Byrd & Chen’s Canadian Tax Principles 2015 – 2016 Edition Volumes I And II – Test Bank

CHAPTER ELEVEN SOLUTIONS
Solution to Assignment Problem Eleven – 1
2012 Analysis
The required information can be calculated as follows:
ITA 3(a)
Business Income $19,800
Taxable Dividends [(138%)($1,870)] 2,581 $22,381
ITA 3(b)
Taxable Capital Gains [(1/2)($1,320)] $ 660
Allowable Capital Losses [(1/2)($4,620)] ( 2,310) Nil
ITA 3(c) $22,381
ITA 3(d)
Farm Loss (See Note) ( 6,750)
Net Income For Tax Purposes And Taxable Income $15,631
Note Dale’s farm losses are restricted as follows:
Total Farm Loss $11,000
Deductible Amount:
First $2,500 ($2,500)
One-Half Of $8,500 ($11,000 – $2,500) ( 4,250) ( 6,750)
Restricted Farm Loss Carry Forward $ 4,250
As noted in the problem, none of the losses can be carried back before 2012. This would leave
the following carry forward balances at the end of 2012:
• Restricted Farm Loss Carry Forward $4,250
• Net Capital Loss Carry Forward ($2,310 – $660) $1,650
2013 Analysis
The required information can be calculated as follows:
ITA 3(a)
Farm Income $ 2,200
Taxable Dividends [(138%)($2,351)] 3,244 $ 5,444
ITA 3(b)
Taxable Capital Gains [(1/2)($2,200)] $ 1,100
Allowable Capital Losses Nil 1,100
ITA 3(c) $ 6,544
ITA 3(d)
Business Loss ( 15,400)
Net Income For Tax Purposes Nil
2012 Net Capital Loss Carry Forward ($ 1,100)
Taxable Income (Loss) Nil
Since there are taxable capital gains this year, and the problem states that Dale would like to
deduct the maximum amount of his net capital loss carry forwards, the net capital loss carry
forward of $1,100 is added to the balance of the non-capital loss.
The non-capital loss carry over is calculated as follows:
Solution To AP Eleven – 1
Solutions Manual for Canadian Tax Principles 2015 – 2016 218
Business Loss $15,400
2012 Net Capital Loss Deducted 1,100
ITA 3(c) Income ( 6,544)
Non-Capital Loss Carry Over For 2013 $ 9,956
The entire non-capital loss carry over could be carried back to 2012, but since Dale requires
$15,400 in Taxable Income to fully utilize his tax credits, the maximum carry back to 2012 is
$231, calculated as follows:
2012 Taxable Income (As Reported) $15,631
Non-Capital Loss Carry Back From 2013 ( 231)
2012 Amended Taxable Income (Minimum) $15,400
This carry back leaves Dale with his required $15,400 in Taxable Income. There would be the
following carry forward balances at the end of 2013:
• Restricted Farm Loss Carry Forward (Unchanged) $4,250
• Net Capital Loss Carry Forward ($1,650 – $1,100)] $ 550
• Non-Capital Loss Carry Forward ($9,956 – $231) $9,725
2014 Analysis
The required information can be calculated as follows:
ITA 3(a)
Business Income $33,000
Farm Income 3,465
Taxable Dividends [(138%)($3,160)] 4,361 $40,826
ITA 3(b)
Taxable Capital Gains [(1/2)($4,400)] $2,200
Allowable Capital Losses Nil 2,200
Net Income For Tax Purposes $43,026
Restricted Farm Loss Carry Forward (Equal To Farm Income) ( 3,465)
Net Capital Loss Carry Forward (Less Than $2,200) ( 550)
Non-Capital Loss Carry Forward (All) ( 9,725)
Taxable Income $29,286
There would be the following carry forward balance at the end of 2014:
• Restricted Farm Loss Carry Forward ($4,250 – $3,465) $ 785
2015 Analysis
The required information can be calculated as follows:
ITA 3(a)
Taxable Dividends [(138%)($5,140)] $ 7,093
ITA 3(b)
Taxable Capital Gains [(1/2)($4,950)] $ 2,475
Allowable Capital Losses [(1/2)($15,950)] ( 7,975) Nil
ITA 3(c) $ 7,093
ITA 3(d)
Business Loss ($20,900)
Farm Loss ( 2,200) ( 23,100)
Net Income For Tax Purposes And Taxable Income Nil
Solution To AP Eleven – 1
Solutions Manual for Canadian Tax Principles 2015 – 2016 219
The available non-capital loss can be calculated as follows:
Business Loss $20,900
Farm Loss (Unrestricted) 2,200 $23,100
ITA 3(c) Income ( 7,093)
Non-Capital Loss Carry Over For 2015 $16,007
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. ITA 31 states that any loss allowed under that provision is considered an unrestricted loss from a farming business for the year for the purposes of calculating
the non-capital loss carryover. As a result, the preceding loss carry over of $16,007 is available
for carry back to 2014 to be applied against any type of income.
With respect to the net capital loss of $5,500 ($7,975 – $2,475), there are $1,650 ($2,200 –
$550) in taxable capital gains left in 2014 as the basis for a carry back. This means that $1,650
of the 2015 net capital loss can be carried back, leaving $3,850 ($5,500 – $1,650) to be
carried forward as a net capital loss balance.
If both the $16,007 non-capital loss and the $1,650 net capital loss were carried back to 2014,
the result would be a Taxable Income of $11,629 ($29,286 – $16,007 – $1,650), less than the
$15,400 that is required to fully utilize Dale’s available tax credits. As the net capital loss can
only be deducted to the extent of taxable capital gains, it would be advisable to claim the full
amount of this loss carry back. Based on this view, the non-capital loss deduction will be
limited to $12,236 ($29,286 – $15,400 – $1,650), an amount that will provide for full use of
Dale’s 2014 tax credits:
2014 Taxable Income (As Reported) $29,286
Non-Capital Loss Carry Back From 2015 ( 12,236)
Net Capital Loss Carry Back From 2015 ( 1,650)
2014 Amended Taxable Income $15,400
These carry backs leave Dale with his required $15,400 in 2014 Taxable Income. There
would be the following carry forward balances at the end of 2015:
• Restricted Farm Loss Carry Forward (Unchanged) $ 785
• Net Capital Loss Carry Forward ($5,500 – $1,650)] $3,850
• Non-Capital Loss Carry Forward (Nil + $16,007 – $12,236) $3,771

Solution to Assignment Problem Eleven – 2
Before consideration of any carry backs, Dotty would have 2014 Taxable Income as follows:
Net Taxable Capital Gains $ 5,000
Net Rental Income 16,000
Interest Income 36,000
Net Income For Tax Purposes And Taxable Income $57,000
The loss on Spec Inc. is a Business Investment Loss (BIL) of $300,000 ($425,000 – $125,000).
However, because of her use of the lifetime capital gains deduction in 2013, $25,000 of this
amount would be disallowed. Given this, the available Allowable Business Investment Loss
(ABIL) would be calculated as follows:
Total Loss $300,000
Disallowed By Lifetime Capital Gains Deduction Use ( 25,000)
Balance $275,000
Inclusion Rate 1/2
Allowable Business Investment Loss (ABIL) $137,500
Given this, Dotty’s 2015 Taxable Income is calculated as follows:
Income Under ITA 3(a)
Net Rental Income $14,000
Interest Income 24,000 $ 38,000
Income Under ITA 3(b)
Taxable Capital Gains $6,000
Allowable Capital Loss (Disallowed ABIL)
[(1/2)($25,000)] (Note 1) ( 12,500) Nil
Balance Under ITA 3(c) $ 38,000
Deduction Under ITA 3(d)
ABIL (Note 2) ( 137,500)
Net Income For Tax Purposes And Taxable Income Nil
Note 1 As the $25,000 disallowed BIL becomes an ordinary capital loss, it must be
deducted against the 2015 capital gain. This leaves a net capital loss carry over of
$6,500 ($12,500 – $6,000) of which $5,000 can be carried back to 2014.
Note 2 As the ABIL was realized in 2015, it must be used to reduce that year’s
income to Nil. Note that, because of this rule, Dotty cannot deduct a smaller amount
in order to have sufficient income to absorb her basic personal tax credit. After this
deduction, a carry forward of $99,500 ($137,500 – $38,000) remains. For the next 10
years, this amount will be treated as a non-capital loss carry forward that can be
deducted against other sources of income. If it has not been utilized within the 10
years, it then becomes a net capital loss carry forward, deductible for an unlimited
number of future periods, but only against net taxable capital gains.
Using the carry over amounts, the 2014 tax return would be amended as follows:
Net Income For Tax Purposes (As Originally Calculated) $57,000
Net Capital Loss Carried Back ( 5,000)
Optimum Taxable Income = 2014 Basic Personal Amount ( 11,138)
Non-Capital Loss Carried Back ($40,862)