TEST BANK
** All Chapters included
,Table of Contents are given below
11 Taxable Income and Tax Payable for Individuals Revisited
12 Taxable Income and Tax Payable for Corporations
13 Taxation of Corporate Investment Income
14 Other Issues in Corporate Taxation
15 Corporate Taxation and Management Decisions
16 Rollovers under Section 85
17 Other Rollovers and Sale of an Incorporated Business
18 Partnerships
19 Trusts and Estate Planning
20 International Issues in Taxation
,Chapter 11. Taxable Income and Tax Payable for Individuals Revisited
11.1 Quick Review
1) There are no items in this section.
Type: ES
11.2 Self-Study Problems
1) There are no items in this section.
Type: ES
11.3 Practical Case
1) There are no items in this section.
Type: ES
11.4 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments," for example a court ordered termination benefit.
What tax policy objective is served by this provision?
Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that
it is received in a single year can result in significant portions of it being subject to income tax rates higher than would
have been the case had it been received over the several years during which it was earned. The deduction of such
amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the amount paid
to the amount that would have been paid if the amount had actually been received over several years. The objective
of such provisions is fairness or equity by an attempt to overcome the inherent penalty built into the graduated rate
system with respect to lump sum amounts that relate to numerous years.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA
provides for the types of losses that it identifies.
Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the
textbook up to Chapter 11 are as follows:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back.
• Net Capital Loss: Unlimited forward and 3 years back
• Listed Personal Property Losses: 7 years forward and 3 years back.
• Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with
unlimited carry forward in year 11.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward, but
only against the partnership income to which they relate.
Type: ES
Topic: Loss carryovers - general concepts
3) When a business has several types of loss carryovers, why is it necessary to keep separate balances for each type?
Answer: There are two reasons for having to track each type of loss carried forward separately. First, different types
of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second, some
1
, types of losses are streamed meaning that they can only be applied against the equivalent type of income (e.g., capital
losses can only be carried over and applied against net taxable capital gains).
Type: ES
Topic: Loss carryovers - general concepts
4) Tax advisors will normally recommend that loss carryovers not be used to reduce taxable income to nil for an
individual. What is the basis for this recommendation?
Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be
carried over to other years. This means that, unless an individual taxpayer has sufficient taxable income and federal
income tax payable, the value of these annual non-refundable credits is simply lost. This, in effect, is what would
happen if various types of loss carryovers were used to reduce taxable income to nil. As a rule one should attempt to
ensure that taxable income is sufficient to allow an individual to apply all available non-refundable personal tax credits
which maximizes the tax savings with each loss application.
Type: ES
Topic: Loss carryovers - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on
listed personal property for that year. Net gains mean the positive amount where LLP gains minus LPP losses in a
given year. If the loss cannot be used during the current year, it can be carried back three years and forward seven
years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital losses and non-capital losses and does not have sufficient income in the current
and previous years to claim these amounts, which type of loss should be claimed first?
Answer: There is no clear cut answer to this question. Net capital losses have an unlimited life but can only be carried
over to the extent of net taxable capital gains in the carryover period. This would suggest that, if net taxable capital
gains are present in the current year, the use of net capital losses should be claimed first. This would be particularly
true if additional net taxable capital gains are not expected in future years. In contrast, non-capital losses can be
deducted against any type of income. However, the downside is that the carry forward period is limited to 20 years.
While no firm conclusion is available, in most cases the lengthy carry forward period for non-capital losses would
suggest using net capital losses first. However, this tentative conclusion would be altered if the taxpayer commonly
has net taxable capital gains.
Type: ES
Topic: Loss carryovers - general concepts
7) John Broley has a 2025 $50,000 non-capital loss and a $50,000 2025 net capital loss. In 2026 his only income is a
$50,000 taxable capital gain. He has asked your advice as to which of the two loss carryovers he should claim. What
advice would you give him?
Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and
will expire at the end of 20 years. In contrast, the net capital loss will not expire until death but can only be applied
against net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss
in the time remaining until it expires, he should claim that loss. Alternatively, if he feels that he is likely to have
sufficient income in that period, but that he is unlikely to have further capital gains, he should claim the net capital
loss. There is no clear answer to this question as it involves estimates about the future. As a rule losses that are
restricted as to the type of income they can be applied against should be claimed before losses with no income
restrictions.
Type: ES
Topic: Loss carryovers - general concepts
2
** All Chapters included
,Table of Contents are given below
11 Taxable Income and Tax Payable for Individuals Revisited
12 Taxable Income and Tax Payable for Corporations
13 Taxation of Corporate Investment Income
14 Other Issues in Corporate Taxation
15 Corporate Taxation and Management Decisions
16 Rollovers under Section 85
17 Other Rollovers and Sale of an Incorporated Business
18 Partnerships
19 Trusts and Estate Planning
20 International Issues in Taxation
,Chapter 11. Taxable Income and Tax Payable for Individuals Revisited
11.1 Quick Review
1) There are no items in this section.
Type: ES
11.2 Self-Study Problems
1) There are no items in this section.
Type: ES
11.3 Practical Case
1) There are no items in this section.
Type: ES
11.4 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments," for example a court ordered termination benefit.
What tax policy objective is served by this provision?
Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that
it is received in a single year can result in significant portions of it being subject to income tax rates higher than would
have been the case had it been received over the several years during which it was earned. The deduction of such
amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the amount paid
to the amount that would have been paid if the amount had actually been received over several years. The objective
of such provisions is fairness or equity by an attempt to overcome the inherent penalty built into the graduated rate
system with respect to lump sum amounts that relate to numerous years.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA
provides for the types of losses that it identifies.
Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the
textbook up to Chapter 11 are as follows:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back.
• Net Capital Loss: Unlimited forward and 3 years back
• Listed Personal Property Losses: 7 years forward and 3 years back.
• Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with
unlimited carry forward in year 11.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward, but
only against the partnership income to which they relate.
Type: ES
Topic: Loss carryovers - general concepts
3) When a business has several types of loss carryovers, why is it necessary to keep separate balances for each type?
Answer: There are two reasons for having to track each type of loss carried forward separately. First, different types
of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second, some
1
, types of losses are streamed meaning that they can only be applied against the equivalent type of income (e.g., capital
losses can only be carried over and applied against net taxable capital gains).
Type: ES
Topic: Loss carryovers - general concepts
4) Tax advisors will normally recommend that loss carryovers not be used to reduce taxable income to nil for an
individual. What is the basis for this recommendation?
Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be
carried over to other years. This means that, unless an individual taxpayer has sufficient taxable income and federal
income tax payable, the value of these annual non-refundable credits is simply lost. This, in effect, is what would
happen if various types of loss carryovers were used to reduce taxable income to nil. As a rule one should attempt to
ensure that taxable income is sufficient to allow an individual to apply all available non-refundable personal tax credits
which maximizes the tax savings with each loss application.
Type: ES
Topic: Loss carryovers - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on
listed personal property for that year. Net gains mean the positive amount where LLP gains minus LPP losses in a
given year. If the loss cannot be used during the current year, it can be carried back three years and forward seven
years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital losses and non-capital losses and does not have sufficient income in the current
and previous years to claim these amounts, which type of loss should be claimed first?
Answer: There is no clear cut answer to this question. Net capital losses have an unlimited life but can only be carried
over to the extent of net taxable capital gains in the carryover period. This would suggest that, if net taxable capital
gains are present in the current year, the use of net capital losses should be claimed first. This would be particularly
true if additional net taxable capital gains are not expected in future years. In contrast, non-capital losses can be
deducted against any type of income. However, the downside is that the carry forward period is limited to 20 years.
While no firm conclusion is available, in most cases the lengthy carry forward period for non-capital losses would
suggest using net capital losses first. However, this tentative conclusion would be altered if the taxpayer commonly
has net taxable capital gains.
Type: ES
Topic: Loss carryovers - general concepts
7) John Broley has a 2025 $50,000 non-capital loss and a $50,000 2025 net capital loss. In 2026 his only income is a
$50,000 taxable capital gain. He has asked your advice as to which of the two loss carryovers he should claim. What
advice would you give him?
Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and
will expire at the end of 20 years. In contrast, the net capital loss will not expire until death but can only be applied
against net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss
in the time remaining until it expires, he should claim that loss. Alternatively, if he feels that he is likely to have
sufficient income in that period, but that he is unlikely to have further capital gains, he should claim the net capital
loss. There is no clear answer to this question as it involves estimates about the future. As a rule losses that are
restricted as to the type of income they can be applied against should be claimed before losses with no income
restrictions.
Type: ES
Topic: Loss carryovers - general concepts
2
