Volume 2 Chapter 11-21

SOLUTIONS

MANUAL

Volume 2 (Chapter 11-21) Gary Donell Byrd & Chen’s Canadian Tax Principles 2023-24 Edition Gary Donell

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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition

Copyright © 2024 Pearson Education Inc. 11-1 Instructor’s Solutions Manual

Chapter 11 – Solutions to Assignment Problems

Solution to AP 11-1 2020 Analysis

The required information can be calculated as follows:

ITA 3(a) Business Income $18,000 Taxable (Grossed Up) Dividends 2,360 $20,360 ITA 3(b) Taxable Capital Gains $ 600 Allowable Capital Losses (2,100) Nil ITA 3(c) ITA 3(d) Unrestricted Farm Loss (See Note)

$20,360

(6,250)

2020 Net Income and Taxable Income $14,110

Note Ms. Breau’s farm losses are restricted as follows:

Total Farm Loss

Unrestricted Amount:

First $2,500

$10,000

($ 2,500)

One-Half of $7,500 ($10,000 – $2,500) (3,750) (6,250) 2020 Restricted Farm Loss $ 3,750

As noted in the problem, none of the losses can be carried back before 2020. This would

leave the following 2020 loss carry over balances:

• 2020 Restricted Farm Loss $3,750 • 2020 Net Capital Loss [($2,100 (ITA 3(b)(ii)) – $600 (ITA 3)(b)(i))] $1,500

In this first year the taxable income is less than the required $15,000 to fully utilize available personal tax credits; however, there is no choice to limit any of the ITA 3 amounts to a smaller amount so as to achieve the $15,000 taxable income.

2021 Analysis

The required information can be calculated as follows:

ITA 3(a) Farm Income $ 2,000 Taxable (Grossed Up) Dividends 2,950 $4,950 ITA 3(b) Taxable Capital Gains Allowable Capital Losses

$ 1,000

Nil

1,000 2 / 4

Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition

Copyright © 2024 Pearson Education Inc. 11-2 ITA 3(c) ITA 3(d) Non-Farming Business Loss

$5,950

(14,000)

2021 Net Income 2020 Net Capital Loss

Nil

($1,000)

2021 Taxable Income Nil Since there are $1,000 of net taxable capital gains this year, and the problem states that Ms.Breau would like to deduct the maximum amount of net capital losses, the net capital loss of $1,000 is applied against the ITA 3(b) amount of $1,000, which effectively increases the 2021 non-capital loss.

The 2021 non-capital loss is calculated as follows:

Business Loss $14,000

Add: 2020 Net Capital Loss Deducted 1,000

ITA 3(c) Income (5,950) 2021 Non-Capital Loss $ 9,050

The entire 2021 non-capital loss could be carried back to 2020, but since Ms. Breau requires $15,000 in taxable income to fully utilize her personal tax credits, no carry back is contemplated.

There would be the following loss balances at the end of 2021:

• 2020 Restricted Farm Loss (Unchanged) $3,750 • 2020 Net Capital Loss ($1,500 – $1,000)] $ 500 • 2021 Non-Capital Loss $9,050

2022 Analysis

The required information can be calculated as follows:

ITA 3(a) Non-Farming Business Income $30,000 Farm Income 3,150 Taxable (Grossed Up) Dividends 3,963 $37,113 ITA 3(b) Taxable Capital Gains $ 2,000 Allowable Capital Losses Nil 2,000 2022 Net Income $39,113 2020 Restricted Farm Loss (Equal to Farm Income) (3,150) 2020 Net Capital Loss (Less than the $2,000 taxable capital gain) (500) 2021 Non-Capital Loss Carry Forward (All) ( 9,050) 2022 Taxable Income $26,413

There would be the following loss balances at the end of 2022:

• 2020 Restricted Farm Loss ($3,750 – $3,150) $ 600

2023 Analysis The required information can be calculated as follows: 3 / 4

Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2023/24 Edition

Copyright © 2024 Pearson Education Inc. 11-3 ITA 3(a) Taxable (Grossed Up) Dividends $ 6,450 ITA 3(b) Taxable Capital Gains $ 2,250 Allowable Capital Losses (7,250) Nil ITA 3(c) ITA 3(d) Non-Farming Business Loss

$ 6,450

($19,000)

Farm Loss (2,000) (21,000) 2023 Net Income and Taxable Income Nil

The 2023 non-capital loss can be calculated as follows:

Business Loss $19,000 ITA 3(c) Income (6,450) Non-Capital Loss $12,550 Farm Loss (Unrestricted) 2,000 2023 Non-capital loss $14,550

The total loss carry over of $14,550 is available for carry back to any of the three preceding years.The 2023 net capital loss would be equal to $5,000 [ITA 3)(b)(ii) $7,250 – ITA 3(b)(i) of $2,250)]. $1,500 of the 2023 net capital loss can be applied to the 2022 year as there is $1,500 ($2,000 – $500) in net taxable capital gains remaining in 2022 as the basis for a carry back. This leaves a balance of $3,500 ($5,000 – $1,500).If both the $14,550 non-capital loss and the $1,500 net capital loss were carried back to 2022, the result would be a Taxable Income of $10,363, less than the $15,000 that is required to fully utilize Ms. Breau’s available personal tax credits. As the 2022 net capital loss can only be deducted to the extent of net taxable capital gains, it would be advisable to first claim the full amount of this loss. Based on this view, the deduction of the 2023 non- capital loss will be limited to $9,913 ($26,413 – $15,000 – $1,500), an amount that will provide

for the full use of Ms. Breau’s 2022 personal tax credits:

2022 Taxable Income (As Reported) $26,413 2023 Net Capital Loss ( 1,500) 2023 Non-Capital Loss ( 9,913) 2022 Revised Taxable Income $15,000 These loss applications leave Ms. Breau with her required $15,000 in 2022 taxable income. The

following loss balances remain at the end of 2023:

• 2020 Restricted Farm Loss $ 600 • 2023 Net Capital Loss ($5,000 – $1,500)] $3,500 • 2023 Non-Capital Loss ($14,550 – $9,913) $4,637

Solution to AP 11-2 Before the consideration of any loss carry overs, Lucinda’s taxable income for 2022 would

be as follows:

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