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Test Bank for Byrd & Chen's Canadian Tax Principles, , (Volume 2) By Gary Donell, Clarence.
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1Test Bank for Byrd & Chen's Canadian Tax Principles,
2023-2024, (Volume 2) By Gary Donell, Clarence.
Chapter 11
11.1 Online Exercises
ITA110.2providesforadeductionof"lump-sum payments",forexampleacourtorderedtermination
benefit.Whataxpolicyobjectiveisservedbythisprovision?
Answer:Suchlump-sum paymentsoftenreflectcompensationforservicesrenderedoverseveralyears.
Thefacthatitisreceivedinasingleyearcanresultinsignificantportionsofitbeingsubjectoincometax
rateshigherthanwouldhavebeenthecasehaditbeenreceivedovertheseveralyearsduringwhichitwas
earned.Thedeductionofsuchamountsprovidesthebasisforanalternativeincometaxpayable
calculationwhichatemptstoadjustheamountpaidtotheamounthatwouldhavebeenpaidifthe
amounthadactualybeenreceivedoverseveralyears.Theobjectiveofsuchprovisionsisfairnesor equity.
Type:ES
Topic:Lump-sum payments-ITA110.2
Thecaryoverperiodsforlosesvarieswiththetypeoflos.Brieflydescribethecaryoverperiodsthat
theITAprovidesforthetypesoflosesthatitidentifies.
Answer:ThecaryoverperiodsforthevarioustypesoflosesidentifiedintheIncomeTaxActand
coveredinthetextuptoChapter11areasfolows:
•Non-CapitalLosesandFarm Loses(includingrestrictedfarm loses):20yearsforwardand3years back.
•NetCapitalLos:Unlimitedforwardand3yearsback
•ListedPersonalPropertyLoses:7yearsforwardand3yearsback.
•AlowableBusinesInvestmentLoses:10years,asanon-capitalosthenconvertedtonetcapitalos
withunlimitedcaryforwardinyear11.
•ForeignTaxCredits:10yearsforwardand3yearsback.
CoveredinChapter18arelimitedpartnershiploses.Theyhavenocarybackandanunlimitedcary
forward,butonlyagainsthepartnershipincometowhichtheyrelate.
Type:ES
Topic:Loscaryovers-generalconcepts
Whenabusineshasseveraltypesofloscaryovers,whyisitnecesarytokeepseparatebalancesfor eachtype?
Answer:Therearetworeasonsforhavingtotrackeachtypeofloscaryforwardseparately.First,
differentypesofloseshavedifferentcaryoverperiods(e.g.,20yearsforfarm losesvs.unlimitedfor
capitaloses).Second,sometypesoflosescanonlybeap liedagainstheequivalentypeofincome
(e.g.,capitalosescanonlybecariedoverandap liedagainstcapitalgains).
Type:ES
Topic:Loscaryovers-generalconcepts
1
, 2
Taxadvisorswilnormalyrecommendthatloscaryoversnotbeusedtoreducetaxableincometonil
foranindividual.Whatisthebasisforthisrecommendation?
Answer:Thisrecommendationreflectsthefacthatmostpersonaltaxcreditsarenon-refundableand can
otbecariedovertootheryears.Thismeansthat,unles anindividualtaxpayerhastaxableincome
andfederalincometaxpayable,thevalueofthesecreditsissimplylost.This,ineffect,iswhatwould hap
enifvarioustypesofloscaryoverswereusedtoreducetaxableincometonil.
Type:ES
Topic:Loscaryovers-individual
Brieflydescribetheincometaxtreatmentoflosesonlistedpersonalproperty.
Answer:Losesonlistedpersonalpropertycanbedeductedduringthecurentyear,butonlyagainstnet
gainsonlistedpersonalpropertyfortheyear.Iftheloscan otbeusedduringthecurentyear,itcanbe
cariedbackthreeyearsorforwardsevenyears.
Type:ES
Topic:Loses-listedpersonalproperty
Ifataxpayerhasbothnetcapitalandnon-capitalosesanddoesnothavesufficientincomeinthe
curentandpreviousyearstoclaim theseamounts,whichtypeoflosshouldbedeductedfirst?
Answer:Thereisnoclearcutanswertothisquestion.Netcapitaloseshaveanunlimitedlifebutcan
onlybecariedovertotheextentofnetaxablecapitalgainsinthecaryoverperiod.
Thiswouldsugesthat,ifnetaxablecapitalgainsarepresentinthecurentyear,theuseofnetcapital
losesshouldreceivepriority.Thiswouldbeparticularlytrueifad itionalnetaxablecapitalgainsare
notexpectedinfutureyears.Incontrast,non-capitalosescanbedeductedagainstanytypeofincome.
However,thedownsidehereisthatheircaryforwardperiodislimitedto20years.Whilenofirm
conclusionisavailable,inmostcasesthelengthycaryforwardperiodfornon-capitaloses,would
sugestusingnetcapitalosesfirst.However,thistentativeconclusionwouldbealteredifthetaxpayer
commonlyhasnetaxablecapitalgains.
Type:ES
Topic:Loscaryovers-generalconcepts
JohnBroleyhasa2021$50,000non-capitalosanda$50,0002021netcapitalos.In2022hisonly
incomeisa$50,000taxablecapitalgain.
Hehasaskedyouradviceastowhichofthetwoloscaryforwardsheshouldclaim.Whatadvicewould
yougivehim?
Answer:Thedifferencebetweenthetwoloscaryforwardsisthathenon-capitalosbalanceistime
limitedandwilexpireatheendof20years.Incontrast,thenetcapitaloswilneverexpirebutcanonly beap
liedagainstnetaxablecapitalgains.IfMr.Broleyisconcernedabouthavingsufficientincometo usethenon-
capitalosinthetimeremaininguntilitexpires,heshouldclaim thatlos.
Alternatively,ifhefeelsthatheislikelytohavesufficientincomeinthatperiod,butthatheisunlikelyto
havefurthercapitalgains,heshouldclaim thenetcapitalos.Thereisnoclearanswertothisquestionasit
involvesestimatesabouthefuture.
Type:ES
Topic:Loscaryovers-generalconcepts
2
, 3
Ifanindividualdiesandhasanetcapitalos intheyearofthedeathorunusednetcapitalosesfrom
previousyears,thesebalancesaresubjectoadifferentreatmenthanwouldbethecaseiftheindividual
werestilalive.Brieflydescribehowthistreatmentisdifferent.
Answer: ITA111(2)containsaspecialprovisionwithrespectobothnetcapitalosesfrom yearspriorto
deathandtonetcapitalosesarisingintheyearofdeath.Esentialy,thisprovisionalowstheselos balancestobeap
liedagainstanytypeofincomeintheyearofdeath,ortheimmediatelyprecedingyear,as
longasthecapitalgainsdeductionhasnotbeenclaimed.Ifthecapitalgainsdeductionhadbeenclaimedin
previousyearsthenthenetcapitalosesthatcanbeclaimedagainstanytypeofincomewilbereduced.
Type:ES
Topic:Loses-netcapitalosesatdeath
WhatisanAlowableBusinesInvestmentLos(ABIL)?Whatspecialtaxprovisionsareasociated
withthistypeoflos?
Answer:AnAlowableBusinesInvestmentLos(ABIL)isthedeductibleportionofacapitalos resultingfrom
thedispositionofsharesordebtofasmalbusinescorporation.Thespecialprovisions
asociatedwiththistypeoflosare:
•Itcanbedeductedagainstanytypeofincomeintheyearinwhichitocurs.
•Totheextentitcan otbefulyuseditbecomespartofanon-capitalosforthatyearandcanbecaried
overtootheryearsasanon-capitalos for10yearsafterwhichitbecomespartofanetcapitalos for
theeleventhyear.
•ItisdisalowedasanABIL(i.e.,itbecomesaregularalowablecapitalos),totheextenthathe
individualhaspreviouslyusedthecapitalgainsdeduction.
•TherealizationofanABILreducesthean ualgainslimithatisusedtodeterminethemaximum
capitalgainsdeductionfortheyear.
Type:ES
Topic:Alowablebusinesinvestmentloses
WhatisaSmalBusinesCorporationasdefinedintheITA?
Answer:AsmalbusinescorporationisdefinedinITA248(1)asaCanadiancontroledprivate
corporation(CCPC)ofwhich"alorsubstantialyal",oftheFMVofitsasetsareusedinanactive
businescariedon"primarily"inCanada.Theterm "substantialyal"generalymeans90% ormore,
while"primarily"isgeneralyinterpretedtomeanmorethan50%.
Type:ES
Topic:Smalbusinescorporation-ITA248(1)
3
, 4
Withrespectothedeductibilityoftheirloses,farmersfalintothreecategories.Whatarethesethree
categoriesandhowarelosestreatedineachcategory?
Answer:Thethreecategories,alongwiththetreatmentoftheirloses,areasfolows:
Hob yFarmer-Thisisanindividualwhorunsafarmingoperationonapartimebasisasahobyorasa
wayofenhancinghisorherlifestyle.Theoperationhasnoreasonableexpectationofaprofitandtherefore
itisnotabusinesandnotasourceofincome.Asaresultitslosesarenotrecognizedforincometax purposes.
PartTimeFarmer-Thisisanindividualforwhom farmingissubordinatetosomeothersourceofincome.
However,ifthereisareasonableexpectationofaprofitandthereforeabusines,theindividualfarmeris
alowedtodeductaportionoftheirfarm loses.Ineachyear,theportionofthefarm losthatcanbe
deductedagainstanysourceofincomeislimitedtothefirst$2,500,plusone-halfofthenext
$30,000,toamaximum amountof$17,500.Losesinexcesofthisdeductibleamountarereferedtoas
restrictedfarm losesand,whentheyarecariedovertoearlierorlateryears,theycanonlybedeductedto
theextentofanyfarm incomeinthatyear.
FulTimeFarmer-Thisisanindividualforwhom farmingistheirprincipalsourceofincomeand
activity.Forthiscategoryofarmer,farm losesarefulydeductibleagainstanyothersourceofincome. Type:ES
Topic:Loses-farming
Thecapitalgainsdeductionisavailablewhenanindividualtaxpayerhasagainonthedispositionof
sharesina"qualifiedsmalbusinescorporation"(QSBCshares).Whataretheconditionsthatmustbe
metforthesharestoqualifyasQSBCshares?
Answer:InordertobesharesofaQSBCforthepurposesofthecapitalgainsdeduction,thecorporation
mustbea"smalbusinescorporation"athetimeofthedispositionoftheshares.Thismeansthat
substantialyal(90% ormore)oftheFMVofitsasetsmustbeusedtoproduceactivebusinesincome,
primarily(morethan50%)inCanada.Ifthesmalbusinescorporationtestismet,twootherconditions
mustbemetforthesharestoqualify.
Theseareasfolows:
•thesharesmustnotbeownedbyanyoneotherthantheindividualorarelatedpersonforatleast24
monthsprecedingthedisposition;and
•throughouthat24monthperiod,morethan50% oftheFMVofthecorporation'sasetsmustbeusedin
anactivebusinescariedonprimarilyinCanada.
Type:ES
Topic:Capitalgainsdeduction-sharesofaQSBC
Anindividualhasacapitalgainonqualifiedfarm property(QFP).Theindividualhasnoothercapital
gainsduringtheyear.Explainhowthean ualgainslimitwouldbecalculatedindeterminingthe
individual'scapitalgainsdeductionfortheyear.
Answer:Inthesecircumstances,thean ualgainslimitisequaltothetaxablecapitalgainontheQFP, les:
•Alowablecapitalosesrealizedduringthecurentyear.
•Netcapitaloscaryoversfrom previousdeductedinthecurentyear.
•AlowableBusinesInvestmentLosesrealizedduringthecurentyear.
Type:ES
Topic:Capitalgainsdeduction-an ualgainslimit
4
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