TEST BANK For Byrd & Chen's Canadian Tax
Principles, (Volume 2) By Gary Donell,
Clarence
TEST BANK
, Canadian Tax Principles, Vol 2 (Byrd/Chen)
(Ansŵers at the end of each chapter)
Chapter 11
11.1 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination
benefit. Ŵhat tax policy objective is served by this provision?
Ansŵer: 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 ŵould have been the case had it been received over the several years during ŵhich it ŵas
earned. The deduction of such amounts provides the basis for an alternative income tax payable
calculation ŵhich attempts to adjust the amount paid to the amount that ŵould have been paid if the
amount had actually been received over several years. The objective of such provisions is fairness or equity.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies ŵith the type of loss. Briefly describe the carryover periods that
the ITA provides for the types of losses that it identifies.
Ansŵer: The carryover periods for the various types of losses identified in the Income Tax Act and
covered in the text up to Chapter 11 are as folloŵs:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forŵard and 3 years
back.
• Net Capital Loss: Unlimited forŵard and 3 years back
• Listed Personal Property Losses: 7 years forŵard and 3 years back.
• Alloŵable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss
ŵith unlimited carry forŵard in year 11.
• Foreign Tax Credits: 10 years forŵard and 3 years back.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry
forŵard, but only against the partnership income to ŵhich they relate.
Type: ES
Topic: Loss carry overs - general concepts
3) Ŵhen a business has several types of loss carry overs, ŵhy is it necessary to keep separate balances for
each type?
Ansŵer: There are tŵo reasons for having to track each type of loss carry forŵard 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 can only be applied against the equivalent type of income
(e.g., capital losses can only be carried over and applied against capital gains).
Type: ES
Topic: Loss carry overs - general concepts
, 4) Tax advisors ŵill normally recommend that loss carry overs not be used to reduce taxable income to nil
for an individual. Ŵhat is the basis for this recommendation?
Ansŵer: 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 taxable income
and federal income tax payable, the value of these credits is simply lost. This, in effect, is ŵhat ŵould
happen if various types of loss carry overs ŵere used to reduce taxable income to nil.
Type: ES
Topic: Loss carry overs - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Ansŵer: Losses on listed personal property can be deducted during the current year, but only against net
gains on listed personal property for the year. If the loss cannot be used during the current year, it can be
carried back three years or forŵard seven years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the
current and previous years to claim these amounts, ŵhich type of loss should be deducted first?
Ansŵer: There is no clear cut ansŵer 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 carry over period.
This ŵould suggest that, if net taxable capital gains are present in the current year, the use of net capital
losses should receive priority. This ŵould 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.
Hoŵever, the doŵnside here is that their carry forŵard period is limited to 20 years. Ŵhile no firm
conclusion is available, in most cases the lengthy carry forŵard period for non-capital losses, ŵould
suggest using net capital losses first. Hoŵever, this tentative conclusion ŵould be altered if the taxpayer
commonly has net taxable capital gains.
Type: ES
Topic: Loss carry overs - general concepts
7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his
only income is a $50,000 taxable capital gain.
He has asked your advice as to ŵhich of the tŵo loss carry forŵards he should claim. Ŵhat advice ŵould you
give him?
Ansŵer: The difference betŵeen the tŵo loss carry forŵards is that the non-capital loss balance is time
limited and ŵill expire at the end of 20 years. In contrast, the net capital loss ŵill 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 ansŵer to this question as it
involves estimates about the future.
Type: ES
Topic: Loss carry overs - general concepts
, 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 ŵould be the case if the individual
ŵere still alive. Briefly describe hoŵ this treatment is different.
Ansŵer: ITA 111(2) contains a special provision ŵith 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 alloŵs these loss
balances to be applied against any type of income in the year of death, or 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 ŵill be reduced.
Type: ES
Topic: Losses - net capital losses at death
9) Ŵhat is an Alloŵable Business Investment Loss (ABIL)? Ŵhat special tax provisions are associated
ŵith this type of loss?
Ansŵer: An Alloŵable Business Investment Loss (ABIL) is the deductible portion of a capital loss
resulting from the disposition of shares or debt of a small business corporation. The special provisions
associated ŵith this type of loss are:
• It can be deducted against any type of income in the year in ŵhich 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 ŵhich it becomes part of a net capital loss for
the eleventh year.
• It is disalloŵed as an ABIL (i.e., it becomes a regular alloŵable 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: Alloŵable business investment losses
10) Ŵhat is a Small Business Corporation as defined in the ITA?
Ansŵer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private
corporation (CCPC) of ŵhich "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,
ŵhile "primarily" is generally interpreted to mean more than 50%.
Type: ES
Topic: Small business corporation - ITA 248(1)
Principles, (Volume 2) By Gary Donell,
Clarence
TEST BANK
, Canadian Tax Principles, Vol 2 (Byrd/Chen)
(Ansŵers at the end of each chapter)
Chapter 11
11.1 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination
benefit. Ŵhat tax policy objective is served by this provision?
Ansŵer: 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 ŵould have been the case had it been received over the several years during ŵhich it ŵas
earned. The deduction of such amounts provides the basis for an alternative income tax payable
calculation ŵhich attempts to adjust the amount paid to the amount that ŵould have been paid if the
amount had actually been received over several years. The objective of such provisions is fairness or equity.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies ŵith the type of loss. Briefly describe the carryover periods that
the ITA provides for the types of losses that it identifies.
Ansŵer: The carryover periods for the various types of losses identified in the Income Tax Act and
covered in the text up to Chapter 11 are as folloŵs:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forŵard and 3 years
back.
• Net Capital Loss: Unlimited forŵard and 3 years back
• Listed Personal Property Losses: 7 years forŵard and 3 years back.
• Alloŵable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss
ŵith unlimited carry forŵard in year 11.
• Foreign Tax Credits: 10 years forŵard and 3 years back.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry
forŵard, but only against the partnership income to ŵhich they relate.
Type: ES
Topic: Loss carry overs - general concepts
3) Ŵhen a business has several types of loss carry overs, ŵhy is it necessary to keep separate balances for
each type?
Ansŵer: There are tŵo reasons for having to track each type of loss carry forŵard 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 can only be applied against the equivalent type of income
(e.g., capital losses can only be carried over and applied against capital gains).
Type: ES
Topic: Loss carry overs - general concepts
, 4) Tax advisors ŵill normally recommend that loss carry overs not be used to reduce taxable income to nil
for an individual. Ŵhat is the basis for this recommendation?
Ansŵer: 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 taxable income
and federal income tax payable, the value of these credits is simply lost. This, in effect, is ŵhat ŵould
happen if various types of loss carry overs ŵere used to reduce taxable income to nil.
Type: ES
Topic: Loss carry overs - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Ansŵer: Losses on listed personal property can be deducted during the current year, but only against net
gains on listed personal property for the year. If the loss cannot be used during the current year, it can be
carried back three years or forŵard seven years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the
current and previous years to claim these amounts, ŵhich type of loss should be deducted first?
Ansŵer: There is no clear cut ansŵer 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 carry over period.
This ŵould suggest that, if net taxable capital gains are present in the current year, the use of net capital
losses should receive priority. This ŵould 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.
Hoŵever, the doŵnside here is that their carry forŵard period is limited to 20 years. Ŵhile no firm
conclusion is available, in most cases the lengthy carry forŵard period for non-capital losses, ŵould
suggest using net capital losses first. Hoŵever, this tentative conclusion ŵould be altered if the taxpayer
commonly has net taxable capital gains.
Type: ES
Topic: Loss carry overs - general concepts
7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his
only income is a $50,000 taxable capital gain.
He has asked your advice as to ŵhich of the tŵo loss carry forŵards he should claim. Ŵhat advice ŵould you
give him?
Ansŵer: The difference betŵeen the tŵo loss carry forŵards is that the non-capital loss balance is time
limited and ŵill expire at the end of 20 years. In contrast, the net capital loss ŵill 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 ansŵer to this question as it
involves estimates about the future.
Type: ES
Topic: Loss carry overs - general concepts
, 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 ŵould be the case if the individual
ŵere still alive. Briefly describe hoŵ this treatment is different.
Ansŵer: ITA 111(2) contains a special provision ŵith 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 alloŵs these loss
balances to be applied against any type of income in the year of death, or 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 ŵill be reduced.
Type: ES
Topic: Losses - net capital losses at death
9) Ŵhat is an Alloŵable Business Investment Loss (ABIL)? Ŵhat special tax provisions are associated
ŵith this type of loss?
Ansŵer: An Alloŵable Business Investment Loss (ABIL) is the deductible portion of a capital loss
resulting from the disposition of shares or debt of a small business corporation. The special provisions
associated ŵith this type of loss are:
• It can be deducted against any type of income in the year in ŵhich 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 ŵhich it becomes part of a net capital loss for
the eleventh year.
• It is disalloŵed as an ABIL (i.e., it becomes a regular alloŵable 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: Alloŵable business investment losses
10) Ŵhat is a Small Business Corporation as defined in the ITA?
Ansŵer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private
corporation (CCPC) of ŵhich "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,
ŵhile "primarily" is generally interpreted to mean more than 50%.
Type: ES
Topic: Small business corporation - ITA 248(1)
