Justina Stein comes to you, a CGA, for some tax advice on claiming $120,000 business investment losses in 2012 and in future years, from the sale of her shares which she believes may qualify as small business corporation (SBC) shares. She has heard that such losses are given special treatment under the Act. Briefly explain to Justina the special treatment given to business investment losses in the year of loss and in future years. Assume that Justina will earn $75,000 in salary in 2012 and has never claimed the lifetime capital gains deduction.
Detailed calculations are not necessary. First, qualified business investment losses Business Investment Loss includes capital losses arising from the disposition of shares and debts of a small business corporation. An SBC is generally defined to be a Canadian-controlled private corporation, where all or substantially all of the fair market value of the assets were, at that time, used principally in an active business carried on primarily in Canada.
For the purposes of a business investment loss only an SBC which ceases to meet the conditions in the definition of an SBC will still be considered as an SBC if at any time in the 12 months preceding the disposition it met the conditions in the definition of an SBC. Second, Allowable Business Investment Loss (ABILs) Refer to paragraph 38(c), a taxpayer’s allowable business investment loss for a taxation year from the disposition of any property is 1/2 of the taxpayer’s business investment loss for the year from the disposition of that property. In this case, ABIL is 1/2 of $120,000 or $60,000.
Regarding the special treatment of ABILs, normally allowable capital losses can only be claimed against taxable capital gains. However, ABILs have such restriction and, hence, are deducted along with other loses from non-capital sources (e. g. , losses from business and property). Deducting ABILs, effectively, against all sources of income, rather than only against net taxable capital gains may result in a more rapid deduction of ABILs, which is the intent of the ABIL investment incentive. In computing net income of Justina, ABILs of $60,000 could be deducted from her employment income of $75,000.
Third, restriction on benefit from capital gains deduction A portion of a BIL, equal to an amount of capital gains that has previously benefited from a capital gains deduction, is disallowed. The capital gains deduction referred to is either a past claim for the general capital gains deduction that was eliminated or the continuing capital gains deduction for shares of a qualified small business corporation or qualified farm property. This disallowed portion reduces the BIL and resultant ABIL, for the purposes of the deduction under paragraph 3(d).
In this case, Justina has never claimed the lifetime capital gains deduction so that $60,000 is all ABILs. Last, future treatment for unused ABILs Any portion of the ABIL, which is not deducted under paragraph 3(d), is added to the non-capital losses for the year subject to non-capital loss carryover rules. If the ABIL that is embedded in the non-capital loss is not used up with a 10-year carry forward, then it reverts to its original nature and becomes a net capital loss available for indefinite carry forward, but only for deduction from net taxable capital gains.
5 marks Question 4 (28 marks) Cosco Ltd. , a small CCPC, is a landscaping supplies wholesaler. The i ncome statement for the year ended December 31, 2012, reported a net income before tax of $ 281,141. You have been retained to determine the corporation’s income tax liability and minimum net federal taxes payable. You have gathered the following information relating to specific income and expense items included in the income statement to arrive at the net income before tax for 2012: Legal expenses1
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