refundable credits is
simply lost. This, in effect, is what would happen if various types of loss carryovers were used to reduce
taxable income to nil. As a rule one should aJempt to ensure that taxable income is sufficient to allow an
individual to apply all available non-refundable personal tax credits.
Type: ES
Topic: Loss carry overs - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Answer: Losses on listed personal property can be deducted during the current year, but only against
net gains on listed personal property for that year. If the loss cannot be used during the current year, it
can be carried back three years and forward seven years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital losses and non-capital losses and does not have sufficient income in
the current and previous years to claim these amounts, which type of loss should be claimed first?
Answer: There is no clear cut answer to this question. Net capital losses have an unlimited life but can
only be carried over to the extent of net taxable capital gains in the carryover period. This would suggest
that, if net taxable capital gains are present in the current year, the use of net capital losses should receive
priority. This would be particularly true if additional net taxable capital gains are not expected in future
years. In contrast, non-capital losses can be deducted against any type of income. However, the downside
is that the carry forward period is limited to 20 years. While no firm conclusion is available, in most cases
the lengthy carry forward period for non-capital losses, would suggest using net capital losses first.
However, this tentative conclusion would be altered if the taxpayer commonly has net taxable capital
gains.
Type: ES
Topic: Loss carry overs - general concepts
7) John Broley has a 2023 $50,000 non-capital loss and a $50,000 2023 net capital loss. In 2024 his only
income is a $50,000 taxable capital gain. He has asked your advice as to which of the two loss carryovers
he should claim. What advice would you give him?
Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time
limited and will expire at the end of 20 years. In contrast, the net capital loss will never expire but can
only be applied against net taxable capital gains. If Mr. Broley is concerned about having sufficient
income to use the non-capital loss in the time remaining until it expires, he should claim that loss.
Alternatively, if he feels that he is likely to have sufficient income in that period, but that he is unlikely to
have further capital gains, he should claim the net capital loss. There is no clear answer to this question as
it involves estimates about the future. As a rule losses that are restricted as to the type of income they can
be applied against should be claimed before losses with no income restrictions.
Type: ES
Topic: Loss carry overs - general concepts
2
,8) If an individual dies and has a net capital loss in the year of the death or unused net capital losses from
previous years, these balances are subject to a different treatment than would be the case if the individual
were still alive. Briefly describe how this treatment is different.
Answer: ITA 111(2) contains a special provision with respect to both net capital losses from years prior
to death and to net capital losses arising in the year of death. Essentially, this provision allows these
capital loss balances to be applied against any type of income in the year of death, and in the immediately
preceding year, as long as the capital gains deduction has not been claimed. If the capital gains deduction
had been claimed in previous years then the net capital losses that can be claimed against any type of
income will be reduced on a dollar for dollar basis.
Type: ES
Topic: Losses - net capital losses at death
9) What is an Allowable Business Investment Loss (ABIL)? What special tax provisions are associated
with this type of loss?
Answer: An Allowable Business Investment Loss (ABIL) is the deductible portion of a capital loss
resulting from the disposition of investments in shares or debt of a small business corporation. The
special provisions associated with this type of loss are:
• It can be deducted against any type of income in the year in which it occurs.
• To the extent it cannot be fully used it becomes part of a non-capital loss for that year and can be carried
over to other years as a non-capital loss for 10 years after which it becomes part of a net capital loss
beginning with year 11.
• It is disallowed as an ABIL (i.e., it becomes a regular allowable capital loss), to the extent that the
individual has previously used the capital gains deduction.
• The realization of an ABIL reduces the annual gains limit that is used to determine the maximum
capital gains deduction for the year.
Type: ES
Topic: Allowable business investment losses
10) What is a Small Business Corporation as defined in the ITA?
Answer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private
corporation (CCPC) of which "all or substantially all," of the FMV of its assets are used in an active
business carried on "primarily" in Canada. The term "substantially all" generally means 90% or more,
while "primarily" is generally interpreted to mean more than 50%.
Type: ES
Topic: Small business corporation - ITA 248(1)
3
, 11) With respect to the deductibility of losses, individuals carrying on a farming activity fall into three
categories. What are these three categories and how are losses treated in each category?
Answer: The three categories, along with the treatment of their losses, are as follows:
Hobby Farmer - This is an individual who carries on a farming activity on a part time basis as a hobby.
The operation has no reasonable expectation of a profit and therefore it is not a business and therefore not
a source of income. As a result its losses are not recognized for income tax purposes.
Part-Time Farmer - This is an individual for whom farming is subordinate to some other source of
income. However, if there is a reasonable expectation of a profit and therefore a business, the individual
farmer is allowed to deduct a portion of their farm losses. In each year, the portion of the farm loss that
can be deducted against any source of income is limited to the first $2,500, plus one-half of the next
$30,000, to a maximum amount of $17,500. Losses in excess of this deductible amount are referred to as
restricted farm losses and, when they are carried over to earlier or later years, they can only be deducted
to the extent of income from any farming business in that year.
Full-Time Farmer - This is an individual for whom farming is their principal source of income and
activity. For this category of farmer, farm losses are fully deductible against any other income.
Type: ES
Topic: Losses - farming
12) The capital gains deduction is available when an individual taxpayer has a gain on the disposition of
shares in a "qualified small business corporation" (QSBC shares). What are the conditions that must be
met for the shares to qualify as QSBC shares?
Answer: In order to qualify as shares of a QSBC for the purposes of the capital gains deduction, the
corporation must be a "small business corporation" at the time of the disposition of the shares. This means
that substantially all (90% or more) of the FMV of its assets must be used to produce active business
income, primarily (more than 50%) in Canada. If the small business corporation test is met, two other
conditions must also be met for the shares to qualify.
These are as follows:
• the shares must not be owned by anyone other than the individual or a related person for at least 24
months preceding the disposition; and
• throughout that 24 month period, more than 50% of the FMV of the corporation's assets must be used in
an active business carried on primarily in Canada.
Type: ES
Topic: Capital gains deduction - shares of a QSBC
13) An individual has a capital gain on qualified farm property (QFP). The individual has no other capital
gains during the year. Explain how the annual gains limit would be calculated in determining the
individual's capital gains deduction for the year.
Answer: In these circumstances, the annual gains limit is equal to the taxable capital gain on the QFP,
less:
• Allowable capital losses realized during the current year.
• Net capital loss carryovers from other years deducted in the current year.
• Allowable Business Investment Losses realized during the current year.
Type: ES
Topic: Capital gains deduction - annual gains limit
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