My Notes

Question 1

How do you calculate the capital gain or loss on any disposal of PUP?

Answer 1

• Used to calculate capital gain or loss on disposal.
• Applies to both PUP and LPP.
• Cost is deemed to be the greater of ACB and $1,000.
• Proceeds are deemed to be the greater of actual proceeds and $1,000

Question 2

What are the carryover provisions for losses pertaining to LPP?

Answer 2

1. Capital losses can be carried back three years and forward seven years.
2. The inclusion is 100%
3. Can be carried over only to the extent of LPP gains.
4. Netted against capital gains, not taxable capital gains.

Question 3

Whiat is the difference in the carryover provision between LPP and ACL?

Answer 3

• Unused LPP capital losses can be carried forward only seven years.
• Unused ACL can be carried forward indefinitely.

Question 4

List the items that are considered to be LPP

Answer 4

• print, etching, drawing, painting, sculpture, or other similar work of art,
• jewellery,
• rare folio, rare manuscript, or rare book
• stamp, or
• coin

Question 5

What is the formula for calculating the exempt portion of a gain disposition of a principle residence?

Answer 5

1 + number of yrs designated

————————————- x gain

   number of yrs owned

• yrs are years after the later of
  
  • December 31, 1971 and
  • the date on which it was last acquired (can refer to deemed reacquisition for personal use after a change in use)

Question 6

What are the steps to follow in order to calculate the principal residence exemption?

Answer 6

1. Calculate the capital gain per year for each principal residence.
2. Determine if any of the years of ownership have been allocated to previous principal residences.
3. Allocate the years available to each residence to optimize the exemption. More years are initially allocated to the residence with the highest gain per year. Change that allocation if you can increase the exemption.

Question 7

After what date can only one house be designated as a principal residence?

Answer 7

December 31, 1981

Until the end of 1981 each individual could own and claim a principal residence. After that time the principal residence exemption is restricted to one residence per family.

Question 8

What does the change-in-use election allow?

Answer 8

• permits taxpayer who changes use of home to choose to designate this home as prinicipal residence for up to four years.
• also allows to postpone change of use from income-producing to principle residence for up to four years.

Question 9

Under what circumstances is the four-year maximum under the change-of-use election waived when there is a change of use from principal residence to income-producing use?

Answer 9

1. If the taxpayer is an employee and
2. he/she or the spouse has moved at least 40km closer to the new work location and
3. subsequently resumes ordinary habitation of his home while employed with the same employer; or
4. subsequently resumes ordinary habitation fo his home within one year from the end of the year in which he terminates employment with that employer; or
5. the taxpayer dies.

Question 10

What is the floating weighted average method for calculating the cost base for stocks?

Answer 10

Divide the aggregate of the costs by the number of shares.

e.g.

100 shares @ $1 = $100

150 shares @ $2 = $200

250 $400

$400 ÷ 250 = $1.60 per share

Question 11

What is the floating weighted average method for calculating the cost base for bonds, debentures, notes, etc.?

Answer 11

Divide the aggregate of the costs by the quotient obtained when the principal amounts of all the identical properties are divided by the principal amount of the property disposed of. e.g..

• 3 $1000 bonds purchased for $2,880 and
• 1 $500 bond purchased by $490

To calculate the weighted average cost of a $1,000 bond:

        $2880 + $490

——————————————– = $963

((3 x $1,000) + (1 x $500))/$1,000

Similarly, to calculate the weighted average cost of a $500 bond:

        $2880 + $490

——————————————– = $481

((3 x $1,000) + (1 x $500))/$500

Alternate method:

Total costs divided by total principle amounts times principal amount of bond disposed of:

For $500 bond:

$2880 + $490

——————————– x $500 = $481

(3 x $1000) + (1 x $500)

Question 12

LIst the exceptions to the cost-averaging rule for identical properties.

Answer 12

1. Securities acquired under an employee stock option plan for which deferral is provided.
2. Securities acquired under an employee stock option plan that are sold within 30 days after the aquistion.
3. Employer shares received by an employee as part of a lump-sum payment on withdrawing from a deferred profit sharing plan (DPSP) where the employee filed an election to defer taxation while they were held in the plan until the employees disposes of them.

Each excepted security has its own unique ACB.

Question 13

Outline the special relief procedure for tax-derred elections made prior to March 4, 2010.

Answer 13

If the proceeds at disposal of stock option shares are less than the tax payable on the stock option benefit that was deferred:

1. Tax = proceeds
2. Deduct an amount equal to the stock option benefit from the stock option benefit (this eliminating any income effect)
3. Apply 1/2 of the lesser of
   
   • the stock option benefit and
   • the capital loss

to the capital loss.The result is the new ACL

Question 14

What is the term that is used when taxable capital gains are less than allowable capital losses?

Answer 14

net capital loss

• can be carried back three years and forward indefinitely

Question 15

What is a superficial loss and how is it handled?

Answer 15

A superficial loss is a loss that occurs when shares are sold at a loss in order to offset a capital gain previously realized in the year.but are repurchased within 30 days.

The taxpayer is denied the loss at the time of the disposition but is permitted to add the superficial loss to the adjusted cost base of the substituted property.

Question 16

Describe what happens when a taxpayer transfers shares of a public corporation that he owns personally to his or her self-administered RRSP.

Answer 16

• The shares are considered to be transferred at FMV.
• If the taxpayer realizes a capital gain, it must be included in computing income.
• If the taxpayer incurs a capital loss, it is not deductible.

Question 17

What is a call option?

Answer 17

It’s an option to buy property.

Question 18

What is a put option?

Answer 18

It’s an option to sell property.

Question 19

Describe the general rule with regards to an option

Answer 19

1. When an option is granted there is a capital gain to the granter in the amount of the proceeds for the option.
2. If the option expires, the grantee has a capital loss in the year of expiration equal to the amount paid for the option.

Question 20

What are the exceptions to the general rule for options?

Answer 20

1. In respect of principal residence:
   
   • No inclusion of proceeds for the granter. (because there is no disposition)
   • On expiration, no capital loss for the grantee. (because option on a principal residence is regarded as a personal-use property)
2. Option granted by a coroporation to another person to buy securities issued by the corporation:
   
   • If the option expires, the corporation realizes a capital gain equal to the proceeds of the option.

Question 21

When is section 49 regarding options not applicable?

Answer 21

It is not applicable if the gain is not a capital gain (e.g. if it is business income)

Question 22

What is the rollover provision for convertible properties?

Answer 22

1. The exchange is deemed not to have been a disposition of property.
2. The cost to the taxpayer of the shares received is deemed to be the ACB of the convertible property immediately before the exchange.
3. The condition is that the taxpayer must not have received any consideration (such as cash) other than shares in exchange for his or her convertible property.

Question 23

What is the formula for calculating the permitted deferral of a capital gain in respect of certain small business investments and what is the condition for it?

Answer 23

• To obtain the deferral, the proceeds from the sale of the small business investment must be used to acquire other small business investments.
• The formula is:

G/H x I where

• G is the lesser of POD and cost of replacement shares.
• H is POD
• I is capital gain from disposition.

In other words,

lesser of (POD, cost of new shares)

———————————————– x capital gain

                    POD

or

• If the POD of the old shares are less than the cost of the new shares, the entire capital gain from the disposition can be deferred. It will be used to reduce the ACB of the new shares.
• Otherwise, only a portion of the capital gain can be deferred using the formula: cost of replacement shares ÷ POD x capital gain.

Question 24

Define an eligible small business corporation share.

Answer 24

An eligible small business corporation share. of an individual is a common share issued by the corporation to the individual where:

• at the time the share is ussued, the corporation was an “eligible small business corporation” and immediately before, and
• after that time the total carrying value of its assets and the assets of corporations related to it does not exceed $50 million.

Question 25

What is the value of an asset of a corporation that is a share or a debt issued by a related corporation?

Answer 25

Nil

Question 26

What is a qualifying disposition of an individual?

Answer 26

A qualifying disposition of an individual is a dispostion of common shares of the capital stock of a corporation owned by the individual where each such share was:

• an eligible small business corporation share of the individual,
• a common share of the capital stock of an active business corporation throughout the time it was owned by the individual, and
• owned by the indivdiual throughout the 185-day period that ended immediately before the disposition.

Question 27

What is the condition for capital gains deferral with regard to the active business of the corporation?

Answer 27

• If the individual owned the shares for less than 730 days, the active business of the corporation has to be carried on primarily in Canada at all times.
• In any other case that active business has to be carried on primarily in Canada for at least 730 days during the individual’s ownership period.

Question 28

Define the term “eligible small business corporation”.

Answer 28

A Canadian-controlled private corporation all or substantially off of the fair market value of the assets of which is, at that time, attributiable to assets of the corporation that are

• assets used principally in an active business carried on primarily in Canada by the corporation or an eligible small business corporation related to it,
• shares of or debt issued by other eligible small business corporations related to the corporation, or
• a combination of those two types of assets

Question 29

What is the formula for calculating the ACB of replacement shares after deducting the deferred capital gain?

Answer 29

If the replacement shares come from more than one corporation, the ACB reduction has to be calculated for the shares of each corporation.

The ACB reduction formula for the shares of each corporation is:

R = D x (E/F) where

• D is the permitted deferral
• E is the cost of the replacement shares of the corporation
• F is the cost of the replacement shares of all the corporations combined.
• R is the ACB reduction resulting from the formula

The ACB of the replacement shares is therefore:

E - R

(cost of replacement shares minus ACB reduction)

Question 30

When are shares deemed to be property eligible for a capital gain or loss?

Answer 30

When a person exchanges substantially all of the assets used in an active, ongoing business to a corporation for shares, the shares are considered property. The subsequent sale of those assets would result in a capital gain or loss and would not be treated as income.

Question 31

How does CRA determine if an arm’s length transaction ocurred? In other words, what does the following statement mean?

“It is a question of fact whether persons not related to each other are dealing at arm’s length.”

Answer 31

To determine whether a transaction between business partners or close friends has occurred at arm’s length:

• was there a common mind which directs the bargaining for both parties to a transaction?
• were the parties to a transaction acting in concert without separate interests?
• was there “de facto” control?

Question 32

Who does not deal at arm’s length?

Answer 32

1. Related persons: connected by blood, marriage or adoption
2. A beneficiary, or anyone not dealing at arm’s length with the beneficiary, and the inter vivos or testamentary trust.
3. It is a question of fact.

Question 33

How are the attribution rules between capital gains and losses and income from property with regard to spousal transfers or loans?

Answer 33

• Income from property: no attribution on “second generation” income (e.g. income on reinvested income)
• Capital gains and loss on reinvested capital gains and losses continue to be attributed to the transferor spouse or common-law partner.

Note: Capital gains and losses arising from transfers and loans to related and deemed related minors do not result in attribution to the transferor.

Question 34

Explain how the interspousal rollowver works.

Answer 34

• The transferor is automatically deemed to have transferred the property at proceeds equal to the ACB of the asset immediately before the transfer. The transaction must be reported even though the gain is nil.
• The transferee spouse or common-law partner will have an ACB equal to the transferor’s ACB.
• When the transferee spouse or common-law partner disposes of the property, the gain or loss will be attributed back to the transferor spouse or common-law partner, as long as they are married or in a common-law relationship

Question 35

What is the difference in the requirement for the election out of the interspousal rollover when a separation occurs?

Answer 35

Income from property

• the election does not need to be filed

Capital gains and losses

• the election must be made by both spouses or common-law partners and
• must be filed with the transferor’s tax return in any year ending after the separation occurs

Question 36

What are the consequences of electing out of the interspousal rollover?

Answer 36

• the property will be deemed to have been disposed of at fair market value at the date of the transfer
• no capital gains attribution on subsequent dispositions of transferred property as long as FMV received by transferor and election made by the taxpayer.
• If consideration includes a loan, interest must be at commercial rate and payments must be made no later than 30 days after each December 31 that the loan is outstanding.
• If the property is sold to a spouse or common-law partner at less than FMV:
  
  1. attribution rules would apply to both income and capital gains.
  2. ACB of transferred property would be the actual price paid by the acquiring spouse. Consequently, when the acquiring spouse sells the property, the avoided capital gain would be taxed twice: once by the transferee and once, through attribution by the transferor.

Question 37

Transfers or Loans of Property to Spouse or Common-law Partner

When there is a transfer as a gift without an election out of interspousal rollover, what are the transferor’s proceeds and the transfererr’s costs?

Answer 37

• transferor: ACB/UCC
• transferee: ACB/UCC

Question 38

Transfers or Loans of Property to Spouse or Common-law Partner

When there is a transfer as a gift with an election out of interspousal rollover, what are the transferor’s proceeds and the transfererr’s costs?

Answer 38

• transferor: FMV
• transferee: FMV

Question 39

Transfers or Loans of Property to Spouse or Common-law Partner

When there is a transfer as a sale without an election out of interspousal rollover, what are the transferor’s proceeds and the transfererr’s costs?

Answer 39

• transferor: ACB/UCC
• transferee: ACB/UCC

Question 40

Transfers or Loans of Property to Spouse or Common-law Partner

When there is a transfer as a sale with an election out of interspousal rollover, what are the transferor’s proceeds and the transfererr’s costs?

Answer 40

• transferor: greater of actual proceeds and FMV
• transferee: lesser of actual cost and FMV

Question 41

Transfers or Loans of Property to Spouse or Common-law Partner

LIst the effects of attribution as a result of transferred or loaned property on

• business income
• property income
• capital gains

Answer 41

• business income
  
  • n/a
• property income
  
  • attributed, including losses but excluding second-generation income from property
• capital gains
  
  • attributed, including capital losses and including second-generation capital gains (losses) after December 31, 1987.

Question 42

Transfers or Loans of Property to Spouse or Common-law Partner

What are the four steps that must be followed to avoid attribution on transfer of depreciable property?

Answer 42

1. the taxpayer must elect to waive the deferral of accrued income afforded by the interspousal rollover.
2. the property must be transferred for fair market consideration
3. where a loan is involved, interest at the lesser of the prescribed rate and the commercial rate must be charged and
4. the interest must be paid within 30 days of the end of each year in which the loan is outstanding.

Question 43

Transfers or Loans of Property to non-arm’s length minors

When there is a transfer as a gift to a non-arm’s length minor and other non-arm’s length individuals, what are the transferor’s proceeds and the transfererr’s costs?

Answer 43

• transferor: FMV
• transferee: FMV

Question 44

Transfers or Loans of Property to non-arm’s length minors

When there is a transfer as a sale to a minor and other non-arm’s length individuals, what are the transferor’s proceeds and the transfererr’s costs?

Answer 44

• transferor: greater of actual proceeds and FMV
• transferee: lesser of actual cost and FMV

Question 45

Transfers or Loans of Property to Minors and Other Non-arm’s Length Individuals

LIst the effects of attribution as a result of transferred or loaned property to a minor or other non-arm’s length individual on

• business income
• property income
• capital gains

Answer 45

Minor’s (generally related) or who are nieces and nephews:

• business income
  
  • n/a
• property income
  
  • attributed, including losses but excluding second-generation income from property
• capital gains
  
  • n/a

Other non-arm’s length individuals:

• business income
  
  • n/a
• property income
  
  • attributed,only on loaned property if one of the reasons for the loan was to reduce or avoid tax
• capital gains
  
  • n/a

Question 46

Do capital gains and losses attibute on gifts or loans to minors?

Answer 46

No. Only the income from the property attributes back to the transferor.

Question 47

What are the three conditions necessary to establish a superficial loss?

Answer 47

1. the taxpayer or an “affiliated person”, in essence, the taxpayer’s spouse or a corporation controlled by either the taxpayer or the taxpayer’s spouse, must dispose of the property;
2. the taxpayer or an affiliated person acquires or re-acquires the same or identical property during the period beginning 30 days before the disposition and ending 30 days after the disposition; and
3. the taxpayer or an affiliated person, at the end of the period referred to in point (2) above, still owns at least some of the property.

Question 48

What are the tax implications if a wife gifts cash to her husband to buy shares on the open market?

Answer 48

The tax implications are the same as if she had gifted the shares to him: the income and capital gains and losses would attribute back to the wife.

This would also be the case if, instead of a gift of cash, she gave him an interest-free loan.

This is because the shares would be considered substituted property for a transfer of cash for no consideration.

Question 49

On disposition of a building sold for $35,000 with a cost of $25,000 there is a recapture of $23,000. How much will be included in income?

a) $5,000
b) $11,500
c) $23,000
d) $28,000

Answer 49

(d) $28,000

• 100% of the recapture of $23,000 plus
• 50% of the capital gain of $10,000 ($35,000 minus $25,000)

100% of the recaptue amount is included in income whereas only 50% of the capital gain is included.

Question 50

Which properties are exempted from the deemed disposition when the taxpayer is an individual who ceases to be resident in Canada?

Answer 50

(a) Property that can be described, conceptually, as:

• Canadian property that is not very movable, such as real property or capital property used in a business carried on through a permanent establishment in Canada, or
• Canadian property that is not very liquid or marketable, such as employment-related stock options.

The taxpayer will continue to be liable for tax on the disposition of such property, but as a non-resident. However, the taxpayer may elect not to have this exemption apply so that capital gains (losses) are triggered to offset other capital losses (gains).

(b) Property of a business carried on by the individual in Canada.
* Income from such property*, including capital property, eligible capital property and property described in the inventory of the business, *will be taxable as business income earned by a non-resident.
(c) The right to receive certain payments such as pension payments and other retirement benefits, including rights under:

• RRSPs
• RPPs
• DPSPs, or
• RESPs on which the taxpayer will be liable fr withholding tax.

Question 51

What is the restriction on allowable capital losses when a taxpayer ceases to be a resident of Canada?

Answer 51

Losses, except listed personal property losses, are restricted to the taxable capital gains actually triggered by the deemed disposition.

Question 52

In which case is there an exception for the deemed dispostion rule when a taypayer ceases to be a resident of Canada?

Answer 52

The exception is for a short-term resident of Canada. He or she will be exempt from the deemed disposition (and therefore tax on departure):

• on any property, which he or she brought with him or her and took away again, as well as
• property acquired by inheritance or beguest after the individual last became resident in Canada.
• (This exemption does not apply to other property he or she acquired while he or she was resident in Canada.)

if

• he or she resided in Canada for 60 months or less during the 10 years preceding his or her departure.

Question 53

How does CRA determine the cost of property that an indivdual brings with him or her when he or she becomes a resident of Canada?

Answer 53

He or she is deemed to have acquired all of his or her property other than:

• taxable Canadian property and inventory; or
• eligible capital property of a business carried on in Canada

at its fair market value at the time.

This means that he or she will only be taxed on gains subsequent to his or her entry to Canada.

Question 54

Outline the computational rules.

Answer 54

Paragraph 3(a): Aggregate of all income from non-capital source (only positive amounts. Do not include losses or deductions here).

• property
• business
• office and employment
• other

Paragraph 3(b): Taxable capital gains and allowable capital losses.

• all taxable capital gains (excuding those from LPPs), plus
• LPP taxable net gains, minus
• allowable capital losses (except for LPP losses and ABILs)

Paragraph 3(c): Total of 3(a) and 3(b) minus Subdivision e deductions such as:

• moving expenses
• alimony
• RRSPs, etc.

Paragraph 3(d): 3(c) minus

• losses from non-capital sources:
  
  • office
  • employment
  • business
  • property
• ABILs

Question 55

Under Divisions B and C, what happens when the capital losses exceed the capital gains in any one year?

Answer 55

The result of the taxable capital gains minus the allowable capital losses cannot be negative. Any negative amount is a “net capital loss” that can be carried back three years or forward indefinitely.

Question 56

Donna’s gains and losses for personal-use property were:

Gains: $1,000

Losses: $700

What is the amount to be included in her tax return?

Answer 56

A taxable capital gain of $500 ($1,000 x 1/2).

Since personal-use property is consumed and wears out, capital losses may never be offset against any capital gains or other sources of revenue.

Question 58

How is unused allowable capital loss treated?

Answer 58

It can be carried back up to three years or carried forward under Division C as net capital loss.

Question 59

True or false?

ABILs can be deducted against any source of income.

Answer 59

True

Question 60

True or false?

ACLs can be deducted from any source of income.

Answer 60

False

ACLs can only be deducted from taxable capital gains.

Question 61

How do you calculate the disallowed portion of a BIL?

Answer 61

If a capital gains deduction was claimed in previous years,

• turn it back into an ACL by multiplying it by inclusion rate for the year (2 for years after October 17, 2000)
• the resulting ACL can be deducted under paragraph 3(b) against taxable capital gains
• unused ACL can be carried back up to three years and forward indefinitely.

Question 62

How do you calculate the ABIL?

Answer 62

• BIL not disallowed (i.e. BIL minus disallowed portion)
• times inclusion rate for the year (1/2 after Oct. 17, 2000)
• equals ABIL
• When computing income, deduct the ABIL in paragraph 3(d).
• unused ABIL becomes a non-capital loss which can be carried forward up to 10 years.
• Unused non-capital loss after 10 years becomes a net capital loss.