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Chapter11Solutions

Chapter11Solutions - Chapter 11 Solution 1 2004 2005 2006...

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Unformatted text preview: Chapter 11 Solution 1 2004 2005 2006 2007 Par. 3(a) Income from business ....................... $ 54,000 $ 32,000 Nil $ 62,500 Income fiom property ....................... 42,500 22,500 $ 18,000 10 500 $ 96,500 $ 54,500 $ 18,000 $ 73,000 Par. 3(1)) Taxable capital gains ........................ 11,000 2,500 5,000 9,000 Allowable capital losses ................... (2,000) (2,500)“) (3,500) Nil Par. 3(c) $ 105,500 $ 54,500 $ 19,500 $ 82,000 Par. 3(d) ABIL ................................................. (3,750) n/a n/a n/a Business loss ..................................... n/a n/a 175,000) n/a Par. 3(3) Income from Division B .................... $ 101,750 $ 54,500 Nil $ 82,000 Sec. 112 Inter-company dividends .................. (42,500) (22,500) —— (10,500) $ 59,250 $ 32,000 Nil 3 71,500 Sec. 110.1 Charitable donationsfz) Carryover ................................... n/a — —- (3,000) Current ....................................... (23,000) (9,000) ~— ( 13,000) $ 36,250 $ 23,000 Nil 3 55,500 Par. 111(l)(b) Net capital losses”) ........................... (9,000) — (1,500) (500) $ 27,250 $ 23,000 Nil $ 55,000 Par. 1 11(1)(a) Non-capital losses“) .......................... (27,250) (23,000) — (24,7501 Taxable income ............................................................... ~, ,, N11 _Nil Nil 3 30,250 —NOTES T 0 SOLUTION (1) A maximum of $2,500 can be deducted in 2005. (2) Charitable donations: 2004: Lesser of: (a) 75% of$101,750 = $76,313 (b) $23,000 Carryforward: Nil 2005: Lesser of: (a) 75% of $54,500 = $40,875 (b) $9,000 Carryforward: Nil 2006: Lesser of: (a) 75% of Nil 2 Nil (b) $3,000 Carryforward: $3,000 2007: Lesser of: (a) 75% of $82,000 = $61,500 (b) $3,000 + $13,000 = $16,000 Cam/forward: Ni] (3) Net capital losses 1999 net capital loss converted to 2004 rates: $13,500 >< V2 / 3/4 ........................................ $ 9,000 Net capital loss deducted in 2004 to the extent of net taxable capital gains ........................ (9,000) Nil 2005 net capital loss not utilized .......................................................................................... $ 2,000 2006 net capital loss deducted to the extent of net taxable capital gains ............................. 1 1,500) $ 500 2007 remaining net capital loss deducted in 2007 to the extent of net taxable capital gains 9500) Available for carryforward .................................................................................................. [Si] (4) Non-capital losses Par. 3(d) Loss from business in 2006 .......................................................... $ 75,000 Dividends deducted under section 112 ......................................... 18,000 $ 93,000 Add: net capital loss deducted ........................................................................................... 1,500 $ 94,500 Less: par. 3(c): par. 3(a) dividends ............................................................... $ 18,000 par. 3(1)) taxable capital gain ................................................ 1,500 19,500 $ 75,000 Losses utilized: 2004 .................................................................................... $ 27,250 2005 .................................................................................... 23,000 2007 .................................................................................... 24,750 75,000 Closing balance .................................................................................................................. Nil Solution 2 The data given in the problem statement can be summarized as follows: expiration . . after deemed carryforward losses non-capital losses net capital losses year-end 2006—repair business ‘_ _____ > M LSSQOO —rental property § LAM 2,000 current deemed from non-capital allowable capital year-end losses 5 sources losses rental property W, 1 0,000 business Eff]: M property 5 § M. m 5 ipotential offset potential elections E f business income taxable capital gain ‘ 3 : potential; recapture—building : 1 ,m ofiset TCG—land E $30000 —buildin i M 5 g L.,po.tentiaLofi’set _____________________ mm; ______________________ : Expected Results from Summary of Data (a) N0 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, 2007 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, 2007 is $40,000. (0) 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, 2007 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, 2007 [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. I 11( 5.1)]. There is a $20,000 accrued loss on the rental property land that must be recognized. The ACE of the land is reduced from $90,000 to $70,000 [pan 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, 2007 is computed below. Par. 3(a) Business income ....................................................................................................... Nil Property income ........................................................................................................ Nil Par. 3(b) Net capital gains: Taxable capital gains ...................................................................... Nil Allowable capital loss: rental property ($20,000 x I/,) ................... sham Nil Par. 3(c) Nil Par. 3(d) Business loss ...................................................................................... $ (60,000) Property loss ...................................................................................... (5,000) $ 165,000) Division B income .................................................................................................... _Nil The net capital losses (($10,000 x 1/2) + $10,000 = $15,000) expire immediately following the oétbbéiisl, 2007 year- end [pan 111(4)(a)]. The non—capital loss balance at November 1, 2007 is computed as follows: Balance, Jan. 1, 2007 ................................................................................................................... $ 42,000 Loss for taxation year ended Oct. 31, 2007: from business ................................................................................................ $ 60,000 from property ................................................................................................ 5,000 $ 65,000 Less Par. 3(c) amount determined above .............................................................. 0 65,000 Balance, Oct. 31, 2007 ................................................................................................................ $ 107,000 Less: unutilized losses about to expire: non-capital property losses ......................................................... $ 2,000 current property loss 5,000 7,000 Balance, Nov. 1,2007 ................................................................................................................. $___LQQ,M 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, 2007. Thus, the rental losses ($2,000 + $5,000 = $7,000) expire immediately following the October 31, 2007 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 [span 111(5)(a)(i)]. The condition appears to be met for the June 30, 2008 and the June 30, 2009 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, 2009. Due to Chris’s 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, 2008, 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, 2007 is deductible for the June 30, 2009 taxation year. None of it is deductible for the June 30, 2008 taxation year due to the loss in that year. The remainder ($100,000 —~ $54,000 = $46,000) can be carried forward to 2010 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, 2008. Thus $11,000 of the 2008 non-capital loss is deductible in 2009, 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). 1f Transtek makes this election, the ACE of the land on November 1, 2007 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 + 1/3 ($230,000 ~ 150,000) = $190,000. The income for the taxation year ended October 31, 2007 will be as follows: Par. 3(a): Business income ........................................................................................................ Nil Property income ........................................................................................................ Nil Par. 3(b): Net capital gains: Taxable capital gains: Repair shop land ($140,000 — $80,000) x V: .................................. $ 30,000 Repair shop building ($230,000 — $150,000) x V, ......................... 40,000 $ 70,000 Allowable capital loss ($20,000 x I/2) ................................................ w 5 60,000 Par. 3(c) ........................................................................................................... $ 60,000 Par. 3(d) Business loss ...................................................................................... $ (60,000) Less: recapture — building ($147,000 ~ $150,000) ........................... 3,000 S (57,000) Property loss ...................................................................................... (5,000) (62,000) Division B income ....................................................................................................................... Nil Division C deductions: . Par. 111(1)(a) Net capital loss from 2006 .................................................... $ (5,000) Par. 1 1 1(1)(b) Nonacapital loss: Business .......................................................... $ (Nil) Property .......................................................... (Nil) (Nil) (5,000) Taxable income ........................................................................................................................... ,Nfl Non-capital loss balance, Nov. 1, 2007: Business ProgerQ Total Balance, Jan. 1, 2007 ............................................................... $ 40,000 $ 2,000 $ 42,000 Added in taxation year ended Oct. 31/07 ($60K — $5K — $5K — $57K ............................................... 7,000 Nil 7,000 Utilized in taxation year ended Oct. 31, 2007 or expired........ (Nil) (2,000) (2,000) Remaining ............................................................................... 3 42,000 A Nil $ 4 2,000 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, 2007, subject to the restrictions discussed in Part A. By making the maximum elections possible, the non-capital loss balance of Transtek at November 1, 2007 has been significantly reduced. Part B (ii) (Minimum election to utilize expiring losses) The following losses will expire October 31, 2007, if not utilized: The 2006 net capital loss .............................................................................................. $ 5,000 The Oct. 31, 2007 allowable capital loss ..................................................................... 10,000 The rental loss portion of the 2006 non-capital loss .................................................... 2,000 The Oct. 31, 2007 rental loss ....................................................................................... 5,000 LEAM It is impossible to utilize the rental loss portion of the 2006 non-capital loss of $2,000 without triggering sufficient income under paragraph 3(c) to utilize the entire October 31, 2007 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, 2007, a capital gain of 2 X $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 1 l l(4)(e) to be deemed to have disposed of the repair shop land for proceeds of $120,000, i.e., (2 x $20,000) + 80,000. The ACE of the land at November 1, 2007 will be $120,000. * An alternative is considered below. The income for the taxation year ended October 31, 2007 will be as follows: Par. 3(a) Business income ................................................................................................ . ....... Nil Property income ................................................................................................ ‘. ....... Nil Par. 3(b) Net capital gains: Taxable capital gain: Repair shop land ($120,000 — $80,000) x I/2 ..................................... $ 20,000 Allowable capital loss ($20,000 x 1/2) ................................................ (10,000) a 10,000 Par. 3(c) ....................................................................................................................................... $ 10,000 Par. 3(d) Business loss ...................................................................................... $ (60,000) Property loss ...................................................................................... (5,000) (65,000) Division B income ....................................................................................................................... Nil Division C deductions: Par. lll(l)(a) Net capital loss from 2006 ............................................................................ 5 15,000) Taxable income ........................................................................................................................... h”, 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, 2007 is computed as follows: Balance, Jan. 1, 2007 ................................................................................................................... $ 42,000 Par. 3(d) Loss for taxation year ended Oct. 31, 2007: from business ....................................................................................... $ 60,000 from property ....................................................................................... 5,000 $ 65,000 Add: Net capital loss deducted ............................................................................. 5,000 $ 70,000 Less: Par. 3(c) amount determined above ............................................................. 10,000 60,000* Balance, Oct. 31, 2007 ................................................................................................................ $ 102,000 Less: the unutilized nonccapital property loss ............................................................................. 2,000 Balance, Nov. 1,2007 ................................................................................................................. M * 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, 2007. 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, 2007: No election Maximum election Partial election Par. 3(a) Income from non-capital sources (2 0) ....................... Nil Nil Nil Par. 3(b) Net taxable capital gains (2 0): Deemed taxable capital gains (elective): land .................................................... Nil 3 30,000 S 20,000 building .............................................. Nil 40,000 Nil Accrued allowable capital loss (automatic): rental land .......................................... $410,000) Nil (1_0_,000) $ 60 000 _(10 000) $ 10 000 Pat. 3(c) Par, 3(a) + par. 3(b) .................................................... Nil $ 60,000 $ 10,000 Par. 3(d) Losses from non-capital sources and ABILS: Loss from business operations .................... $ (60,000) $ (60,000) $(60,000) Recapturc (elective): building... .. Nil 3,000 Nil Loss from propeny ............... .. (5,000) 165 000) N__(5 000) _( 62 000) (5 00_0) _( 65 000) Division B income ....................................... Nil Nil Nil Optional net capital loss deducted ....................... Nil (5,000) (5,000) Non-capital loss deducted: From property ............................................. Nil Nil Nil From business ............................................. Nil Nil Nil (Nil) Nil Nil Taxable income ......................................................................... Nil Ni Ni Non-Capital Losses Available for Cartyforward at Deemed Taxation Year Ended Oct. 31, 200 7: No election Maximum election Partial election Balance from Jan. 1,2007 ......................................................... $ 42,000 $ 42,000 $ 42,000 Non—capital loss — Oct. 31, 2007: Par. 3(d) losses — see above ........................ $ 65,000 $ 62,000 $ 65,000 Add: net capital losses deducted .................. Ni...
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