Ch11: Taxable Income And Tax Payable For Individuals Revisited Flashcards
How do you go from net to taxable income?
Calculating Taxable Income:
Employment income (+-)
Business income (+-)
Property income (+-)
Net TCG (+ only)
Other income (+ only)
Other deductions (- only)
= Net income (Division B income)
Division C deductions:
Worker’s compensation
Social assistance
Employee Stock Option deduction
Lifetime CG deduction
Carry over losses deductible
= Taxable income (Division C income)
What is the Stock Option Benefit (employer is a public company)?
ITA 110(1)(d) deduction: ½ of employment income inclusion would be a deduction from net income to get to taxable income.
→ Deduction is available only if at issue (when option granted) the option price ≥ market price.
What is the Lifetime Capital Gains Deduction?
When you sell shares of a Qualified Small Business Corporation (QSBC) you may be entitled to the lifetime capital gains deduction/exemption (CGD/CGE). 100% of TCG.
- There are 3 conditions to qualify in order to be able to deduct.
- There is a maximum deduction for Lifetime Capital Gains Deduction.
What are the 3 conditions to qualify for the Lifetime Capital Gains Deduction?
Definition of a Small Business Corporation (SBC):
Corporation must be a CCPC.
Condition 1) 24 months prior to the shares being sold, the shares were not owned by anyone other than you or a related person.
Condition 2) 24 months prior to the shares being sold, at least 50% of its assets at FMV were used in a Canadian Active Business.
Condition 3) at the time shares are sold, at least 90% of its assets at FMV are used in a Canadian Active Business (e.g., in order to qualify, sell shares for cash, and get rid of excess cash by buying inventory/equipment/paying bills/paying bonus/paying dividend).
What is the maximum deduction for the Lifetime Capital Gains Deduction?
Maximum Deduction: $971,190 in lifetime CG (for 2023) or $485,595 in TCG from the sale of QSBC shares.
→ The $971,190 amount increases every year by inflation.
→ Only Canadian individuals and trusts get it.
What is treatment of losses?
Losses must be used in year incurred, if possible.
→ May not have enough income.
→ May not have right type of income (e.g., CG required to use CL).
Carry backs: result in refund.
Carry forward: result in reduced tax payable.
→ Using loss carry overs should not result in the loss of non-refundable tax credits.
Types of treatment of losses: Net Capital Losses, Listed Personal Property (LPP), Non-Capital Losses of other years (business losses), Allowable Business Investment Loss (ABIL), Restricted Farm Losses (RFL).
Explain Net Capital Losses
→ Excess, if any, of allowable capital losses over TCG of the year.
→ Net CL in the year they are incurred can be carried back 3 years and forward indefinitely against net CG of the year you are applying them to.
Explain Listed Personal Property (LPP)
→ Print, etching, drawing, painting, sculpture, or other similar work of art.
→ Jewelry
→ Rare folio, rare manuscript, or rare book
→ Stamp
→ Coin
In the year they occur ACL from LPP are only deductible against LPP TG.
$1,000 minimum rule for ACB and POD.
→ Excess, if any, of ACL from LPP over LPP TCG of the year.
→ Net CL from LPP in the year they are incurred can be carried back 3 years and forward 7 years against LPP net TG of the year you are applying them to.
All other types of losses from other years that are carried back or forward are applied in Division C to arrive at taxable income, except for LPP net CL. For some reason they are applied in Division B.
Explain Non-Capital Losses of other years (business losses)
→ No restriction on how they are applied in Division C.
→ Can be carried back 3 years and forward 20 years, against any type of income.
→ Claim this last.
Explain Allowable Business Investment Loss (ABIL)
→ 50% of a CL resulting from the disposition of shares or debt of a SBC.
Must be deducted in year realized (in Division B) to the extent of sufficient income.
Unused amounts become non-capital losses, can be carried back 3 years and forward 10 years and applied in Division C against any type of income.
After 10 years, if not used they revert to a net CL carry forward (can then be carried forward indefinitely against future net TCGs).
Explain Restricted Farm Losses (RFL)
Farm losses:
Hobby farmers: no losses deductible.
Full time farmers: losses of other years deductible against any type of income in Division C (like non-CL).
Part time farmers: RFL
RFL arise when:
Reasonable expectation of profit.
Not taxpayer’s principal source of income (farming is a subordinate source).
→ Limit of RFL in year incurred: 1st $2,500, + ½ next $30,000 (max $17,500).
→ RFLs from other years can be applied back 3 years and forward 20 years in Division C.
→ RFLs can be applied against farming income of the year you are applying them to.
