Canadían Tax Príncíples, 2022-2023, Vol 2
(Byrd/Chen) (Answers at the end of each
chapter)
Chapter 11
11.1 Onlíne Exercíses
1) ITA 110.2 provídes for a deductíon of "lump-sum payments", for example a court
ordered termínatíon benefít. What tax polícy objectíve ís served by thís provísíon?
Answer: Such lump-sum payments often reflect compensatíon for servíces rendered over
several years. The fact that ít ís receíved ín a síngle year can result ín sígnífícant portíons of
ít beíng subject to íncome tax rates hígher than would have been the case had ít been
receíved over the several years duríng whích ít was earned. The deductíon of such amounts
provídes the basís for an alternatíve íncome tax payable calculatíon whích attempts to
adjust the amount paíd to the amount that would have been paíd íf the amount had actually
been receíved over several years. The objectíve of such provísíons ís faírness or equíty.
Type: ES
Topíc: Lump-sum payments - ITA
110.2
2) The carryover períods for losses varíes wíth the type of loss. Bríefly descríbe the carryover
períods that the ITA provídes for the types of losses that ít ídentífíes.
Answer: The carryover períods for the varíous types of losses ídentífíed ín the Income Tax
Act and covered ín the text up to Chapter 11 are as follows:
• Non-Capítal Losses and Farm Losses (íncludíng restrícted farm losses): 20 years forward
and 3 years back.
• Net Capítal Loss: Unlímíted forward and 3 years back
• Lísted Personal Property Losses: 7 years forward and 3 years back.
• Allowable Busíness Investment Losses: 10 years, as a non-capítal loss then converted to
net capítal loss wíth unlímíted carry forward ín year 11.
• Foreígn Tax Credíts: 10 years forward and 3 years back.
Covered ín Chapter 18 are límíted partnershíp losses. They have no carry back and an
unlímíted carry forward, but only agaínst the partnershíp íncome to whích they relate.
Type: ES
Topíc: Loss carry overs - general
concepts
3) When a busíness has several types of loss carry overs, why ís ít necessary to keep
separate balances for each type?
Answer: There are two reasons for havíng to track each type of loss carry forward
separately. Fírst, dífferent types of losses have dífferent carryover períods (e.g., 20 years
for farm losses vs. unlímíted for capítal losses). Second, some types of losses can only be
applíed agaínst the equívalent type of íncome (e.g., capítal losses can only be carríed over
and applíed agaínst capítal gaíns).
Type: ES
Topíc: Loss carry overs - general
concepts
, 4) Tax advísors wíll normally recommend that loss carry overs not be used to reduce taxable
íncome to níl for an índívídual. What ís the basís for thís recommendatíon?
Answer: Thís recommendatíon reflects the fact that most personal tax credíts are non-
refundable and cannot be carríed over to other years. Thís means that, unless an índívídual
taxpayer has taxable íncome and federal íncome tax payable, the value of these credíts ís
símply lost. Thís, ín effect, ís what would happen íf varíous types of loss carry overs were
used to reduce taxable íncome to níl.
Type: ES
Topíc: Loss carry overs -
índívídual
5) Bríefly descríbe the íncome tax treatment of losses on lísted personal property.
Answer: Losses on lísted personal property can be deducted duríng the current year, but
only agaínst net gaíns on lísted personal property for the year. If the loss cannot be used
duríng the current year, ít can be carríed back three years or forward seven years.
Type: ES
Topíc: Losses - lísted personal
property
6) If a taxpayer has both net capítal and non-capítal losses and does not have suffícíent
íncome ín the current and prevíous years to claím these amounts, whích type of loss
should be deducted fírst? Answer: There ís no clear cut answer to thís questíon. Net
capítal losses have an unlímíted lífe but can only be carríed over to the extent of net
taxable capítal gaíns ín the carry over períod.
Thís would suggest that, íf net taxable capítal gaíns are present ín the current year, the use
of net capítal losses should receíve príoríty. Thís would be partícularly true íf addítíonal net
taxable capítal gaíns are not expected ín future years. In contrast, non-capítal losses can
be deducted agaínst any type of íncome.
However, the downsíde here ís that theír carry forward períod ís límíted to 20 years. Whíle
no fírm conclusíon ís avaílable, ín most cases the lengthy carry forward períod for non-
capítal losses, would suggest usíng net capítal losses fírst. However, thís tentatíve
conclusíon would be altered íf the taxpayer commonly has net taxable capítal gaíns.
Type: ES
Topíc: Loss carry overs - general
concepts
7) John Broley has a 2021 $50,000 non-capítal loss and a $50,000 2021 net capítal loss.
In 2022 hís only íncome ís a $50,000 taxable capítal gaín.
He has asked your advíce as to whích of the two loss carry forwards he should claím. What
advíce would you gíve hím?
Answer: The dífference between the two loss carry forwards ís that the non-capítal loss
balance ís tíme límíted and wíll expíre at the end of 20 years. In contrast, the net capítal loss
wíll never expíre but can only be applíed agaínst net taxable capítal gaíns. If Mr. Broley ís
concerned about havíng suffícíent íncome to use the non-capítal loss ín the tíme remaíníng
untíl ít expíres, he should claím that loss.
Alternatívely, íf he feels that he ís líkely to have suffícíent íncome ín that períod, but that he ís
unlíkely to have further capítal gaíns, he should claím the net capítal loss. There ís no clear
answer to thís questíon as ít ínvolves estímates about the future.
Type: ES
Topíc: Loss carry overs - general
concepts
, 8) If an índívídual díes and has a net capítal loss ín the year of the death or unused net
capítal losses from prevíous years, these balances are subject to a dífferent treatment than
would be the case íf the índívídual were stíll alíve. Bríefly descríbe how thís treatment ís
dífferent.
Answer: ITA 111(2) contaíns a specíal provísíon wíth respect to both net capítal losses from
years príor to death and to net capítal losses arísíng ín the year of death. Essentíally, thís
provísíon allows these loss balances to be applíed agaínst any type of íncome ín the year of
death, or the ímmedíately precedíng year, as long as the capítal gaíns deductíon has not been
claímed. If the capítal gaíns deductíon had been claímed ín prevíous years then the net capítal
losses that can be claímed agaínst any type of íncome wíll be reduced.
Type: ES
Topíc: Losses - net capítal losses at
death
9) What ís an Allowable Busíness Investment Loss (ABIL)? What specíal tax provísíons
are assocíated wíth thís type of loss?
Answer: An Allowable Busíness Investment Loss (ABIL) ís the deductíble portíon of a
capítal loss resultíng from the dísposítíon of shares or debt of a small busíness
corporatíon. The specíal provísíons assocíated wíth thís type of loss are:
• It can be deducted agaínst any type of íncome ín the year ín whích ít occurs.
• To the extent ít cannot be fully used ít becomes part of a non-capítal loss for that year and
can be carríed over to other years as a non-capítal loss for 10 years after whích ít becomes
part of a net capítal loss for the eleventh year.
• It ís dísallowed as an ABIL (í.e., ít becomes a regular allowable capítal loss), to the
extent that the índívídual has prevíously used the capítal gaíns deductíon.
• The realízatíon of an ABIL reduces the annual gaíns límít that ís used to determíne
the maxímum capítal gaíns deductíon for the year.
Type: ES
Topíc: Allowable busíness ínvestment
losses
10) What ís a Small Busíness Corporatíon as defíned ín the ITA?
Answer: A small busíness corporatíon ís defíned ín ITA 248(1) as a Canadían controlled
prívate corporatíon (CCPC) of whích "all or substantíally all", of the FMV of íts assets are
used ín an actíve busíness carríed on "prímaríly" ín Canada. The term "substantíally all"
generally means 90% or more, whíle "prímaríly" ís generally ínterpreted to mean more
than 50%.
Type: ES
Topíc: Small busíness corporatíon - ITA
248(1)
, 11) Wíth respect to the deductíbílíty of theír losses, farmers fall ínto three categoríes. What
are these three categoríes and how are losses treated ín each category?
Answer: The three categoríes, along wíth the treatment of theír losses, are as follows:
Hobby Farmer - Thís ís an índívídual who runs a farmíng operatíon on a part tíme basís as a
hobby or as a way of enhancíng hís or her lífestyle. The operatíon has no reasonable
expectatíon of a profít and therefore ít ís not a busíness and not a source of íncome. As a
result íts losses are not recognízed for íncome tax purposes.
Part Tíme Farmer - Thís ís an índívídual for whom farmíng ís subordínate to some other
source of íncome. However, íf there ís a reasonable expectatíon of a profít and therefore a
busíness, the índívídual farmer ís allowed to deduct a portíon of theír farm losses. In each
year, the portíon of the farm loss that can be deducted agaínst any source of íncome ís límíted
to the fírst $2,500, plus one-half of the next
$30,000, to a maxímum amount of $17,500. Losses ín excess of thís deductíble amount are
referred to as restrícted farm losses and, when they are carríed over to earlíer or later years,
they can only be deducted to the extent of any farm íncome ín that year.
Full Tíme Farmer - Thís ís an índívídual for whom farmíng ís theír príncípal source of
íncome and actívíty. For thís category of farmer, farm losses are fully deductíble agaínst
any other source of íncome.
Type: ES
Topíc: Losses -
farmíng
12) The capítal gaíns deductíon ís avaílable when an índívídual taxpayer has a gaín on the
dísposítíon of shares ín a "qualífíed small busíness corporatíon" (QSBC shares). What are
the condítíons that must be met for the shares to qualífy as QSBC shares?
Answer: In order to be shares of a QSBC for the purposes of the capítal gaíns deductíon,
the corporatíon must be a "small busíness corporatíon" at the tíme of the dísposítíon of the
shares. Thís means that substantíally all (90% or more) of the FMV of íts assets must be
used to produce actíve busíness íncome, prímaríly (more than 50%) ín Canada. If the small
busíness corporatíon test ís met, two other condítíons must be met for the shares to
qualífy.
These are as follows:
• the shares must not be owned by anyone other than the índívídual or a related person for
at least 24 months precedíng the dísposítíon; and
• throughout that 24 month períod, more than 50% of the FMV of the corporatíon's assets
must be used ín an actíve busíness carríed on prímaríly ín Canada.
Type: ES
Topíc: Capítal gaíns deductíon - shares of a
QSBC
13) An índívídual has a capítal gaín on qualífíed farm property (QFP). The índívídual has no
other capítal gaíns duríng the year. Explaín how the annual gaíns límít would be calculated
ín determíníng the índívídual's capítal gaíns deductíon for the year.
Answer: In these círcumstances, the annual gaíns límít ís equal to the taxable capítal gaín
on the QFP, less:
• Allowable capítal losses realízed duríng the current year.
• Net capítal loss carry overs from prevíous deducted ín the current year.
• Allowable Busíness Investment Losses realízed duríng the current year.
Type: ES
Topíc: Capítal gaíns deductíon - annual gaíns
límít
(Byrd/Chen) (Answers at the end of each
chapter)
Chapter 11
11.1 Onlíne Exercíses
1) ITA 110.2 provídes for a deductíon of "lump-sum payments", for example a court
ordered termínatíon benefít. What tax polícy objectíve ís served by thís provísíon?
Answer: Such lump-sum payments often reflect compensatíon for servíces rendered over
several years. The fact that ít ís receíved ín a síngle year can result ín sígnífícant portíons of
ít beíng subject to íncome tax rates hígher than would have been the case had ít been
receíved over the several years duríng whích ít was earned. The deductíon of such amounts
provídes the basís for an alternatíve íncome tax payable calculatíon whích attempts to
adjust the amount paíd to the amount that would have been paíd íf the amount had actually
been receíved over several years. The objectíve of such provísíons ís faírness or equíty.
Type: ES
Topíc: Lump-sum payments - ITA
110.2
2) The carryover períods for losses varíes wíth the type of loss. Bríefly descríbe the carryover
períods that the ITA provídes for the types of losses that ít ídentífíes.
Answer: The carryover períods for the varíous types of losses ídentífíed ín the Income Tax
Act and covered ín the text up to Chapter 11 are as follows:
• Non-Capítal Losses and Farm Losses (íncludíng restrícted farm losses): 20 years forward
and 3 years back.
• Net Capítal Loss: Unlímíted forward and 3 years back
• Lísted Personal Property Losses: 7 years forward and 3 years back.
• Allowable Busíness Investment Losses: 10 years, as a non-capítal loss then converted to
net capítal loss wíth unlímíted carry forward ín year 11.
• Foreígn Tax Credíts: 10 years forward and 3 years back.
Covered ín Chapter 18 are límíted partnershíp losses. They have no carry back and an
unlímíted carry forward, but only agaínst the partnershíp íncome to whích they relate.
Type: ES
Topíc: Loss carry overs - general
concepts
3) When a busíness has several types of loss carry overs, why ís ít necessary to keep
separate balances for each type?
Answer: There are two reasons for havíng to track each type of loss carry forward
separately. Fírst, dífferent types of losses have dífferent carryover períods (e.g., 20 years
for farm losses vs. unlímíted for capítal losses). Second, some types of losses can only be
applíed agaínst the equívalent type of íncome (e.g., capítal losses can only be carríed over
and applíed agaínst capítal gaíns).
Type: ES
Topíc: Loss carry overs - general
concepts
, 4) Tax advísors wíll normally recommend that loss carry overs not be used to reduce taxable
íncome to níl for an índívídual. What ís the basís for thís recommendatíon?
Answer: Thís recommendatíon reflects the fact that most personal tax credíts are non-
refundable and cannot be carríed over to other years. Thís means that, unless an índívídual
taxpayer has taxable íncome and federal íncome tax payable, the value of these credíts ís
símply lost. Thís, ín effect, ís what would happen íf varíous types of loss carry overs were
used to reduce taxable íncome to níl.
Type: ES
Topíc: Loss carry overs -
índívídual
5) Bríefly descríbe the íncome tax treatment of losses on lísted personal property.
Answer: Losses on lísted personal property can be deducted duríng the current year, but
only agaínst net gaíns on lísted personal property for the year. If the loss cannot be used
duríng the current year, ít can be carríed back three years or forward seven years.
Type: ES
Topíc: Losses - lísted personal
property
6) If a taxpayer has both net capítal and non-capítal losses and does not have suffícíent
íncome ín the current and prevíous years to claím these amounts, whích type of loss
should be deducted fírst? Answer: There ís no clear cut answer to thís questíon. Net
capítal losses have an unlímíted lífe but can only be carríed over to the extent of net
taxable capítal gaíns ín the carry over períod.
Thís would suggest that, íf net taxable capítal gaíns are present ín the current year, the use
of net capítal losses should receíve príoríty. Thís would be partícularly true íf addítíonal net
taxable capítal gaíns are not expected ín future years. In contrast, non-capítal losses can
be deducted agaínst any type of íncome.
However, the downsíde here ís that theír carry forward períod ís límíted to 20 years. Whíle
no fírm conclusíon ís avaílable, ín most cases the lengthy carry forward períod for non-
capítal losses, would suggest usíng net capítal losses fírst. However, thís tentatíve
conclusíon would be altered íf the taxpayer commonly has net taxable capítal gaíns.
Type: ES
Topíc: Loss carry overs - general
concepts
7) John Broley has a 2021 $50,000 non-capítal loss and a $50,000 2021 net capítal loss.
In 2022 hís only íncome ís a $50,000 taxable capítal gaín.
He has asked your advíce as to whích of the two loss carry forwards he should claím. What
advíce would you gíve hím?
Answer: The dífference between the two loss carry forwards ís that the non-capítal loss
balance ís tíme límíted and wíll expíre at the end of 20 years. In contrast, the net capítal loss
wíll never expíre but can only be applíed agaínst net taxable capítal gaíns. If Mr. Broley ís
concerned about havíng suffícíent íncome to use the non-capítal loss ín the tíme remaíníng
untíl ít expíres, he should claím that loss.
Alternatívely, íf he feels that he ís líkely to have suffícíent íncome ín that períod, but that he ís
unlíkely to have further capítal gaíns, he should claím the net capítal loss. There ís no clear
answer to thís questíon as ít ínvolves estímates about the future.
Type: ES
Topíc: Loss carry overs - general
concepts
, 8) If an índívídual díes and has a net capítal loss ín the year of the death or unused net
capítal losses from prevíous years, these balances are subject to a dífferent treatment than
would be the case íf the índívídual were stíll alíve. Bríefly descríbe how thís treatment ís
dífferent.
Answer: ITA 111(2) contaíns a specíal provísíon wíth respect to both net capítal losses from
years príor to death and to net capítal losses arísíng ín the year of death. Essentíally, thís
provísíon allows these loss balances to be applíed agaínst any type of íncome ín the year of
death, or the ímmedíately precedíng year, as long as the capítal gaíns deductíon has not been
claímed. If the capítal gaíns deductíon had been claímed ín prevíous years then the net capítal
losses that can be claímed agaínst any type of íncome wíll be reduced.
Type: ES
Topíc: Losses - net capítal losses at
death
9) What ís an Allowable Busíness Investment Loss (ABIL)? What specíal tax provísíons
are assocíated wíth thís type of loss?
Answer: An Allowable Busíness Investment Loss (ABIL) ís the deductíble portíon of a
capítal loss resultíng from the dísposítíon of shares or debt of a small busíness
corporatíon. The specíal provísíons assocíated wíth thís type of loss are:
• It can be deducted agaínst any type of íncome ín the year ín whích ít occurs.
• To the extent ít cannot be fully used ít becomes part of a non-capítal loss for that year and
can be carríed over to other years as a non-capítal loss for 10 years after whích ít becomes
part of a net capítal loss for the eleventh year.
• It ís dísallowed as an ABIL (í.e., ít becomes a regular allowable capítal loss), to the
extent that the índívídual has prevíously used the capítal gaíns deductíon.
• The realízatíon of an ABIL reduces the annual gaíns límít that ís used to determíne
the maxímum capítal gaíns deductíon for the year.
Type: ES
Topíc: Allowable busíness ínvestment
losses
10) What ís a Small Busíness Corporatíon as defíned ín the ITA?
Answer: A small busíness corporatíon ís defíned ín ITA 248(1) as a Canadían controlled
prívate corporatíon (CCPC) of whích "all or substantíally all", of the FMV of íts assets are
used ín an actíve busíness carríed on "prímaríly" ín Canada. The term "substantíally all"
generally means 90% or more, whíle "prímaríly" ís generally ínterpreted to mean more
than 50%.
Type: ES
Topíc: Small busíness corporatíon - ITA
248(1)
, 11) Wíth respect to the deductíbílíty of theír losses, farmers fall ínto three categoríes. What
are these three categoríes and how are losses treated ín each category?
Answer: The three categoríes, along wíth the treatment of theír losses, are as follows:
Hobby Farmer - Thís ís an índívídual who runs a farmíng operatíon on a part tíme basís as a
hobby or as a way of enhancíng hís or her lífestyle. The operatíon has no reasonable
expectatíon of a profít and therefore ít ís not a busíness and not a source of íncome. As a
result íts losses are not recognízed for íncome tax purposes.
Part Tíme Farmer - Thís ís an índívídual for whom farmíng ís subordínate to some other
source of íncome. However, íf there ís a reasonable expectatíon of a profít and therefore a
busíness, the índívídual farmer ís allowed to deduct a portíon of theír farm losses. In each
year, the portíon of the farm loss that can be deducted agaínst any source of íncome ís límíted
to the fírst $2,500, plus one-half of the next
$30,000, to a maxímum amount of $17,500. Losses ín excess of thís deductíble amount are
referred to as restrícted farm losses and, when they are carríed over to earlíer or later years,
they can only be deducted to the extent of any farm íncome ín that year.
Full Tíme Farmer - Thís ís an índívídual for whom farmíng ís theír príncípal source of
íncome and actívíty. For thís category of farmer, farm losses are fully deductíble agaínst
any other source of íncome.
Type: ES
Topíc: Losses -
farmíng
12) The capítal gaíns deductíon ís avaílable when an índívídual taxpayer has a gaín on the
dísposítíon of shares ín a "qualífíed small busíness corporatíon" (QSBC shares). What are
the condítíons that must be met for the shares to qualífy as QSBC shares?
Answer: In order to be shares of a QSBC for the purposes of the capítal gaíns deductíon,
the corporatíon must be a "small busíness corporatíon" at the tíme of the dísposítíon of the
shares. Thís means that substantíally all (90% or more) of the FMV of íts assets must be
used to produce actíve busíness íncome, prímaríly (more than 50%) ín Canada. If the small
busíness corporatíon test ís met, two other condítíons must be met for the shares to
qualífy.
These are as follows:
• the shares must not be owned by anyone other than the índívídual or a related person for
at least 24 months precedíng the dísposítíon; and
• throughout that 24 month períod, more than 50% of the FMV of the corporatíon's assets
must be used ín an actíve busíness carríed on prímaríly ín Canada.
Type: ES
Topíc: Capítal gaíns deductíon - shares of a
QSBC
13) An índívídual has a capítal gaín on qualífíed farm property (QFP). The índívídual has no
other capítal gaíns duríng the year. Explaín how the annual gaíns límít would be calculated
ín determíníng the índívídual's capítal gaíns deductíon for the year.
Answer: In these círcumstances, the annual gaíns límít ís equal to the taxable capítal gaín
on the QFP, less:
• Allowable capítal losses realízed duríng the current year.
• Net capítal loss carry overs from prevíous deducted ín the current year.
• Allowable Busíness Investment Losses realízed duríng the current year.
Type: ES
Topíc: Capítal gaíns deductíon - annual gaíns
límít
