Canadian Tax Principles, 2022-2023, Vol 2
(Byrd/Chen) (Answers at the end of each
chapter)
Chapter 11
11.1 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination benefit.
What tax policy objective is served by this provision?
Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that
it is received in a single year can result in significant portions of it being subject to income tax rates higher than
would have been the case had it been received over the several years during which it was earned. The deduction of
such amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the
amount paid to the amount that would have been paid if the amount had actually been received over several years.
The objective of such provisions is fairness or equity.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA
provides for the types of losses that it identifies.
Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the
text up to Chapter 11 are as follows:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back.
• Net Capital Loss: Unlimited forward and 3 years back
• Listed Personal Property Losses: 7 years forward and 3 years back.
• Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with
unlimited carry forward in year 11.
• Foreign Tax Credits: 10 years forward and 3 years back.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward,
but only against the partnership income to which they relate.
Type: ES
Topic: Loss carry overs - general concepts
3) When a business has several types of loss carry overs, why is it necessary to keep separate balances for each
type?
Answer: There are two reasons for having to track each type of loss carry forward separately. First, different types
of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second,
some types of losses can only be applied against the equivalent type of income (e.g., capital losses can only be
carried over and applied against capital gains).
Type: ES
Topic: Loss carry overs - general concepts
, 4) Tax advisors will normally recommend that loss carry overs not be used to reduce taxable income to nil for an
individual. What is the basis for this recommendation?
Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be
carried over to other years. This means that, unless an individual taxpayer has taxable income and federal income
tax payable, the value of these credits is simply lost. This, in effect, is what would happen if various types of loss
carry overs were used to reduce taxable income to nil.
Type: ES
Topic: Loss carry overs - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on
listed personal property for the year. If the loss cannot be used during the current year, it can be carried back three
years or forward seven years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the current and
previous years to claim these amounts, which type of loss should be deducted first? Answer: There is no clear
cut answer to this question. Net capital losses have an unlimited life but can only be carried over to the extent of
net taxable capital gains in the carry over period.
This would suggest that, if net taxable capital gains are present in the current year, the use of net capital losses
should receive priority. This would be particularly true if additional net taxable capital gains are not expected in
future years. In contrast, non-capital losses can be deducted against any type of income.
However, the downside here is that their carry forward period is limited to 20 years. While no firm conclusion is
available, in most cases the lengthy carry forward period for non-capital losses, would suggest using net capital
losses first. However, this tentative conclusion would be altered if the taxpayer commonly has net taxable capital
gains.
Type: ES
Topic: Loss carry overs - general concepts
7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his only
income is a $50,000 taxable capital gain.
He has asked your advice as to which of the two loss carry forwards he should claim. What advice would you give
him?
Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and
will expire at the end of 20 years. In contrast, the net capital loss will never expire but can only be applied against
net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss in the
time remaining until it expires, he should claim that loss.
Alternatively, if he feels that he is likely to have sufficient income in that period, but that he is unlikely to have further
capital gains, he should claim the net capital loss. There is no clear answer to this question as it involves estimates
about the future.
Type: ES
Topic: Loss carry overs - general concepts
, 8) If an individual dies and has a net capital loss in the year of the death or unused net capital losses from previous
years, these balances are subject to a different treatment than would be the case if the individual were still alive.
Briefly describe how this treatment is different.
Answer: ITA 111(2) contains a special provision with respect to both net capital losses from years prior to death and
to net capital losses arising in the year of death. Essentially, this provision allows these loss balances to be applied
against any type of income in the year of death, or the immediately preceding year, as long as the capital gains
deduction has not been claimed. If the capital gains deduction had been claimed in previous years then the net capital
losses that can be claimed against any type of income will be reduced.
Type: ES
Topic: Losses - net capital losses at death
9) What is an Allowable Business Investment Loss (ABIL)? What special tax provisions are associated with
this type of loss?
Answer: An Allowable Business Investment Loss (ABIL) is the deductible portion of a capital loss resulting
from the disposition of shares or debt of a small business corporation. The special provisions associated with this
type of loss are:
• It can be deducted against any type of income in the year in which it occurs.
• To the extent it cannot be fully used it becomes part of a non-capital loss for that year and can be carried over to
other years as a non-capital loss for 10 years after which it becomes part of a net capital loss for the eleventh year.
• It is disallowed as an ABIL (i.e., it becomes a regular allowable capital loss), to the extent that the
individual has previously used the capital gains deduction.
• The realization of an ABIL reduces the annual gains limit that is used to determine the maximum capital
gains deduction for the year.
Type: ES
Topic: Allowable business investment losses
10) What is a Small Business Corporation as defined in the ITA?
Answer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private corporation
(CCPC) of which "all or substantially all", of the FMV of its assets are used in an active business carried on
"primarily" in Canada. The term "substantially all" generally means 90% or more, while "primarily" is
generally interpreted to mean more than 50%.
Type: ES
Topic: Small business corporation - ITA 248(1)
, 11) With respect to the deductibility of their losses, farmers fall into three categories. What are these three categories
and how are losses treated in each category?
Answer: The three categories, along with the treatment of their losses, are as follows:
Hobby Farmer - This is an individual who runs a farming operation on a part time basis as a hobby or as a way of
enhancing his or her lifestyle. The operation has no reasonable expectation of a profit and therefore it is not a business
and not a source of income. As a result its losses are not recognized for income tax purposes.
Part Time Farmer - This is an individual for whom farming is subordinate to some other source of income. However,
if there is a reasonable expectation of a profit and therefore a business, the individual farmer is allowed to deduct a
portion of their farm losses. In each year, the portion of the farm loss that can be deducted against any source of
income is limited to the first $2,500, plus one-half of the next
$30,000, to a maximum amount of $17,500. Losses in excess of this deductible amount are referred to as restricted
farm losses and, when they are carried over to earlier or later years, they can only be deducted to the extent of any
farm income in that year.
Full Time Farmer - This is an individual for whom farming is their principal source of income and activity. For
this category of farmer, farm losses are fully deductible against any other source of income.
Type: ES
Topic: Losses - farming
12) The capital gains deduction is available when an individual taxpayer has a gain on the disposition of shares in
a "qualified small business corporation" (QSBC shares). What are the conditions that must be met for the shares to
qualify as QSBC shares?
Answer: In order to be shares of a QSBC for the purposes of the capital gains deduction, the corporation must be a
"small business corporation" at the time of the disposition of the shares. This means that substantially all (90% or
more) of the FMV of its assets must be used to produce active business income, primarily (more than 50%) in
Canada. If the small business corporation test is met, two other conditions must be met for the shares to qualify.
These are as follows:
• the shares must not be owned by anyone other than the individual or a related person for at least 24 months
preceding the disposition; and
• throughout that 24 month period, more than 50% of the FMV of the corporation's assets must be used in an active
business carried on primarily in Canada.
Type: ES
Topic: Capital gains deduction - shares of a QSBC
13) An individual has a capital gain on qualified farm property (QFP). The individual has no other capital gains
during the year. Explain how the annual gains limit would be calculated in determining the individual's capital gains
deduction for the year.
Answer: In these circumstances, the annual gains limit is equal to the taxable capital gain on the QFP, less:
• Allowable capital losses realized during the current year.
• Net capital loss carry overs from previous deducted in the current year.
• Allowable Business Investment Losses realized during the current year.
Type: ES
Topic: Capital gains deduction - annual gains limit
(Byrd/Chen) (Answers at the end of each
chapter)
Chapter 11
11.1 Online Exercises
1) ITA 110.2 provides for a deduction of "lump-sum payments", for example a court ordered termination benefit.
What tax policy objective is served by this provision?
Answer: Such lump-sum payments often reflect compensation for services rendered over several years. The fact that
it is received in a single year can result in significant portions of it being subject to income tax rates higher than
would have been the case had it been received over the several years during which it was earned. The deduction of
such amounts provides the basis for an alternative income tax payable calculation which attempts to adjust the
amount paid to the amount that would have been paid if the amount had actually been received over several years.
The objective of such provisions is fairness or equity.
Type: ES
Topic: Lump-sum payments - ITA 110.2
2) The carryover periods for losses varies with the type of loss. Briefly describe the carryover periods that the ITA
provides for the types of losses that it identifies.
Answer: The carryover periods for the various types of losses identified in the Income Tax Act and covered in the
text up to Chapter 11 are as follows:
• Non-Capital Losses and Farm Losses (including restricted farm losses): 20 years forward and 3 years back.
• Net Capital Loss: Unlimited forward and 3 years back
• Listed Personal Property Losses: 7 years forward and 3 years back.
• Allowable Business Investment Losses: 10 years, as a non-capital loss then converted to net capital loss with
unlimited carry forward in year 11.
• Foreign Tax Credits: 10 years forward and 3 years back.
Covered in Chapter 18 are limited partnership losses. They have no carry back and an unlimited carry forward,
but only against the partnership income to which they relate.
Type: ES
Topic: Loss carry overs - general concepts
3) When a business has several types of loss carry overs, why is it necessary to keep separate balances for each
type?
Answer: There are two reasons for having to track each type of loss carry forward separately. First, different types
of losses have different carryover periods (e.g., 20 years for farm losses vs. unlimited for capital losses). Second,
some types of losses can only be applied against the equivalent type of income (e.g., capital losses can only be
carried over and applied against capital gains).
Type: ES
Topic: Loss carry overs - general concepts
, 4) Tax advisors will normally recommend that loss carry overs not be used to reduce taxable income to nil for an
individual. What is the basis for this recommendation?
Answer: This recommendation reflects the fact that most personal tax credits are non-refundable and cannot be
carried over to other years. This means that, unless an individual taxpayer has taxable income and federal income
tax payable, the value of these credits is simply lost. This, in effect, is what would happen if various types of loss
carry overs were used to reduce taxable income to nil.
Type: ES
Topic: Loss carry overs - individual
5) Briefly describe the income tax treatment of losses on listed personal property.
Answer: Losses on listed personal property can be deducted during the current year, but only against net gains on
listed personal property for the year. If the loss cannot be used during the current year, it can be carried back three
years or forward seven years.
Type: ES
Topic: Losses - listed personal property
6) If a taxpayer has both net capital and non-capital losses and does not have sufficient income in the current and
previous years to claim these amounts, which type of loss should be deducted first? Answer: There is no clear
cut answer to this question. Net capital losses have an unlimited life but can only be carried over to the extent of
net taxable capital gains in the carry over period.
This would suggest that, if net taxable capital gains are present in the current year, the use of net capital losses
should receive priority. This would be particularly true if additional net taxable capital gains are not expected in
future years. In contrast, non-capital losses can be deducted against any type of income.
However, the downside here is that their carry forward period is limited to 20 years. While no firm conclusion is
available, in most cases the lengthy carry forward period for non-capital losses, would suggest using net capital
losses first. However, this tentative conclusion would be altered if the taxpayer commonly has net taxable capital
gains.
Type: ES
Topic: Loss carry overs - general concepts
7) John Broley has a 2021 $50,000 non-capital loss and a $50,000 2021 net capital loss. In 2022 his only
income is a $50,000 taxable capital gain.
He has asked your advice as to which of the two loss carry forwards he should claim. What advice would you give
him?
Answer: The difference between the two loss carry forwards is that the non-capital loss balance is time limited and
will expire at the end of 20 years. In contrast, the net capital loss will never expire but can only be applied against
net taxable capital gains. If Mr. Broley is concerned about having sufficient income to use the non-capital loss in the
time remaining until it expires, he should claim that loss.
Alternatively, if he feels that he is likely to have sufficient income in that period, but that he is unlikely to have further
capital gains, he should claim the net capital loss. There is no clear answer to this question as it involves estimates
about the future.
Type: ES
Topic: Loss carry overs - general concepts
, 8) If an individual dies and has a net capital loss in the year of the death or unused net capital losses from previous
years, these balances are subject to a different treatment than would be the case if the individual were still alive.
Briefly describe how this treatment is different.
Answer: ITA 111(2) contains a special provision with respect to both net capital losses from years prior to death and
to net capital losses arising in the year of death. Essentially, this provision allows these loss balances to be applied
against any type of income in the year of death, or the immediately preceding year, as long as the capital gains
deduction has not been claimed. If the capital gains deduction had been claimed in previous years then the net capital
losses that can be claimed against any type of income will be reduced.
Type: ES
Topic: Losses - net capital losses at death
9) What is an Allowable Business Investment Loss (ABIL)? What special tax provisions are associated with
this type of loss?
Answer: An Allowable Business Investment Loss (ABIL) is the deductible portion of a capital loss resulting
from the disposition of shares or debt of a small business corporation. The special provisions associated with this
type of loss are:
• It can be deducted against any type of income in the year in which it occurs.
• To the extent it cannot be fully used it becomes part of a non-capital loss for that year and can be carried over to
other years as a non-capital loss for 10 years after which it becomes part of a net capital loss for the eleventh year.
• It is disallowed as an ABIL (i.e., it becomes a regular allowable capital loss), to the extent that the
individual has previously used the capital gains deduction.
• The realization of an ABIL reduces the annual gains limit that is used to determine the maximum capital
gains deduction for the year.
Type: ES
Topic: Allowable business investment losses
10) What is a Small Business Corporation as defined in the ITA?
Answer: A small business corporation is defined in ITA 248(1) as a Canadian controlled private corporation
(CCPC) of which "all or substantially all", of the FMV of its assets are used in an active business carried on
"primarily" in Canada. The term "substantially all" generally means 90% or more, while "primarily" is
generally interpreted to mean more than 50%.
Type: ES
Topic: Small business corporation - ITA 248(1)
, 11) With respect to the deductibility of their losses, farmers fall into three categories. What are these three categories
and how are losses treated in each category?
Answer: The three categories, along with the treatment of their losses, are as follows:
Hobby Farmer - This is an individual who runs a farming operation on a part time basis as a hobby or as a way of
enhancing his or her lifestyle. The operation has no reasonable expectation of a profit and therefore it is not a business
and not a source of income. As a result its losses are not recognized for income tax purposes.
Part Time Farmer - This is an individual for whom farming is subordinate to some other source of income. However,
if there is a reasonable expectation of a profit and therefore a business, the individual farmer is allowed to deduct a
portion of their farm losses. In each year, the portion of the farm loss that can be deducted against any source of
income is limited to the first $2,500, plus one-half of the next
$30,000, to a maximum amount of $17,500. Losses in excess of this deductible amount are referred to as restricted
farm losses and, when they are carried over to earlier or later years, they can only be deducted to the extent of any
farm income in that year.
Full Time Farmer - This is an individual for whom farming is their principal source of income and activity. For
this category of farmer, farm losses are fully deductible against any other source of income.
Type: ES
Topic: Losses - farming
12) The capital gains deduction is available when an individual taxpayer has a gain on the disposition of shares in
a "qualified small business corporation" (QSBC shares). What are the conditions that must be met for the shares to
qualify as QSBC shares?
Answer: In order to be shares of a QSBC for the purposes of the capital gains deduction, the corporation must be a
"small business corporation" at the time of the disposition of the shares. This means that substantially all (90% or
more) of the FMV of its assets must be used to produce active business income, primarily (more than 50%) in
Canada. If the small business corporation test is met, two other conditions must be met for the shares to qualify.
These are as follows:
• the shares must not be owned by anyone other than the individual or a related person for at least 24 months
preceding the disposition; and
• throughout that 24 month period, more than 50% of the FMV of the corporation's assets must be used in an active
business carried on primarily in Canada.
Type: ES
Topic: Capital gains deduction - shares of a QSBC
13) An individual has a capital gain on qualified farm property (QFP). The individual has no other capital gains
during the year. Explain how the annual gains limit would be calculated in determining the individual's capital gains
deduction for the year.
Answer: In these circumstances, the annual gains limit is equal to the taxable capital gain on the QFP, less:
• Allowable capital losses realized during the current year.
• Net capital loss carry overs from previous deducted in the current year.
• Allowable Business Investment Losses realized during the current year.
Type: ES
Topic: Capital gains deduction - annual gains limit
