SOLUTIONS MANUAL
** All Chapters included
** Answers to Quick Review Questions
** Solutions to Assignment Problems
,Table of Contents are given below
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 12 Instructor’s Solutions Manual
Answers to Quick Review
1. C. The business limit is reduced by the greater of the TCEC grind and the AAII
grind.
2. C
3. C. The capital gains deduction is not available to corporations.
4. D. Non-capital loss = E – F
E = $700,000 business loss + $50,000 ABIL + $70,000 ITA 112 deduction + $90,000
net capital loss deduction = $910,000
F = ITA 3(c) amount of $200,000 [$70,000 + $130,000]
E – F = $910,000 – $200,000 = $710,000.
The $750,000 business loss and ABIL are only offset by $40,000, which is the
amount of the taxable dividends and net taxable capital gains that make their way
through to taxable income [$200,000 – ITA 112 deduction $70,000 – ITA 111(1)(b)
net capital loss deduction of $90,000].
5. D. Net income (ITA 3) would be nil [taxable dividends $100,000 – $100,000 business
loss); taxable income would also be nil [net income nil minus ITA 112 taxable dividend
deduction]; the non-capital loss would be $100,000 [ITA 112 deduction $100,000 +
$100,000 business loss – ITA 3(c) amount of $100,000].
6. D. A corporation incorporated outside Canada cannot be a CCPC (a). In (b),
although the TCEC is below the $10,000,000 threshold, the AAII is above the
$150,000 threshold, which would eliminate all of its business limit. In (c), although
the AAII is below the $50,000 threshold, the TCEC is above the $50,000,000
threshold, resulting in the reduction of its business limit to nil. In (d), the TCEC is
below the $10,000,000 threshold and therefore does not affect the business limit.
The AAII, however, is within the acceptable range of $50,000 to $150,000; therefore,
not all of the business limit would be reduced to nil.
7. D. (a) is incorrect because of the business notion and economic entity notion. (b) is
incorrect because not all CCPCs are entitled to the SBD, which depends on the
TCEC and AAII of the CCPC. (c) is incorrect because associated CCPCs would be
required to share one maximum available SBD.
8. A. (b) is incorrect because in 2026 the corporation would be controlled by a public
corporation and therefore would not qualify as a CCPC and could not claim the
SBD. (c) is incorrect for the same reasons as (b) in that the corporation cannot
qualify as a CCPC if controlled by non-residents of Canada. (d) is incorrect for 2026
since the corporation is no longer controlled by Canadian residents.
9. B. Without the M&P deduction, corporations would still be eligible for a 13% tax
reduction through the general rate reduction (GRR).
12-1
, 10. D. Of the three tax reductions/deductions, it is only the SBD that is restricted to
CCPCs.
Solutions to Assignment Problems
Solution to AP 12-1
The minimum 2026 net income and taxable income of Margo Ltd. would be calculated
as follows:
Pre-tax accounting income $32,420
Additions:
Inventory reserve (Note 1) $15,000
Property taxes on vacant land (Note 2) 1,200
Amortization expense 35,600
Accounting write-down of goodwill (Note 3) 1,700
Charitable donations (Note 4) 19,800
Taxable capital gain on investments (Note 5) 4,750
Estimated warranties (Note 6) 5,500
Social club membership fees (Note 7) 7,210
Interest on late income tax instalments (Note 8) 1,020
Foreign income tax withheld (Note 9) 270 92,050
Deductions:
CCA (given) ($79,785)
Accounting gain on sale of investments (Note 5) (9,500) (89,285)
2026 net income $35,185
Deductions:
Charitable donations (Note 4) ($19,800)
Taxable dividends (3,000) (22,800)
2026 taxable income $12,385
Note 1 ITA 18(1)(e) prohibits the claiming of any reserves except those
specifically allowed by the ITA. A reserve for anticipated declines in inventory
value is not specifically listed as a deductible reserve and is therefore disallowed.
Since the accounting reserve would have increased cost of goods sold by $15,000
it resulted in a decrease in net income by that same amount. A reconciliation
adjustment to add it back is therefore necessary.
Note 2 ITA 18(2) prohibits the deduction of property taxes on vacant land that is
not being used for the purposes of earning income. The disallowed property taxes
can however be added to the ACB of the vacant land (ITA 53(1)(h)).
Note 3 Goodwill is depreciable property that is a Class 14.1 property, subject to the
extended AccII and a declining balance rate of 5%. The accounting write-down of
$1,700 would be denied as a result of ITA 18(1)(b) and would be required to be added
back to income in the reconciliation process. No CCA calculations are required as note
4 assumed that the CCA calculations have been correctly determined as $79,785.
Note 4 While charitable donations can be claimed as a taxable income deduction,
they cannot be deducted in the determination of net income.
12-2
** All Chapters included
** Answers to Quick Review Questions
** Solutions to Assignment Problems
,Table of Contents are given below
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 12 Instructor’s Solutions Manual
Answers to Quick Review
1. C. The business limit is reduced by the greater of the TCEC grind and the AAII
grind.
2. C
3. C. The capital gains deduction is not available to corporations.
4. D. Non-capital loss = E – F
E = $700,000 business loss + $50,000 ABIL + $70,000 ITA 112 deduction + $90,000
net capital loss deduction = $910,000
F = ITA 3(c) amount of $200,000 [$70,000 + $130,000]
E – F = $910,000 – $200,000 = $710,000.
The $750,000 business loss and ABIL are only offset by $40,000, which is the
amount of the taxable dividends and net taxable capital gains that make their way
through to taxable income [$200,000 – ITA 112 deduction $70,000 – ITA 111(1)(b)
net capital loss deduction of $90,000].
5. D. Net income (ITA 3) would be nil [taxable dividends $100,000 – $100,000 business
loss); taxable income would also be nil [net income nil minus ITA 112 taxable dividend
deduction]; the non-capital loss would be $100,000 [ITA 112 deduction $100,000 +
$100,000 business loss – ITA 3(c) amount of $100,000].
6. D. A corporation incorporated outside Canada cannot be a CCPC (a). In (b),
although the TCEC is below the $10,000,000 threshold, the AAII is above the
$150,000 threshold, which would eliminate all of its business limit. In (c), although
the AAII is below the $50,000 threshold, the TCEC is above the $50,000,000
threshold, resulting in the reduction of its business limit to nil. In (d), the TCEC is
below the $10,000,000 threshold and therefore does not affect the business limit.
The AAII, however, is within the acceptable range of $50,000 to $150,000; therefore,
not all of the business limit would be reduced to nil.
7. D. (a) is incorrect because of the business notion and economic entity notion. (b) is
incorrect because not all CCPCs are entitled to the SBD, which depends on the
TCEC and AAII of the CCPC. (c) is incorrect because associated CCPCs would be
required to share one maximum available SBD.
8. A. (b) is incorrect because in 2026 the corporation would be controlled by a public
corporation and therefore would not qualify as a CCPC and could not claim the
SBD. (c) is incorrect for the same reasons as (b) in that the corporation cannot
qualify as a CCPC if controlled by non-residents of Canada. (d) is incorrect for 2026
since the corporation is no longer controlled by Canadian residents.
9. B. Without the M&P deduction, corporations would still be eligible for a 13% tax
reduction through the general rate reduction (GRR).
12-1
, 10. D. Of the three tax reductions/deductions, it is only the SBD that is restricted to
CCPCs.
Solutions to Assignment Problems
Solution to AP 12-1
The minimum 2026 net income and taxable income of Margo Ltd. would be calculated
as follows:
Pre-tax accounting income $32,420
Additions:
Inventory reserve (Note 1) $15,000
Property taxes on vacant land (Note 2) 1,200
Amortization expense 35,600
Accounting write-down of goodwill (Note 3) 1,700
Charitable donations (Note 4) 19,800
Taxable capital gain on investments (Note 5) 4,750
Estimated warranties (Note 6) 5,500
Social club membership fees (Note 7) 7,210
Interest on late income tax instalments (Note 8) 1,020
Foreign income tax withheld (Note 9) 270 92,050
Deductions:
CCA (given) ($79,785)
Accounting gain on sale of investments (Note 5) (9,500) (89,285)
2026 net income $35,185
Deductions:
Charitable donations (Note 4) ($19,800)
Taxable dividends (3,000) (22,800)
2026 taxable income $12,385
Note 1 ITA 18(1)(e) prohibits the claiming of any reserves except those
specifically allowed by the ITA. A reserve for anticipated declines in inventory
value is not specifically listed as a deductible reserve and is therefore disallowed.
Since the accounting reserve would have increased cost of goods sold by $15,000
it resulted in a decrease in net income by that same amount. A reconciliation
adjustment to add it back is therefore necessary.
Note 2 ITA 18(2) prohibits the deduction of property taxes on vacant land that is
not being used for the purposes of earning income. The disallowed property taxes
can however be added to the ACB of the vacant land (ITA 53(1)(h)).
Note 3 Goodwill is depreciable property that is a Class 14.1 property, subject to the
extended AccII and a declining balance rate of 5%. The accounting write-down of
$1,700 would be denied as a result of ITA 18(1)(b) and would be required to be added
back to income in the reconciliation process. No CCA calculations are required as note
4 assumed that the CCA calculations have been correctly determined as $79,785.
Note 4 While charitable donations can be claimed as a taxable income deduction,
they cannot be deducted in the determination of net income.
12-2
