Small Business

Question 1

Criteria for Qualified Small Business Corporation

Answer 1

all or substantially (90%) of its assets are used in an active business carried on in Canada

owned by a taxpayer, his or her spouse, common law partner or a related partnership
AND
during the previous 24 month period, it was not owned by an unrelated person and more than 50% of the FMV of the assets of the corporation during that time could be attributed to assets that are used in an active business carried on primarily in Canada

Shares in a holding company which hold all or substantially all (at least 90%) of its assets in the form of a QSBC are considered QSBC shares

Question 2

Lifetime limit of capital gains

Answer 2

$892,218 in capital gains on the disposition of qualifying small business shares
Up to $1M in cap gains on the disposition of a qualifying farm or fishing property

Question 3

Maximum allowable capital gain deduction

Answer 3

LCGE $892,218 x 50% = $446,109

Question 4

What is CNIL?

Answer 4

Cumulative Net Investment losses

Question 5

What does a CNIL do?

Answer 5

Reduce the capital gains deduction. Limits the extent to which taxpayers can use tax shelters as wella s the lifetime capital gains exemption

Question 6

Capital dividend account

Answer 6

Payment from CDA will result in tax free dividend payments which will reduce surplus cash

Question 7

Retirement allowance

Answer 7

For years prior to 1996, can pay retirement allowance of $2000 per year to reduce surplus cash and rollover to RRSP

Question 8

Create a holding company

Answer 8

They can move surplus cash from the company to a Holdco to reduce surplus cash without generating taxable income

Question 9

Make a charitable donation

Answer 9

To reduce surplus cash flow by the amount of the donation without generating taxable income

Question 10

Pay an eligible dividend

Answer 10

To reduce surplus cash flow. Subject to gross up of 38% so a dividend will result in taxable income which will reduce CNIL balance

Question 11

Pay an ineligible dividend

Answer 11

subject to gross up of 15% so the taxable income would reduce CNIL balance and allow them to access LCGE

Question 12

Buy inventory

Answer 12

To reduce surplus cash without generating taxable income

Question 13

What is a business loss?

Answer 13

Expenses are greater than revenue

Question 14

What is a non capital loss?

Answer 14

Business loss is greater than total income

i) unusedlosses form office, employment, business or unused allowable business invesment losses (ABIL)
ii) ABIL=50% of a capital loss realized upon the disposition of shares of a CCPC or a debt owed by a CCPC. ABILs are deductible against ordinary income and may be carried foward 10 years
iv) non capital losses may be deducted again ALL sources of income for the year in which they occured or carried back 3 years or forward 20 years

Question 15

ABIL

Answer 15

50% of a capital loss upon the disposition of shares of a CCPC or a debt owed by a CCPC. ABILs are deducted against ordinary income and may be carried forward 10 years
If unused, ABILs become net capital losses after 10 years