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canadian income taxation

canadian income taxation - loss which can be used to reduce...

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Solution to P 3-1 1. Tax liability of Day: Employment Income $40,000 Property Income 15,000 $55,000 Less business loss (20,000 ) $35,000 Tax @ 40% $14,000 Tax liability of Night : Employment Income $40,000 Property Income 15,000 $55,000 Tax @ 40% $22,000 2. Knight's business loss belongs exclusively to the corporation as a separate taxable entity. The loss in the corporation is preserved and can be offset against future profits of the business, if they occur within 20 years [ITA 111(1)(a)]. Alternatively, Knight may dispose of the shares of the corporation at a reduced value and may recognize a capital loss of which only one-half is available for tax purposes. Assuming the corporation is a small business corporation, the loss is an allowable business investment loss which can be offset against other sources of income, but not until the year in which the shares are disposed. Therefore, both the timing and amount of
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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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