Solutions to Chapter 11 Assignment Problems

177

CHAPTER 11

Computation of Taxable Income and Tax After

General Reductions for Corporations
Solution 1 (Basic)
2008
Par. 3(a)
Par. 3(b)

Income from business.......................... $

Income from property..........................
$
Taxable capital gains............................
Allowable capital losses.......................

54,000
42,500
96,500
11,000
(2,000)

2009
$
$

2010

32,000
22,500
54,500
2,500
(2,500)

$
$

2011

Nil
18,000
18,000
5,000
(3,500)

19,500
n/a
(75,000)
Nil

Nil

62,500
10,500
73,000
9,000
Nil

(1)

Par. 3(c)
Par. 3(d)

$ 105,500
ABIL....................................................
(3,750)
Business loss........................................
n/a
Par. 3(e)
Income from Division B...................... $ 101,750
Sec. 112
Inter-company dividends......................
(42,500)
$
59,250
Sec. 110.1
Charitable donations:(2)
Carryover......................................
n/a
Current..........................................
(23,000)
$
36,250
Par. 111(1)(b)
Net capital losses(3)...............................
(9,000)
$
27,250
Par. 111(1)(a)
Non-capital losses(4)..............................
(27,250)
Taxable income....................................................................
Nil

54,500
n/a
n/a
$
54,500
(22,500)
$
32,000

(9,000)
$
23,000

$
23,000
(23,000)
Nil

Nil
(1,500)
Nil

Nil

82,000
n/a
n/a
$
82,000
(10,500)
$
71,500
(3,000)
(13,000)
$
55,500
(500)
$
55,000
(24,750)
$
30,250

NOTES TO SOLUTION
(1)

A maximum of $2,500 can be deducted in 2009.

(2)

Charitable donations:
2008: Lesser of:
2009: Lesser of:
2010: Lesser of:
2011: Lesser of:

(a) 75% of $101,750 = $76,313

(b) $23,000
Carryforward: Nil
(a) 75% of $54,500 = $40,875
(b) $9,000
Carryforward: Nil
(a) 75% of Nil = Nil
(b) $3,000
Carryforward: $3,000
(a) 75% of $82,000 = $61,500
(b) $3,000 + $13,000 = $16,000
Carryforward: Nil

(3) Net capital losses

1999 net capital loss converted to 2008 rates: $13,500 / ................................................
Net capital loss deducted in 2008 to the extent of net taxable capital gains................................
2009 net capital loss not utilized.................................................................................................
2010 net capital loss deducted to the extent of net taxable capital gains.....................................
2011 remaining net capital loss deducted in 2011 to the extent of net taxable capital gains
Available for carryforward..........................................................................................................

9,000
(9,000)
Nil
$
2,000
(1,500)
$
500
(500)
Nil

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178
(4) Non-capital losses

Par. 3(d) Loss from business in 2010............................................................... $ 75,000

Dividends deducted under section 112...............................................
18,000
Add: net capital loss deducted...................................................................................................
Less: par. 3(c): par. 3(a) dividends....................................................................
par. 3(b) taxable capital gain.....................................................

$
$

93,000
1,500
94,500

19,500
75,000

18,000
1,500

Losses utilized: 2008......................................................................................... $ 27,250

2009.........................................................................................
23,000
2011.........................................................................................
24,750
Closing balance.........................................................................................................................

75,000
Nil

Solutions to Chapter 11 Assignment Problems

179

Solution 2 (Advanced)
The data given in the problem statement can be summarized as follows:
carryforward losses

non-capital losses

2010repair business

$40,000

rental property

$2,000

current deemed
year-end losses

from non-capital
sources

rental property
$60,000

property

$5,000

recapturebuilding
TCGland
building

$5,000

2,000
allowable capital
losses
$10,000

business

potential elections

net capital losses

potential offset
business income

10,000

5,000
$22,000
taxable capital gain

$3,000

potential offset

expiration
after deemed
year-end
$5,000

$30,000
40,000
$70,000

potential
offset

Expected Results from Summary of Data

(a) No Election
Note that if no election is made, there is no income to offset the current business loss of $60,000 or the non-capital
loss carryforward of $40,000. Therefore, the non-capital loss available to carry forward from October 31, 2011 is
$100,000 (i.e., $60,000 + $40,000). Note that the $2,000 of non-capital loss carryforward from a property loss expires.
(b) Maximum Election
If the maximum election is made, the $3,000 of recapture offsets the business loss, leaving $57,000 (i.e.,
$60,000 $3,000) of net business loss. The $70,000 of taxable capital gain offsets the $22,000 of expiring losses,
leaving $48,000 (i.e., $70,000 $22,000) to offset the remaining $57,000 of business loss. There is no remaining
taxable capital gain to offset some of the $40,000 non-capital loss carryforward. As a result, the non-capital loss
available for carry forward from October 31, 2011 is $40,000.
(c) Partial Election
If only a partial election is made, it should be enough to offset only $20,000 of the $22,000 of expiring
losses. The other $2,000 of expiring loss is the property loss carryforward which can only be utilized if enough
Division B income is elected, resulting in the elimination of the current business loss, as was the case with the
maximum election. If a partial election of only $20,000 of taxable capital gain is made, the current business loss
of $60,000 is not offset and, hence, is available to carry forward, along with the $40,000 of business non-capital
losses, from October 31, 2011 for a total of $100,000.
Part A (Ignoring all possible elections)
An acquisition of control occurred when Chris acquired more than 50% of the voting shares of Transtek Inc.
from an unrelated person, Tom.
The taxation year of Transtek is deemed to end immediately before the acquisition of control, October 31,
2011 [ssec. 249(4)].
Tax returns are required to be filed for this short year (i.e., 10 months) and amounts, such as CCA (if
claimed), will have to be prorated.
It is assumed that any accrued losses in inventory and accounts receivable have been recognized in
calculating the business loss of $60,000.
There are no accrued losses on the depreciable property. Therefore, there is no adjustment required
[ssec. 111(5.1)].

Introduction to Federal Income Taxation in Canada

180

There is a $20,000 accrued loss on the rental property land that must be recognized. The ACB of the land is
reduced from $90,000 to $70,000 [par. 111(4)(c)]. The $20,000 reduction is deemed to be a capital loss
[par. 111(4)(d)].
The income (loss) for the taxation year ended October 31, 2011 is computed below.
Par. 3(a)
Par. 3(b)

Par. 3(c)
Par. 3(d)

Business income.............................................................................................................
Property income..............................................................................................................
Net capital gains:
Taxable capital gains............................................................................
Nil
Allowable capital loss: rental property ($20,000 1/2)......................... $ (10,000)
................................................................................................................
Business loss........................................................................................... $ (60,000)
Property loss............................................................................................
(5,000)
Division B income..........................................................................................................

Nil
Nil
Nil
Nil
$ (65,000)
Nil

The net capital losses (($10,000 1/2) + $10,000 = $15,000) expire immediately following the October 31,
2011 year-end [par. 111(4)(a)].
The non-capital loss balance at November 1, 2011 is computed as follows:
Balance, Jan. 1, 2011..........................................................................................................................
Loss for taxation year ended Oct. 31, 2011:
from business...................................................................................................... $
60,000
from property......................................................................................................
5,000
$
65,000
Less Par. 3(c) amount determined above.................................................................
Nil
Balance, Oct. 31, 2011........................................................................................................................
Less: unutilized losses about to expire:
non-capital property losses............................................................................. $
2,000
current property loss......................................................................................
5,000
......................................................................................................................
Balance, Nov. 1, 2011.........................................................................................................................

42,000

65,000
$ 107,000
(7,000)
$ 100,000

Only the portion of the non-capital loss that may reasonably be regarded as a loss from carrying on a
business ($40,000 + $60,000 = $100,000) is deductible after October 31, 2011. Thus, the rental losses ($2,000 +
$5,000 = $7,000) expire immediately following the October 31, 2011 year-end [par. 111(5)(a)].
The $100,000 non-capital loss will be deductible only if the following condition is met the transmission
repair business is carried on for profit or with a reasonable expectation of profit throughout the taxation year in
which the losses are to be claimed [spar. 111(5)(a)(i)]. The condition appears to be met for the June 30, 2012 and
the June 30, 2013 taxation years. The transmission repair business was carried on throughout each of the years. It
was carried on for profit for the taxation year ended June 30, 2013. Due to Chriss work ethic and contacts in the
industry, it is reasonable to assume that it was carried on with a reasonable expectation of profit for the taxation
year ended June 30, 2012, despite the loss that was actually realized.
The $100,000 non-capital loss is deductible only to the extent of income from the transmission repair
business and income from a business selling similar products or providing similar services [spar. 111(5)(a)(ii)].
Thus, $54,000 of the non-capital loss incurred prior to November 1, 2011 is deductible for the June 30, 2013
taxation year. None of it is deductible for the June 30, 2012 taxation year due to the loss in that year. The
remainder ($100,000 $54,000 = $46,000) can be carried forward to 2014 subject to these same restrictions.
These restrictions do not apply to the non-capital loss ($25,000 $6,000 = $19,000) incurred in the taxation
year ended June 30, 2012. Thus $11,000 of the 2012 non-capital loss is deductible in 2013, in addition to the
$54,000 mentioned above.
Part B (i) (Maximum election)
Paragraph 111(4)(e) allows Transtek to elect to be deemed to have disposed of the repair shop land for
proceeds of $140,000 (maximum) and the repair shop building for proceeds of $230,000 (maximum). If Transtek
makes this election, the ACB of the land on November 1, 2011 will be $140,000 and the ACB of the building will
be $230,000. The new undepreciated capital cost for the building will be limited by paragraph 13(7)( f) to
$150,000 + 1/2 ($230,000 150,000) = $190,000.
The income for the taxation year ended October 31, 2011 will be as follows:
Par. 3(a):

Business income..............................................................................................................
Property income..............................................................................................................

Nil
Nil

Solutions to Chapter 11 Assignment Problems

Par. 3(b):

Par. 3(c)
Par. 3(d)

Net capital gains:

Taxable capital gains:
Repair shop land ($140,000 $80,000) 1/2........................................
Repair shop building ($230,000 $150,000) 1/2................................
Allowable capital loss ($20,000 1/2)......................................................
.................................................................................................................
Business loss............................................................................................
Less: recapture building ($147,000 $150,000).................................

Property loss............................................................................................
Division B income.......................................................................................................
Division C deductions:
Par. 111(1)(a) Net capital loss from 2010..................................
Par. 111(1)(b) Non-capital loss:
Business..............................................................
$
(Nil)
Property..............................................................
(Nil)
Taxable income....................................................................................
Non-capital loss balance, Nov. 1, 2011:
Business
Balance, Jan. 1, 2011.................................................................... $
40,000
Added in taxation year ended Oct. 31, 2011
($60K $5K $5K $57K)...................................................
7,000
Utilized in taxation year ended Oct. 31, 2011 or expired..............
(Nil)
Remaining.................................................................................... $
47,000

181

30,000
40,000
$
70,000
(10,000)

$
$

$ (60,000)
3,000
$ (57,000)
(5,000)
$

(62,000)
Nil

(5,000)
(Nil)

60,000
60,000

Property
2,000

(5,000)
Nil
Total
$
42,000

Nil
(2,000)
Nil

7,000
(2,000)
47,000

The $47,000 remaining may reasonably be regarded as a loss from carrying on business and thus is
deductible in a taxation year after October 31, 2011, subject to the restrictions discussed in Part A.
By making the maximum elections possible, the non-capital loss balance of Transtek at November 1, 2011
has been significantly reduced.
Part B (ii)(Minimum election to utilize expiring losses)
The following losses will expire October 31, 2011, if not utilized:
The 2010 net capital loss....................................................................................................
The Oct. 31, 2011 allowable capital loss.............................................................................
The rental loss portion of the 2010 non-capital loss............................................................
The Oct. 31, 2011 rental loss..............................................................................................

5,000
10,000
2,000
5,000
22,000

It is impossible to utilize the rental loss portion of the 2010 non-capital loss of $2,000 without triggering
sufficient income under paragraph 3(c) to utilize the entire October 31, 2011 business loss. This would not be
beneficial. Therefore, only $20,000 of the expiring losses will be used.
To utilize these losses in the taxation year ending October 31, 2011, a capital gain of 2 $20,000 = $40,000
is needed. To avoid recapture, the election should be made on the land, not the building.* Thus, Transtek will
elect under paragraph 111(4)(e) to be deemed to have disposed of the repair shop land for proceeds of $120,000,
i.e., (2 $20,000) + 80,000. The ACB of the land at November 1, 2011 will be $120,000.
* An alternative is considered below.

The income for the taxation year ended October 31, 2011 will be as follows:
Par. 3(a)

Business income.......................................................................................
Property income.......................................................................................
Par. 3(b) Net capital gains:
Taxable capital gain:
Repair shop land ($120,000 $80,000) 1/2............................................
Allowable capital loss ($20,000 1/2)......................................................
Par. 3(c).......................................................................................................................
Par. 3(d) Business loss............................................................................................
Property loss............................................................................................
Division B income.......................................................................................................

Nil
Nil
$

20,000
(10,000)

$ (60,000)
(5,000)

$
$

10,000
10,000
(65,000)
Nil

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182

Division C deductions:
Par. 111(1)(a) Net capital loss from 2010.............................................................
Taxable income...........................................................................................................

$ (5,000)
Nil

The net capital loss claimed has no effect on taxable income, but it will increase the non-capital loss balance.
The non-capital loss balance at November 1, 2011 is computed as follows:
Balance, Jan. 1, 2011...................................................................................................
Par. 3(d) Loss for taxation year ended Oct. 31, 2011:
from business.............................................................................................
from property.............................................................................................
Add: Net capital loss deducted....................................................................................
Less: Par. 3(c) amount determined above....................................................................

$
60,000
5,000
$ 65,000
5,000
$ 70,000
(10,000)

42,000

60,000
*
$ 102,000
(2,000)
$ 100,000

Balance, Oct. 31, 2011................................................................................................

Less: the unutilized non-capital property loss..............................................................
Balance, Nov. 1, 2011..................................................................................................
* Exactly equal to the business loss above.

Only the portion of the non-capital loss that may reasonably be regarded as a loss from carrying on a business
($40,000 + $60,000 = $100,000) is deductible after October 31, 2011. It is subject to the restrictions discussed in Part A.
Summary:
The three alternatives presented above are summarized as follows for comparative purposes:
Taxable Income for the Deemed Taxation Year Ended October 31, 2011:
No election
Par. 3(a) Income from non-capital sources ( 0).
Nil
Par. 3(b) Net taxable capital gains ( 0):
Deemed taxable capital gains (elective):
land.............................................
Nil
building.......................................
Nil
Accrued allowable capital loss (automatic):
rental land................................... $
Nil
(10,000)
Par. 3(c) Par. 3(a) + par. 3(b)......................
Nil
Par. 3(d) Losses from non-capital sources and ABILs:
Loss from business operations............ $
(60,000)
Recapture (elective): building.............
Nil
Loss from property..............................
(5,000)
(65,000
)
Division B income......................................
Nil
Optional net capital loss deducted...............
Nil
Non-capital loss deducted:
From property.....................................
Nil
From business.....................................
Nil
Nil
Taxable income...........................................
Nil

Maximum election
Nil
$ 30,000
40,000
(10,000)

Partial election
Nil
$ 20,000
Nil

$ 60,000

(10,000)

$ 60,000
$
(60,000)
3,000
(5,000)

(62,000)

$ 10,000
$
(60,000)
Nil
(5,000)
(65,000
)
Nil

Nil
(5,000)
Nil
Nil

$ 10,000

(5,000)
(Nil)
Nil

Nil
Nil

Nil
Nil

Non-Capital Losses Available for Carryforward at Deemed Taxation Year Ended October 31, 2011:
Balance from Jan. 1, 2011.............................
Non-capital loss Oct. 31, 2011:
Par. 3(d) losses see above................
Add: net capital losses deducted...........

No election
$ 42,000

Less: par. 3(c) income see above.....

$65,000
Nil
$65,000
Nil

Less: losses utilized at Oct. 31, 2011...........

Nil

65,000
$107,000

Maximum election
$42,000
$62,000
5,000
$67,000
60,000
Nil

7,000
$49,000

Partial election
$ 42,000
$65,000
5,000
$70,000
10,000
Nil

60,000
$ 102,000

Solutions to Chapter 11 Assignment Problems

183

losses not utilized but expired:

Current property loss.................... $ 5,000
Carryforward property loss...........
2,000
Available for carryforward from Nov. 1, 2011
Net Capital Losses available for Carryforward

7,000
$ 100,000
Nil

Nil
2,000

2,000
$ 47,000
Nil

Nil
2,000

2,000
$ 100,000
Nil

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Introduction to Federal Income Taxation in Canada

The results of the above comparison of the three alternatives are further summarized as follows:
Options
Taxable income......................................................................
Net capital loss deducted.......................................................
Non-capital loss balance, Nov. 1, 2011..................................
ACB of repair shop land........................................................
ACB of repair shop building..................................................
UCC of repair shop building..................................................

(A)
$

Nil
Nil
100,000
80,000
150,000
147,000

(B)(i)
$

Nil
5,000
47,000
140,000
230,000
190,000
*

(B)(ii)
Nil
$
5,000
100,000
120,000
150,000
147,000

* $147,000 + $3,000 + 1/2 ($230,000 $150,000)

Option B (ii) is better if the non-capital loss can be offset by income generated in the next 20 years. The
resultant lower ACB of the land and building under this option is only relevant on a disposition. The lower UCC
on the building only represents an opportunity loss of CCA at a 4% declining balance rate.
Consider the alternative of electing deemed proceeds of disposition of $190,000 (i.e., (2 $20,000) + $150,000)
on the repair shop building. Income under paragraph 3(b) would be the same as for Part B (ii). However, the business
loss under paragraph 3(d) would be only $57,000 (i.e., $60,000 $3,000 recapture), since recapture would be triggered.
This would reduce the non-capital loss balance at November 1, 2011 by $3,000 to $97,000. However, the UCC of the
repair shop building could be increased from $147,000 to $170,000 (i.e., +$3,000 of recapture + $20,000 of taxable
capital gain). The increased CCA base would begin to shelter income from tax, in this case, in the year ended June 30,
2012, when the corporation earns a profit. If, for example, the corporation uses a discount rate of 10% and faces a tax
rate of 20%, the present value of the tax shield on the incremental UCC base of $23,000 (i.e., $170,000 $147,000) at
the 4% CCA rate is:

$23,000 .04 .20

$1,314
.04 .10
The value of the extra $3,000 in the non-capital loss balance in the same year and at the same assumed tax
rate of 20% is $600 (i.e., 20% of $3,000).

Solutions to Chapter 11 Assignment Problems

185

Solution 3 (Advanced)
The data given in the problem statement can be summarized as follows:
carryforward losses
2008
2009
2010
current deemed
year-end losses

non-capital losses
$60,000
45,000
25,000
$130,000
from non-capital
sources

ACL
businessoperations
inventory
equipment

2,000

$10,000
20,000
16,000

potential elections
recapturebuilding

$20,000

TCGland
building

$12,000

allowable capital
losses
$2,000

$46,000
$5,500
potential offset
business income

property

net capital losses

$6,000
4,000
2,000
$12,000

expiration
after deemed
year-end

potential offset

5,500
$19,500
taxable capital gain

$20,000
5,000
$25,000

potential
offset

The two election options to consider are the maximum election and the partial election.
(a) Maximum Election
If the maximum election is made, the $20,000 of recapture offsets the business loss, leaving $26,000 (i.e.,
$46,000 $20,000) of net business loss. The $25,000 of taxable capital gain offsets the $19,500 of expiring
losses, leaving $5,500 (i.e., $25,000 $19,500) to offset the remaining $26,000 of business loss, leaving $20,500
of that business loss. As a result, the non-capital loss available for carry forward from June 30, 2011 is $150,500
(i.e., $20,500 + $130,000).
(b) Partial Election
If only a partial election is made to offset the $19,500 of expiring losses, the current business loss of
$46,000 is not offset and, hence, is available to carry forward, along with the $130,000 of non-capital losses,
from June 30, 2011 for a total of $176,000. If the election is made on the land, the ACB of the land can be
increased without a tax cost.
(c) No Election
Note that if no election is made there is no income to offset the current business loss of $46,000 or the noncapital loss carryforward of $130,000. Therefore, the non-capital loss available to carry forward from June 30,
2011 is $176,000 (i.e., $46,000 + $130,000), which is the same as in the partial election, but there is no increase
in any cost value.
Deemed Year-end
Buscat Ltd. is deemed to have a taxation year ending June 30, 2011, immediately before the acquisition of
control by Buns Plus Ltd. on July 1, 2011 [ssec. 249(4)]. Tax returns will have to be filed for this short taxation
year (i.e., 6 months) and amounts such as CCA will have to be prorated. In addition, the short taxation year will
cause the counting of a carryforward year for the non-capital losses from 2008, 2009, and 2010.
Loss from Non-capital Sources
Losses from non-capital sources for the deemed taxation year ended June 30, 2011, before any elections and
options are computed as follows:

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186

Loss from business.............................................................................................................

Add: Inventory loss [ssec. 10(1)] ($85,000 $65,000)....................................................
Bakery equipment Deemed CCA ($86,000 $70,000).......................................
Total business losses...........................................................................................................
Add: Property loss (will expire unless utilized by June 30, 2011)....................................
Total losses from non-capital sources.................................................................................

$
$
$

10,000
20,000
16,000
46,000
5,500
51,500

Maximum Election
Division B income and taxable income
Par. 3(a)
Par. 3(b)

Income from non-capital sources......................................................................................

Net taxable capital gains:..................................................................................................
Election on land [($195,000 $155,000) 1/2]..........................................................
Election on building [($75,000 $65,000) 1/2].......................................................

Less: Allowable capital loss......................................................................................

Sum of par. 3(a) plus par. 3(b) less any Subdivision e deductions (nil).............................
Property loss................................................................................................ $
5,500
Business losses............................................................................................
46,000
$ 51,500
Less: Building recapture..............................................................................
(20,000)
Sec. 3 income.......................................................................................................................................
Division C deductions:
Net capital losses: 2008......................................................................................... $
6,000
2009.........................................................................................
4,000
2010.........................................................................................
2,000
Taxable income....................................................................................................................................
Par. 3(c)
Par. 3(d)

Nil
$ 20,000
5,000
$ 25,000
(2,000)
$ 23,000

31,500
Nil

$ 12,000
Nil

Non-capital losses available for carryforward after acquisition of control:

Balance July 1, 2011
2008 non-CL...........................................................................................................
2009 non-CL...........................................................................................................
2010 non-CL...........................................................................................................
Non-CL from deemed taxation year before acquisition of control:
Total par. 3(d) loss (see above calculation)..............................................................
Add: Net capital loss deducted................................................................................

60,000
45,000
25,000

$ 130,000

31,500
12,000
$ 43,500
Less: Par. 3(c) income above...................................................................................
(23,000)
Total non-capital losses........................................................................................................................

20,500
$ 150,500

The $150,500 loss carryforward balance must reasonably be regarded as its loss from carrying on a
business.
2008, 2009, and 2010 loss carryforwards from a business as stated in the question.....................
June 30, 2010 business loss net of recapture........................................................... $ 26,000
Less portion of this loss used against par. 3(c) income*..........................................
(5,500)
* Par. 3(c) income........................................................................................................
Less:
Property losses....................................................................... $ 5,500
Net capital losses restored as business losses.......................
12,000

$ 130,000
20,500
$ 150,500

$ 23,000
(17,500)
$ 5,500

The non-capital losses will expire in 20 taxation years, including the deemed taxation year, from the year of
the loss as follows, assuming that Buscat Ltd.s fiscal year-end after the acquisition of control returns to
December 31.
2008 non-CL on December 31, 2027
2009 non-CL on December 31, 2028
2010 non-CL on December 31, 2029
2011 deemed taxation year on December 31, 2030

Solutions to Chapter 11 Assignment Problems

187

The adjusted cost base/capital cost of the properties which were deemed to be sold at their fair market values
would be:
Capital cost
Bakery equipment........................................................................
$ 100,000
Land............................................................................................ n/a
Building* (Class 1)......................................................................
70,000

UCC
70,000
n/a
70,000

Adjusted cost base

$ 100,000
195,000
75,000

* $65,000 + 1/2 ($75,000 $65,000).

In order for these non-capital losses to be deductible in subsequent fiscal periods, two conditions in
subparagraph 111(5)(a)(i) must be met:
(a) the bakery business which generated the loss must be carried on throughout the taxation year in which
the non-capital loss is deducted; and
(b) the bakery business must be carried on for profit or with a reasonable expectation of profit.
It would appear that both conditions will be met, since the Buscat business is being carried on and Buns Plus
expects that the Buscat bakery business will earn a profit of $65,000 in 2012.
If the conditions of subparagraph 111(5)(a)(i) are met, then the non-capital losses may be deducted from
income of the bakery business that generated the loss plus the income from the sale of similar products or
services. If it can be assumed that the bakery business, transferred to Buscat Ltd., sells similar products and/or
services as the Buscat bakery business, then the maximum $90,000 of non-capital losses can be deducted on
December 31, 2011 as follows:
Lesser of:
(a) Net income for year.............................................................................................................
(b) Income from: the loss business...................................................................
Nil
the sale of similar products................................................... $ 130,000

90,000

$ 130,000

The remaining $60,500 ($150,500 $90,000) of non-capital losses can be carried forward to 2012 subject to
the deductibility tests discussed above.
Partial election
The minimum amount to be elected upon under paragraph 111(4)(e) (i.e., proceeds of disposition) should be
an amount equal to 2 times the sum of:
(a) the allowable capital loss of $2,000 which is about to expire,
(b) the net capital losses of $12,000 which would otherwise expire, and
(c) the property loss of $5,500 which otherwise expires plus the adjusted cost base of the property to be
elected upon.
If the land was chosen as the asset to trigger all of the taxable capital gain, then the deemed proceeds would
be determined as:
[2 ($2,000 + $5,500 + $12,000) + $155,000] or $194,000
The resulting taxable income computation would be:
Par. 3(a)
Par. 3(b)

Non-capital sources of income

Net taxable capital gain:
Land, 1/2 ($194,000 $155,000).............................................................. $ 19,500
Allowable capital loss..............................................................................
(2,000)
Par. 3(c)
Sum of par. 3(a) plus par. 3(b) less any Subdivision e deductions (nil)...........................
Par. 3(d) Property loss............................................................................................ $
5,500
Business loss............................................................................................
46,000
$ 51,500
Less: Building recapture..........................................................................
Nil
Sec. 3 income.....................................................................................................................................
Division C
Net capital loss...................................................................................................................................
Taxable income..................................................................................................................................
Non-capital losses available for carryforward after the acquisition of control:
Balance, July 1, 2011..........................................................................................................................
Non-capital losses from the deemed taxation year ended June 30, 2010..................... $ 51,500
Add: Net capital losses deducted above......................................................................
12,000
$ 63,500
Less: Par. 3(c) income above......................................................................................
(17,500)
Total non-capital losses......................................................................................................................

Nil
$
$

17,500
17,500

51,500
Nil
$

12,000
Nil

$ 130,000

46,000
*
$ 176,000

Introduction to Federal Income Taxation in Canada

188
* Exactly equal to the business loss above.

Summary
The two alternatives presented above are summarized as follows for comparative purposes:
Taxable Income for the Deemed Taxation Year Ended June 30, 2011:
Maximum election
Partial election
Par. 3(a) Income from non-capital sources ( 0)............
Nil
Nil
Par. 3(b) Net taxable capital gains ( 0):
Deemed taxable capital gains (elective):
land.................................................... $ 20,000
$ 19,500
building..............................................
5,000
Nil
Allowable capital loss...............................
(2,000) $ 23,000
(2,000) $ 17,500
Par. 3(c) Par. 3(a) + par. 3(b)........................................
$ 23,000
$ 17,500
Par. 3(d) Losses from non-capital sources and ABILs:
Loss from business.................................... $ (46,000)
$ (46,000)
Recapture (elective): building....................
20,000
Nil
Loss from property....................................
(5,500)
(31,500)
(5,500)
(51,500)
Division B income...........................................................
Nil
Nil
Optional net capital loss deducted...................................
(12,000)
(12,000)
Non-capital loss deducted................................................
Nil
Nil
Taxable income................................................................
Nil
Nil
Non-Capital Losses available for Carryforward at Deemed Taxation Year ended June 30, 2011:
Maximum election
Partial election
Balance, Jan. 1, 2011.......................................................
$ 130,000
$ 130,000
Non-capital loss June. 30, 2011:
Par. 3(d) losses see above.................................... $ 31,500
$ 51,500
Add: net capital losses deducted...............................
12,000
12,000
$ 43,500
$ 63,500
Less: par. 3(c) income see above.........................
(23,000)
20,500
(17,500)
46,000
$ 150,500
$ 176,000
Less: losses utilized at June 30, 2011.............................
Nil
Nil
losses not utilized but expired...............................
Nil
Nil
Nil
Nil
Available for carryforward from June. 30, 2011..............
$ 150,500
$ 176,000
Net Capital Losses available for Carryforward...............
Nil
Nil

The results of the above comparison of the two alternatives are further summarized as follows:
Options
Taxable income.........................................................................
Net capital loss deducted..........................................................
Total non-capital losses available for carryforward..................
ACB of land..............................................................................
UCC of building (Class 1)........................................................
ACB of building........................................................................

(a)
0
$ 12,000
150,500
195,000
70,000
75,000

(b)
0
$ 12,000
176,000
194,000
45,000
65,000

Difference
0
0
$ 25,500
(1,000)
(25,000)
(10,000)

Option (b) is better if the additional $25,500 of non-capital loss can be offset by income generated in the
next 20 years. The resultant lower ACB of the land under this option is only relevant on a disposition. The lower
UCC on the building only represents a loss of CCA at a 4% declining balance rate. On the other hand, if an
additional $25,500 of income cannot be generated in the next 20 years (i.e., business losses continue),
alternative (a) is better. Note that 20 years is a long time to sustain continued business losses without generating
at least $25,000 of business income. It is unlikely that alternative (a) is better, unless the land and building will
be sold in the near future.

Solutions to Chapter 11 Assignment Problems

189

Solution 4 (Basic)
Net income before income taxes.........................................................................................................
Add: Loss on the sale of investment [ssec. 9(3)]...................................................... $
10,000
Depreciation and amortization [par. 18(1)(b)].................................................
104,900
Interest on income tax payments [par. 18(1)(t)]...............................................
435
Club dues [par. 18(1)(l)]..................................................................................
1,750
Political contributions [par. 18(1)(n)]..............................................................
2,500
Charitable donations [par. 18(1)(a)].................................................................
22,500
Property tax on vacant land [ssec. 18(2)].........................................................
3,000
Life insurance premium [pars. 18(1)(a), (b), (c)].............................................
1,950
Subtotal...........................................................................................................
Deduct: Capital cost allowance [par. 20(1)(a)].......................................................... $ 149,500
Gain on sale of land [ssec. 9(3)]..................................................................
126,200
Add: Taxable capital gain on business land [sec. 38]: 1/2 ($200,000 $73,800)....
Allowable capital loss on investments [sec. 38]: 1/2 ($75,000 $85,000):....
Net income under Division B......................................................................................
Less Division C deductions:
Charitable donations [sec. 110.1].........................................................................
Dividends [sec. 112]............................................................................................
Non-capital loss [par. 111(1)(b)]..........................................................................
Net capital loss [par. 111(1)(a)]: $75,000 4/3 1/2.............................................
Taxable income...........................................................................................................

The following items were correctly included on the accounting income statement:
(a) Landscaping costs [par. 20(1)(aa)];
(b) Site investigation fees [par. 20(1)(dd)];
(c) Dividends from taxable Canadian corporations [par. 12(1)(j)]; and
(d) Dividends from foreign corporations [par. 12(1)(k)].

342,000

147,035
489,035

(275,700)
213,335

58,100
271,435

(189,100)
82,335

63,100
(5,000)

22,500
42,800
73,800
50,000

190

Introduction to Federal Income Taxation in Canada

Solution 5 (Basic)
[Reference: Chicago Blower (Canada) Ltd. v. M.N.R., 66 DTC 471 (T.A.B.)]
(A) Facts fall within Regulation 400(2)(b)
(i) the company carried on business in each province through an agent,
the agent was established in a particular place, clearly identified to the public,
occupied building with various warehouse facilities,
the agent had general authority to contract,
the agent had a stock of merchandise from which he filled orders,
the exception to this was on orders for larger fans,
thus, the condition was met at least in part,
(ii) therefore, the company does have a permanent establishment in the provinces indicated.
(B) This conclusion differs from that in the Sunbeam case which can be distinguished on its facts,
(i) in the Sunbeam case, the taxpayers representatives in Quebec did not have authority to make contracts
on the companys behalf,
(ii) there was no telephone listing in the companys name and that name did not appear on any business
signs.

Solutions to Chapter 11 Assignment Problems

191

Solution 6 (Basic)
Income under Division B from consulting business...........................................................................
Canadian investment royalty income..................................................................................................
U.K. non-foreign affiliate dividend income........................................................................................
Taxable dividend received from non-connected Canadian corporations.............................................
Taxable capital gains..........................................................................................................................
Income under Division B....................................................................................................................
Deduct:
Charitable donations (not exceeding 75% $305,000 = $228,750)............................................
Canadian dividends received.......................................................................................................
1999 net capital loss ($12,000 1/2 / 3/4; limited to taxable capital gains of $6,000)....................
Taxable income..................................................................................................................................
Basic federal tax at 38% of $194,000.................................................................................................
Deduct: Abatement from federal tax (see Schedule 1)........................................................................
Net......................................................................................................................................................
Deduct:
Non-business foreign tax credit (see Schedule 2)........................................................................
Business foreign tax credit (see Schedule 3)...............................................................................
Tax reduction (11.5% of $194,000).............................................................................................
Part I tax payable (federal).................................................................................................................
Provincial tax:
British Columbia 10% of $77,600...............................................................................................
Alberta rate 10% of $58,200.......................................................................................................
Total tax..............................................................................................................................................

264,000
10,000
20,000
5,000
6,000
305,000

(100,000)
(5,000)
(6,000)
$ 194,000
$
73,720
(13,580)
$
60,140
(2,573)
(17,486)
(22,310)
$
17,771
7,760
5,820
31,351

Schedule 1: Abatement from federal tax

Gross revenues.........................................
% gr. revenues (1).....................................
Salaries and wages...................................
% S&W (2)...............................................

(1) ( 2)
............................................
2

B.C.
$3,000K
30%
$500K
50%

Alberta
$3,000K
30%
$300K
30%

Total Cdn.
$6,000K
60%
$800K
80%

U.S.
$4,000K
40%
$200K
20%

Total
$10,000K
100%
$1,000K
100%

40%

30%

70%

30%

100%

Abatement: 10% of 70% of $194,000 = $13,580

Allocation of income to: B.C. 40% $194,000 = $77,600
Alberta 30% $194,000 = $58,200
Schedule 2: Non-business foreign tax credit (U.K. income)
Lesser of:
(i) tax paid
(ii)

income from U.K.

income less dividends and
net capital loss carryover

3,000

2,573

tax otherwise payable after

abatement minus general
tax reduction

$20,000
...........................................................................
$305,000 $5,000 $6,000
($60,140 $22,310)

$20,000
$294,000

$37,850 =.........................................................................

Lesser amount is $3,000.

Schedule 3: Business foreign tax credit (U.S. income)

Least of:
(i) tax paid and unused credit ($16,000 + $3,000)........................................................................
(ii)
tax otherwise payable
minus general tax
reduction

$ 19,000

Introduction to Federal Income Taxation in Canada

192

income from U.S.

income less dividends and
net capital loss carryover
$100,000
$305,000 $5,000 $6,000
$100,000
$294,000

($73,720 $22,310)

$51,410 =.....................................................................

$ 17,486

(iii) tax otherwise payable before any reduction or credits plus surtax less non-business tax credit
($73,720 $22,310 $2,573).................................................................................................
Least amount is $17,486.

$ 48,837

Solutions to Chapter 11 Assignment Problems

Solution 7 (Basic)
(A) The maximum investment tax credit is
20% [$1,700,000 + $300,000] = $400,000
Note that the used equipment is not a qualified expenditure for the purposes of subsection 127(9)
because it is not new property [Reg. 2902(2)(iii)].
(B) Taxable income before sec. 37 deduction........................................................................ $ 3,200,000
Section 37 deduction.......................................................................................................
(2,200,000)
Taxable income............................................................................................................... $ 1,000,000
Net tax 16.5%.................................................................................................................. $
165,000
Investment tax credit.......................................................................................................
(165,000)
Net federal tax payable under Part I................................................................................
Nil
(C) The remaining investment tax credit of $235,000 (i.e., $400,000 $165,000) may be carried back three
and forward 20 taxation years.
(D) Section 37 SR&ED expenditures in first year................................................................. $ 2,200,000
Section 37 deduction in first year....................................................................................
(2,200,000)
Balance at the beginning of the second year....................................................................
Nil
Less: ITC claim for first year..........................................................................................
(180,000)
Recapture in second year [par. 12(1)(t)]..........................................................................
180,000
Balance after recapture....................................................................................................
Nil
If no further SR&ED expenditures are made in the following year, the income inclusion would be
$165,000 [par. 12(1)(t)].

193

Introduction to Federal Income Taxation in Canada

194
Solution 8 (Basic)

Income under Division B:

Operating profits.................................................................................................................................
Dividends from taxable Canadian corporations..................................................................................
Canadian investment income (i.e., interest income)............................................................................
Foreign investment income ($61,000 + $10,000)................................................................................

$
Add: donations.................................................................................................................................
Division B income..............................................................................................................................
Less: Division C deductions:
Taxable dividends deductible under sec. 112................................................................. $ 85,000
Donations (max. 75% of $718,255 = $538,691)............................................................
9,755
Non-capital losses.........................................................................................................
255,545
Taxable income...........................................................................................................................................
Federal tax (38% of $367,955)...................................................................................................................
Federal abatement (10% of $367,955)........................................................................................................
Federal tax after abatement.........................................................................................................................
Less: Foreign non-business tax credit(1)..............................................................................
6,807
Tax rate reduction (11.5% of $367,955).....................................................................
42,315
Federal tax before investment tax credit.....................................................................................................
Investment tax credit (10% of $250,000)....................................................................................................
Part I federal tax payable............................................................................................................................
New Brunswick tax @ 11% of $367,955....................................................................................................
Total tax liability.........................................................................................................................................

500,000
85,000
52,500
71,000
708,500
9,755
718,255

(350,300)
367,955
139,823
(36,796)
$ 103,027
$
$

(49,122)
53,905
(25,000)
$
28,905
40,475
$
69,380
$

NOTE TO SOLUTION
(1) Foreign non-business tax credit
Lesser of:
(i) Amount paid................................................................................................................

$71,000
($103,027 $42,315) .............................
(ii)
$718,255 $85,000

10,000

6,807

Solutions to Chapter 11 Assignment Problems

195

Solution 9 (Advanced)
Net income under Division B...........................................................................................................
Division C deductions: Dividends from taxable Canadian corporations.......................................
Charitable donations (max. 75% $2,097,000).......................................
Net capital losses ($9,000 1/2 / 3/4).........................................................
Non-capital losses....................................................................................
Taxable income................................................................................................................................
Tax @ 38%.......................................................................................................................................
Federal abatement(1)..........................................................................................................................
Non-business foreign tax deductions(2).............................................................................................
Business foreign tax deductions(3).....................................................................................................
Tax reduction (11.5% of $1,966,000)................................................................................................
Federal tax before investment tax credit...........................................................................................
Investment tax credit(4)......................................................................................................................
Federal Part I tax payable.................................................................................................................
Provincial tax payable: Ontario @ 11.5% $963,340..................................................................
Alberta @ 10% $196,600.....................................................................

$ 2,097,000
(15,000)
(50,000)
(6,000)
(60,000)
$ 1,966,000
$
747,080
(115,994)
$
631,086
(3,000)
(200,000)
(226,090)
$
201,996
(30,000)
$
171,996
$
110,784
19,660
$
130,444

NOTES TO SOLUTION
(1) Federal abatement:
Gross revenue
Salaries & wages
Amount
%
Amount
%
Average percentage
1
Ontario............ $ 6,000,000
54.6% $ 2,540,000
43.3%
/2 (54.6% + 43.3%) = 49.0%
1
Alberta............
400,000
3.6
960,000
16.4
/2 (3.6% + 16.4%) = 10.0%
1
$ 6,400,000
58.2
$ 3,500,000
59.7
/2 (58.2% + 59.7%) = 59.0%
U.S..................
4,600,000
41.8
2,360,000
40.3
Total................ $ 11,000,000
100.0% $ 5,860,000
100.0%
Allocation of taxable income to each province:
Ontario..................................................................................... 49% $1,966,000 =
$
963,340
Alberta..................................................................................... 10% $1,966,000 =
196,600
Taxable income earned in a province or territory.....................
$ 1,159,940
Abatement is 10% $1,159,940 = $115,994.

(2)

Non-business foreign tax deduction:

lesser of:
(a) tax paid
(b)

3,000

tax otherwise payable

foreign non - business income (basic abatement general reduction)

Div. B income - par. 111(1)( b) - sec.112

$20,000
($631
,086 $226,090)
................................................................................................................................
$
3,902
$2,097,000 $6,000 $15,000
(3)

Business foreign tax deduction:

least of:
(a) tax paid..............................................................................................................................
(b)
tax otherwise payable
foreign business income (basic general reduction)

200,000

Div. B income - par. 111(1)( b) - sec. 112

$800,000
($747,080 $226,090.....................................................................................
)
$
200,767
$2,097,000 $6,000 $15,000
(c) tax otherwise payable minus non-business foreign tax deduction
($747,080 $226,090 $3,000)......................................................................................

517,980

(4) Investment tax credit: 20% $150,000 = $30,000

Since all $150,000 of the expenditure was deducted in 2011, all $30,000 of the ITC claimed in 2011 will be
included in income in 2012 [par. 12(1)(t)].

Introduction to Federal Income Taxation in Canada

196
Advisory Case
King Enterprises Inc.

ADVISORY CASE DISCUSSION NOTES

This case deals primarily with the issues surrounding acquisition of control and the adjustment to, and carry
forward of, the losses of Royal.
1. Deemed year-end

Day before the closing.

This uses up one of the years for the carryover of losses unless the AOC occurs on the same date,
or very close to it, as the year end of Royal.
Can choose any new year-end within 12 months.

2. Accrued but unrealized losses

Accrued terminal losses, if CCA has been claimed in the past, but did not cover full decline in
value.

If the allowance for doubtful accounts was not fully claimed last year then it needs to be.

Is there an accrued loss on ECP or non-depreciable capital property?

3. Election

Do any of the assets have a fair market value in excess of their tax values?

Designation available under paragraph 111(4)(e) to use up losses that will expire on the AOC or
that might expire before they can be utilized.

4. Expiry of losses on the AOC

Property losses, net capital losses, ABILs.

Did the sale of land and building cause a net capital loss?

They have had six years of losses, so the carry forward period getting shorter, especially, with the
deemed year-end on acquisition of control counting as one taxation year.
o not a major problem with a 20-year carry forward

5. Utilization of losses

Need to meet 3 conditions in order for the business losses to be available after the AOC:
i) The business that generated the loss must be carried on throughout the year. The forms
business of Royal must be continued.

ii) The forms business must be carried on with a reasonable expectation of profit. Ian
seems to think that he can make it profitable.
iii) The losses carried over can be applied against income only from the same business
or from the sale of similar products or services. The forms losses of Royal can only
be used against the profits from the forms business or from the sale of forms. There
could be some grey area here, but Ian should not assume that he can use Royals
losses against Kings profits.