Gryffindor
Explain the differences between non-capital loss and capital loss in terms of 1) carry forward/back period, 2) restriction on use, and 3) inclusion rate.
Non-capital loss can be carried back 3 years and carried forward 20 years. Capital loss can be carried back 3 years and carried forward indefinitely. Non-capital loss may be applied against any source of income whereas capital loss can only be applied against capital gain. Lastly, the current inclusion rate is 50% for capital loss.
In FY22, Canco A earned business income of $100K and also sold its investment in Canco B for $50K proceeds. Canco A had purchased these shares for $80K and did not sell any shares previously. Company B qualified as a small business corporation throughout the period its shares were held by Canco A. Considering only these facts, what is the taxable income for Canco A in FY22 and if it has tax pool available at the end of the year, what is the name of the tax pool, the amount unused at the end of the year, and what is the carry forward/back period for the pool?
Taxable income is $85K ($100K business income, less ABIL of $15K). No carry forward balance.
A “business investment loss” is, in very general terms, a capital loss arising from the disposition of shares in or debt owing from a small business corporation. An “allowable business investment loss” (“ABIL”) is 50% of the taxpayer’s business investment loss for the year from the disposition of that property. Generally, a taxpayer may deduct an ABIL from any source of income, and any ABIL not used in the year that it arose may be carried back 3 years or carried forward 10 years; after 10 years of carried forward, the ABIL is treated as net capital loss and may be carried forward indefinitely.
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Mr. X (Canadian resident) has a yacht and a beach house that are used primarily for his personal enjoyment. He sold his yacht in FY21 for a capital loss of $500K and his beach house in FY22 for a capital gain of $400K. Considering only these facts, what is his taxable income/loss for FY21 and FY22.
Bonus point (300) - what is the subparagraph that deems the capital loss on PUP to be nil?
Loss for FY21 is nil and taxable income for FY22 is $200K (50% x $400K).
Property used primarily for personal enjoyment are considered to be “personal-use property” (“PUP”) under s. 54 of the Act. Capital loss on these property are deemed to be nil per subpar. 40(2)(g)(iii) and cannot be carried forward/back/otherwise utilized against capital gain on other PUP.
Mr. Y (Canadian resident) has a love-hate relationship with Tesla. On Jan 20, 2022, he bought 10 shares at $1,000/share. On March 15, 2022, he sold 10 shares at $800/share fearing it would drop further. On March 31, 2022, he bought 10 shares at $900/share due to FOMO. Considering only these facts, what is his taxable income for FY2022, his adjusted cost base in the shares of Tesla, and if he has tax pool available at the end of the year, what is the name of the tax pool, the amount unused at the end of the year, and what is the carry forward/back period for the pool?
Bonus point (300) - What is the subparagraph that deems a superficial loss to be nil?
Mr. Y has nil taxable income for FY22. As the shares were sold then repurchased within 30 days, the capital loss of $200/share is a superficial loss and deemed to be nil and added to the ACB of the shares repurchased (i.e. ACB of shares he now holds is $1,100/share). No other tax pool (i.e. no capital loss) carry forward.
A superficial loss generally arises on the disposition of a property when the same or identical property is acquired within 30 days before or after the disposition by the taxpayer, the taxpayer’s spouse/common-law partner, or by a corporation controlled directly or indirectly in any manner whatever, by the taxpayer. Superficial losses is deemed to be nil by subpar. 40(2)(g)(i), but may be added to the cost of the substituted property for purposes of computing that property’s adjusted cost base.
Company A has a 100% held subsidiary, Company B. Company A has $100K taxable income for FY22 and Company B has $100K of loss for tax purposes for FY22. At 25% tax rate, how much tax does each Company have to pay for FY22?
It depends. In Canada, there is no consolidated tax filing. If Company A/B are both Canadian residents, then Company A has taxes payable of $25K and Company B has no taxes payable for FY22. If Company A/B are both residents of USA or another country that allows consolidated tax filing, then they may be able to file a consolidated tax return and neither Company would have to pay taxes for FY22.
Remote participants only
Canco has $6M of capital gain for FY22 and $10M of business loss for FY22. Canco has capital loss of $6M from FY21 and was not subject to a loss restriction event. How should Canco best optimize its carry forward balances and describe manual adjustments, if any, required in taxprep?
Non-capital loss in general are more useful than capital losses (e.g. can be utilized against both capital gains and business gains, less restrictive after a loss restriction event), so it would be in Canco’s best interest to “trade” the capital loss for non-capital losses at a 2:1 ratio.
Canco can manually override box 225 on Sch.4, the amount of capital loss from prior years to apply against current year capital gain (i.e. $6M). This will result in a deduction on T2 jacket of $3M and the full $10M non-capital loss (and $0M capital loss) being carried forward at the end of FY22.
Canco A disposed of the following assets in FY22: 1) marketable securities, POD of $300K and ACB of $400K; 2) computer equipment, POD of $100K, ACB of $500K and UCC of $0K; and 3) internally generated intellectual property, POD of $1M, ACB and UCC of $0 (never added to Sch.8). Canco A is in the business of R&D and has no more computer equipment at the end of the year. Considering only these facts, what is the taxable income for Canco A in FY22 and if it has tax pool available at the end of the year, what is the name of the tax pool, the amount unused at the end of the year, and what is the carry forward/back period for the pool?
Generally, marketable securities are capital properties unless they are treated as inventory of the taxpayer. As Canco A is in R&D business, these marketable securities should be capital properties and the disposition should result in capital loss of $100K ($300K - $400K).
For a disposition of depreciable property, such as computer equipment, the UCC is reduced by the lower of cost or proceeds. As the POD was lower, the UCC is reduced by $100K. Further, since UCC is $0 to start with, the $100K is recaptured and becomes regular business income – this is to reverse the CCA that was previously deducted. Lastly, even though POD is lower than ACB, no capital loss is allowed on depreciable properties.
Since the IP was internally generated, no CCA should have been taken in the past. The capital gain is $1M.
In summary, the taxable income for the year is $550K [$100K recapture + 50% x ($1M - $100K)]. There is no tax pool for carry forward/back.
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Canco A was acquired by Canco B on June 1, 2021. In its May 31, 2021 taxation year, Canco A had $5M of regular business loss and $10M capital gain. In its December 31, 2021 taxation year, Canco A incurred a capital loss of $20M. Considering only these facts, is there anything Canco can do to optimize its tax pool carry forward?
Bonus point (300) - Which paragraph describes the limitation of post-AOC net capital loss carry back?
Considering only these facts, there isn’t anything that can be done. Pursuant to par. 111(4)(b), net capital loss post-AOC cannot be carried back to a pre-AOC period. Therefore, Canco A cannot request for a capital loss carry back to its May 31, 2021 taxation year to retain the non-capital losses.
Canco A amalgamated with Canco B, wholly owned subsidiary, on June 1, 2021 to form Amalco. Canco A incurred $5M of business income and Canco B incurred $2M of business income in their respective May 31, 2021 taxation year. Amalco in its December 31, 2021 taxation year incurred a business loss of $7M. Considering only these facts, is there anything Canco can do to optimize its tax position?
Bonus point (300) - Which subsection enables the carryback in this particular situation?
Per ss. 87(2.11), where a particular company amalgamates with its wholly-owned subsidiary, the new corporation is deemed to be a continuation of the particular company (i.e. parent company) for section 111 purposes. Therefore, Amalco can carry $5M back to Canco A’s last taxation year, but cannot carry back its losses back to Canco B’s last taxation year.
Canco A has a 100% held subsidiary, Canco B. Canco A also has shares of CIBC and TD for investment purposes, with $100K of ACB in each investment. In FY21, Canco A sold its shares of CIBC to a third party for $150K and sold its shares of TD to Canco B for $80K. In FY22, Canco B sold the TD shares to a third party for $130K. Considering only these facts, what is Canco A and Canco B’s taxable income as well as tax pool carry forward/back for FY21 and FY22?
Bonus point (300) - Which subsection describes the effect of this particular stop-loss rule?
In FY21, Canco A has taxable income of $25K [50% x ($150K - $100K)] and Canco B has no taxable income. Neither Canco has tax pool carry forward at the end of FY21 but Canco A has suspended loss of $20K ($100K - $80K).
In FY22, Canco A has an allowable capital loss of $10K (50% x $20K previously suspended) which can be carried back to FY21. Canco B has taxable income of $25K [50% x ($130K - $80K)].
Stop-loss rule in ss. 40(3.4) applies where a corporation/trust/partnership disposes of a particular non-depreciable capital property and: 1) the disposition is not describe din the exceptions in paragraphs 54 “superficial loss” (c) to (g), 2) the transferor, or a person affiliated with the transferor, acquires the transferred property or an identical property (i.e. “substituted property”) during a period that begins 30 days before and ends 30 days after the disposition, and 3) the transferor, or a person affiliated with the transferor, owns the substituted property at the end of the relevant period. If the conditions are met, ss. 40(3.4) deems the transferor’s loss from the disposition to be nil. This loss is “deferred” and may be realized at a triggering event (e.g. when substituted property is sold to third party).
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Canco has $1M of debt being forgiven in FY22. Other than the debt forgiveness, Canco has opening non-capital loss of $400K. Canco also has deductible expenses of $300K in FY22. What is FY22 taxable income for Canco and name any assumptions being made?
Assuming there was no loss restriction event, Canco will have $150K taxable income for FY22.
The forgiven amount of $1M will first be applied against non-capital loss balance of $400K (ss. 80(3)). The remaining unapplied amount of $600K is 50% taxable (ss. 80(13)), giving rise to taxable income of $300K.
The current year deductible expenses of $300K, together with the $300K income inclusion from debt forgiveness, results in $0 taxable income for FY22.
Canco A was acquired by Canco B on June 1, 2021. Canco A had $3M non-capital loss and $10M of capital loss carry forward as at May 31, 2021, and incurred a capital gain of $5M in its December 31, 2021 taxation year. The capital gain arose on an investment that was purchased in the Dec 31, 2021 taxation year-end. Considering only these facts, what is Canco A’s taxable income as well as tax pool(s) carry forward for its Dec 31, 2021 taxation year?
Bonus point (300/section reference) - Which paragraph describes the limitation of pre-AOC non-capital loss in a post-AOC period and which paragraph describes the limitation of pre-AOC net capital loss in a post-AOC period?
Taxable income is $2.5M (50% x $5M).
Pursuant to par. 111(5)(a), pre-AOC non-capital losses may only be utilized in a post-AOC period if certain conditions are met: 1) the business that gave rise to the pre-AOC losses need to be operated post-AOC with a reasonable expectation of profit, and 2) the income against which the losses are to be utilized against need to be from either the particular business or a similar business. Given that capital gain is not income from a business, pre-AOC non-capital losses cannot be utilized against post-AOC capital gains.
Pursuant to par. 111(4)(a), net capital loss before AOC cannot be utilized in a taxation year post-AOC.
Canco B (newly incorporated subsidiary of Canco A, a public company in exploration business) amalgamated with Canco C (a cannabis company) to form Amalco on June 1, 2021. As a result of the amalgamation, Canco A issued 50M of its shares to the previous shareholders of Canco C. Prior to the transaction, Canco A had 40M issued and outstanding shares. Canco A had $10M of non-capital loss carry forward as at May 31, 2021. After the acquisition, Canco A ceased its exploration activities and started to operate in the cannabis business. Canco A incurred business income of $2M in its December 31, 2021 taxation year. Considering only these facts, what is Canco A’s taxable income as well as tax pool carry forward for its Dec 31, 2021 taxation year?
Bonus point (400) - Which subparagraph describes the application of the AOC rules in a reverse-takeover situation?
Pursuant to par. 256(7)(c), where a particular company issues more than 50% of its shares (post-issuance) to acquire the shares of another company from persons who dealt at arm’s length with the particular company, there is a deemed acquisition of control of the particular company. Therefore, Canco A is subject to the AOC rules, the previous shareholders of Canco C now holds more than 50% (50M/90M) of total issued and outstanding shares post-acquisition.
Pursuant to par. 111(5)(a), pre-AOC non-capital losses may only be utilized in a post-AOC period if certain conditions are met: 1) the business that gave rise to the pre-AOC losses need to be operated post-AOC with a reasonable expectation of profit, and 2) the income against which the losses are to be utilized against need to be from either the particular business or a similar business.
Given that 1) the mining business was discontinued and 2) the income in the Dec 31, 2021 period is from cannabis which is not similar to a mining business, the pre-AOC losses cannot be utilized. Therefore, the taxable income for Dec 31, 2021 is $2M. The tax loss carry forward remains at $10M, but rules in par. 111(5)(a) will need to be considered whenever Canco A intends to utilize these losses.
Canco has $1M of debt being forgiven in FY22. Other than the debt forgiveness, Canco has opening non-capital loss of $200K and net capital loss of $250K (net capital loss arose from FY21). Canco has no other activities in FY22. What is FY22 taxable income for Canco and name any assumptions being made?
Bonus point (600) - Which two paragraphs work together to allow capital loss to be applied at full inclusion rate rather than 1/2 inclusion rate against forgiven amount?
Assuming there was no loss restriction event, Canco will have $150K taxable income for FY22.
The forgiven amount of $1M will first be applied against non-capital loss balance of $200K (ss. 80(3)) then against net capital loss balance of $250K (ss. 80(4)). Pursuant to par. 80(2)(d) and (e), when applying an unapplied portion of a forgiven amount under ss. 80(4), no more than ½ of the forgiven amount will be applied to reduce a net capital loss for FY21. Therefore, the unapplied amount after application of ss. 80(4) is $300K (i.e. $1M - $200K – ($250K divided by ½)).
The remaining unapplied amount of $300K is 50% taxable (ss. 80(13)), giving rise to taxable income of $150K.
Canco A amalgamated with Canco B, its sister company, on June 1, 2021 to form Amalco. Canco A incurred $5M of business loss and Canco B incurred $2M of business loss in their respective May 31, 2021 taxation year. Amalco discontinued the businesses operated by the predecessor corporations and started a new business. In its December 31, 2021 taxation year Amalco incurred business income of $3M. Considering only these facts, what is Amalco’s taxable income as well as tax pool carry forward for its Dec 31, 2021 taxation year?
Bonus point (300) - Which subsection deems Amalco to be a continuation of its predecessor for purposes of determining the loss balances of Amalco?
Per ss. 87(2.1), for purposes of determine Amalco’s non-capital loss balance, Amalco is considered to be the same corporation as each predecessor corporation. In addition, as there was no acquisition of control, the losses are not “streamed” to a particular business so the discontinuation of pre-amalgamation businesses does not affect loss carry forward. Therefore, $7M of non-capital loss from the predecessors are available to Amalco in its Dec 31, 2021 taxation year. Its Dec 31, 2021 taxable income is $0 and the non-capital loss carry forward is $4M.
Canco A purchased the shares of Canco B for $15M on July 1, 2021. Canco B has nominal assets and the purchase price is allocated to internally generated intellectual property ($5M) and goodwill ($10M). Canco B has $0 undepreciated capital cost, incurred $5M of business loss and $9M of capital loss in its June 30, 2021 taxation year. Canco B intends to continue operating the same business after the acquisition and with new management they expect to turn a profit within 2 years. Considering only these facts, how should Canco B best optimize its carry forward balances and provide the opening balance as at July 1, 2021.
Bonus point (400/section reference) - Which paragraph that allows the taxpayer to trigger unrealized capital gain and which paragraph has the computation of UCC on the re-acquisition.
Canco B will be subject to the AOC rules as 100% of its shares were acquired by Canco A. Therefore, generally speaking, its non-capital losses will be “streamed” to the pre-AOC loss that generated the loss and its capital loss cannot be utilized post-AOC.
Canco B can make a designation under par. 111(4)(e) to result in a deemed disposition of capital properties (e.g. goodwill and IP) to trigger a capital gain and a deemed re-acquisition of the capital properties immediately after the AOC. Canco B can choose the amount of deemed proceeds of disposition, between the tax cost and the fair market value of the capital property. Given that tax cost is nil, Canco B may designate up to $5M of POD in respect of the IP and $10M in respect of goodwill. Pursuant to par. 13(7)(f), when re-acquiring the capital property, the cost to Canco B is equal to the original cost at the time of disposition (i.e. $0) and ½ of the capital gain realized.
Given that Canco B intends to continue the same pre-AOC business in post-AOC period with reasonable expectation of profit, it would be more preferable to only trigger a capital gain up to the amount of capital loss available (i.e. $9M). The CCA class of the IP would depend on the nature of the IP, but goodwill in general is Class 14.1, which is only 5% declining balance which generally is not preferred over streamed non-capital losses. Therefore, the optimal designation would be to elect POD of $5M for IP and $4M for goodwill, resulting in $9M of capital gain. The entire $9M capital loss can be applied to eliminate the capital gain. As of July 1, 2021, Canco B would have $5M non-capital loss (streamed) and $9M of UCC.