Unformatted text preview: loss which can be used to reduce income are affected [ITA 38, 39(1)(c)]. 3. Impact on return on investment: because Day's tax liability is $8,000 less in year 20X1, Day has a greater cash flow which can be used for reinvestment. This increased cash flow may provide a greater long-term return on investment than can be achieved by Knight (who may reduce taxes from the loss at some future time). In addition, if Knight recognizes the loss from a sale of shares, a lesser amount of tax savings will be received as only one-half of the loss is deductible. Because Day has higher cash flow than Knight in the first year, Day can use this cash flow to fund the loss of the business thereby reducing the risk of a complete business failure. Consequently, Day may achieve greater and more immediate success from the business. In other words, the increased cash flow may reduce the risk of business failure....
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- Spring '08