Question

canadian taxation

work During the current taxation year, KT Ltd., a Canadian-controlled private corporation located in Nova Scotia, earned $160,000 of active business income. In addition, the Alberta branch had been inc PROBLEM TWO company made the following capital transactions: Gain on sale of shares of a public corporation Loss on shares of a public corporation $48,000 (20,000) At the end of the previous taxation year, the following unused losses were available for carry-forward: Net capital losses $29,000 Non-capital losses 42,000 Required: For the current taxation year of KT Ltd., calculate the following: (a) Net income for income tax purposes (b) Taxable income (c) Total federal income tax

Answer 1

SOLUTION Business income $160,000 Taxable capital gain - 1/2 x $48,000 Allowable capital loss - 1/2 x $20,000 $24,000 (10,000 14,000 Net income 174,000 Non capital loss [ITA 111(1)(a)] (note 1) Net capital loss [ITA 111(1)(b)] (note 1) (14,000 Taxable income $160,000

Federal tax: 38% x $160,000 [ITA 123(1)] $ 60,800 Abatement 10% x $160,000 [ITA 124(1)] (16,000 Refundable tax on CCPC investment income (ITA 123.3] 6 2/3% x ($14,000 - $14,000) 0 Small business deduction: [ITA 125(1)] 17% x $160,000 (note 3) (27,200 Federal tax (note 4) $17,600 NOTES: 1) Debt forgiveness: $60,000 (42,000, Forgiven amount Applied to reduce: Non-capital losses (80(3)(a)] Net capital losses adjusted to full capital loss [80(4)(b)] ($29,000 x 2) = $58,000 (18,000 Unapplied balance $0 Net capital loss balance remaining: ($58,000 - $18,000) x 1/2 Used in 20X1 (above) $20,000 (14,000 $6,000

ITA 80(3) to 80(13) provide rules with respect to the gain on the settlement of debt. These sections must be applied to the forgiven amount in numerical order [ITA 80(2)(c)]. First, non-capital losses are reduced for the forgiven amount [ITA 80(3)]. If there remains a forgiven amount after the reduction for the non-capital losses, then capital losses are reduced by the forgiven amount [ITA 80(4)].

The reduction of the non-capital losses and capital losses is mandatory. If there remains a forgiven amount after the reduction of the non-capital losses and capital losses, then the rules provide that various other tax attributes (e.g. UCC, CEC, ACB of capital property) may be reduced by the forgiven amount, at the election of the taxpayer, through a series of designations [ITA 80(5) to 80(12)]. However, these sections must be applied in order and to the maximum extent possible. If there remains an unapplied balance of the forgiven amount, 50% of the balance of the forgiven amount would be included in income [ITA 80(13)]. Debt forgiveness was discussed in detail in Chapter 9.

2) Small business deduction: [ITA 125(1)]

  17% of the lesser of:

Active business income $160,000

Taxable income less foreign source income $160,000

Business Limit $500,000

The General tax reduction does not apply because all of the taxable income is subject to the small business deduction.