Chapter 10

Chapter 10 - Chapter Ten CHAPTER 10 INDIVIDUALS:...

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Chapter Ten CHAPTER 10 INDIVIDUALS: DETERMINATION OF TAXABLE INCOME AND TAXES PAYABLE SOLUTIONS TO REVIEW QUESTIONS 1. Net income for tax purposes consists of the aggregate of a taxpayer's current year's income from employment, business, property, capital gains and other sources, taking into account the losses from those sources. Net income for tax purposes is not the base to which the tax rates are applied. Taxable income consists of net income for tax purposes minus certain reductions. For individuals, those reductions consist primarily of losses from other years that were unable to be used in the year incurred and the lifetime capital gain deduction on qualified property. Taxable income is the base to which the annual tax rates apply. 2. An allowable capital loss is one-half of the loss incurred on the sale of capital property in a particular year, and forms part of that year's calculation of net income for tax purposes. To the extent that the aggregating formula for a particular year restricts the deduction of allowable capital losses because there are insufficient taxable capital gains, the restricted portion is classified as a net capital loss. Net capital losses, therefore, may consist of the unused allowable capital losses of a number of years, and may be available for deduction in other years in arriving at the taxable income of those other years (see 3 below) [S.111(1)(b)]. 3. Net capital losses can be carried back three years and forward indefinitely from the year in which they were incurred. During the carry-over period, the net capital losses can be deducted as a special reduction in arriving at taxable income only to the extent that the taxpayer has realized net taxable capital gains (gains minus losses) for that year [S.111(1)(b), 111(1.1)]. 4. If, in a particular year, the aggregating formula for determining a taxpayer's net income for tax purposes does not permit the full deduction of employment losses, business losses, property losses, and allowable business investment losses because there is insufficient income in that year, the unused portion is classified as a non- capital loss. Non-capital losses can be carried back three years and forward twenty years from the year in which they are incurred, and can be deducted in arriving at the taxable income of those other years, regardless of the type of income earned in those other years [S.111(1)(a)]. [Note the carry forward for non-capital losses incurred in taxation years that end prior to March 22, 2004 is seven years. For non-capital losses incurred in taxation years ending between March 23, 2004 and December 31, 2005 the carry forward is ten years.] 5. It is not always desirable to utilize a loss carry-over as soon as possible. Within the restricted time limit the use of net capital losses and non-capital losses is optional. The decision to use the loss carry-over must consider both the timing and the amount of the tax savings that will occur. Obviously, the sooner they are 175
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Chapter 10 - Chapter Ten CHAPTER 10 INDIVIDUALS:...

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