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chap11

# chap11 - CHAPTER 11 Computation of Taxable Income and Tax...

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CHAPTER 11 Computation of Taxable Income and Tax after General Reductions for Corporations Problem 1 [ITA: 3; 110.1–112] The following data summarizes the operations of Red Pocket Limited for the years of 2002 to 2005 ended September 30. 2002 2003 2004 2005 Income (loss) from business ...... \$ 54,000 \$ 32,000 \$ (75,000) \$ 62,500 Dividend income — Taxable Canadian corporations ............ 42,500 22,500 18,000 10,500 Taxable capital gains .................. 11,000 2,500 5,000 9,000 Allowable capital losses ............. 2,000 4,500 3,500 Allowable business investment loss .......................................... 3,750 Charitable donations .................. 23,000 9,000 3,000 13,000 The corporation has a net capital loss balance of \$13,500 which arose in 1998. REQUIRED Compute the taxable income for Red Pocket Limited for the years indicated and show the amounts that are available for carryforward to 2006. (Deal with each item line-by-line across the years, rather than computing income one year at a time.) 229

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Introduction to Federal Income Taxation in Canada Solution 1 2002 2003 2004 2005 Par. 3( a ) Income from business ....................... \$ 54,000 \$ 32,000 Nil \$ 62,500 Income from property ....................... 42,500 22,500 \$ 18,000 10,500 \$ 96,500 \$ 54,500 \$ 18,000 \$ 73,000 Par. 3( b ) Taxable capital gains ......................... 11,000 2,500 5,000 9,000 Allowable capital losses .................... (2,000) (2,500) 1 (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 (75,000) n/a Par. 3 ( e ) 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 \$ 71,500 Sec. 110.1 Charitable donations 2 : Carryover .................................... n/a (3,000) Current ........................................ (23,000) (9,000) (13,000) \$ 36,250 \$ 23,000 Nil \$ 55,500 Par. 111(1)( b ) Net capital losses 3 .............................. (9,000) (1,500) (500) \$ 27,250 \$ 23,000 Nil \$ 55,000 Par. 111(1)( a ) Non-capital losses 4 ............................ (27,250) (23,000) (24,750) Taxable income ................................................................ Nil Nil Nil \$ 30,250 NOTES TO SOLUTION (1) A maximum of \$2,500 can be deducted in 2003. (2) Charitable donations: 2002: Lesser of: (a) 75% of \$101,750 = \$76,313 (b) \$23,000 Carryforward: Nil 2003: Lesser of: (a) 75% of \$54,500 = \$40,875 (b) \$9,000 Carryforward: Nil 2004: Lesser of: (a) 75% of Nil = Nil (b) \$3,000 Carryforward: \$3,000 2005: Lesser of: (a) 75% of \$82,000 = \$61,500 (b) \$3,000 + \$13,000 = \$16,000 Carryforward: Nil (3) Net capital losses 1998 net capital loss converted to 2002 rates: \$13,500 × 1 / 2 / 3 / 4 ........................................... \$ 9,000 Net capital loss deducted in 2002 to the extent of net taxable capital gains ......................... (9,000) Nil 2003 net capital loss not utilized .......................................................................................... \$ 2,000 2004 net capital loss deducted to the extent of net taxable capital gains .............................. (1,500) \$ 500 2005 remaining net capital loss deducted in 2005 to the extent of net taxable capital gains (500) Available for carryforward ................................................................................................... Nil 230
Solutions to Chapter 11 Assignment Problems (4) Non-capital losses Par. 3( d ) Loss from business in 2004 ........................................................... \$ 75,000 Dividends deducted under sec. 112 ............................................... 18,000 \$ 93,000 Add: net capital loss deducted ............................................................................................ 1,500 \$ 94,500 Less: sec 3( c ): par. 3( a ) dividends ................................................................. \$ 18,000 par. 3( b ) taxable capital gain ................................................. 1,500 19,500 \$ 75,000 Losses utilized: 2002 ..................................................................................... \$ 27,250 2003 ..................................................................................... 23,000 2005 ..................................................................................... 24,750 75,000 Closing balance .................................................................................................................. Nil 231

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Introduction to Federal Income Taxation in Canada Problem 2 [ITA: 111(4), (5), (5.1); 249(4)] On November 1, 2005, Chris purchased all the issued shares of Transtek Inc. from an acquaintance, Tom. Transtek carries on a transmission repair business and has done so since its incorporation on January 1, 2004. In addition to the transmission repair business, Transtek rents out a small building it owns. Neither the transmission repair business nor the rental endeavour has been successful.
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chap11 - CHAPTER 11 Computation of Taxable Income and Tax...

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