ACCT226 Chapter 11 Problem 5 PDF

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ACCT226 Chapter 11 Problem 5...

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The following information is for Doug Santiago for the year ending December 31, 2019:

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Doug sold shares of Flop Inc., a small business corporation that did not qualify for the lifetime capital gains deduction. The shares had cost $345,000. The net proceeds of disposition were $78,000.

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Doug sold shares of Flip Inc., a qualified small business corporation, for $480,000. The adjusted cost base of these shares was $187,000. Selling costs were $4,000.

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Doug had net employment income of $142,000.

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At the end of 2019, Doug had a Cumulative Net Investment Loss of $2,300.

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On January 1, 2019, Doug had a net capital loss carry forward of $3,400 [(1/2)($6,800)].

Doug has used the ITA 110.6 lifetime capital gains deduction to eliminate a 2011 capital gain of $29,500, as well as a 2014 capital gain of $49,000. Doug has not deducted any other amounts under ITA 110.6 in the years prior to 2019.

Required: Calculate Doug’s minimum Net Income For Tax Purposes and Taxable Income for 2019. Provide all of the calculations required to determine the maximum ITA 110.6 deduction assuming:

A. Doug would prefer to make the maximum deduction of his net capital loss carry forward, prior to making any use of the lifetime capital gains deduction.

B. Doug would prefer to make the maximum use of the lifetime capital gains deduction.

To the extent that there has been use of the lifetime capital gains deduction in previous years, business investment losses (BILs) are disallowed. When they are disallowed, they become ordinary capital losses that must be deducted against the current year’s taxable capital gains. Given this, the non-disallowed portion of the BIL would be calculated as follows:

2019 BIL Realized ($345,000 - $78,000)

$267,000

BIL Disallowed By Previous Use Of ITA 110.6 ($29,500 + $49,000)

( 78,500)

Remaining Business Investment Loss

$188,500

Inclusion Rate

1/2

Allowable Business Investment Loss

$ 94,250

Doug’s Net Income For Tax Purposes would be calculated as follows:

Net Employment Income

$142,000

Allowable Business Investment Loss

( 94,250)

Net Taxable Capital Gains:

Taxable Capital Gain [(1/2)($480,000 - $187,000 - $4,000)]

$144,500

Allowable Capital Loss (Disallowed ABIL) [(1/2)($78,500)]

( 39,250)

105,250

Net Income For Tax Purposes

$153,000

Doug’s Taxable Income under the two different assumptions would be calculated as follows:

Part A Net Income For Tax Purposes Net Capital Loss Carry Forward Deducted

$153,000 ( 3,400)

Part B $153,000 Nil

Lifetime Capital Gains Deduction (Note) Taxable Income

( 5,300) $144,300

( 8,700) $144,300

Note As the only capital gains during 2019 are on qualified property, the simplified formula for the annual gains limit can be used. Given this, the lifetime capital gains deduction is the cumulative gains limit for both Part A and B as it is the least of the following:

Part A

Part B

Amount Available [(1/2)($866,912*)]

$433,456

$433,456

Amount Used [(1/2)($29,500 + $49,000)]

( 39,250)

( 39,250)

Amount Available

$394,206

$394,206

*This is the 2019 limit for gains on dispositions of shares of a qualified small business corporation. For gains on qualified farm or fishing property, the 2019 limit would be $1,000,000.

Part A

Part B

Taxable Capital Gain On Qualified Property

$144,500

$144,500

ABIL Realized

( 94,250)

( 94,250)

Allowable Capital Loss Deducted (Disallowed ABIL)

( 39,250)

( 39,250)

Net Capital Loss Carry Forward Deducted

( 3,400)

Nil

Annual Gains Limit

$ 7,600

$ 11,000

Part A

Part B

Sum Of Annual Gains Limits ($14,750 + $24,500 + $7,600)

$46,850

($14,750 + $24,500 + $11,000)

$50,250

Amounts Deducted In Previous Years ($14,750 + $24,500)

( 39,250)

( 39,250)

CNIL (Given)

( 2,300)

( 2,300)

Cumulative Gains Limit

$ 5,300

$ 8,700

In Part B, Doug will still have his $3,400 net capital loss carry forward, but will have used $3,400 more of his lifetime capital gains deduction. His Taxable Income in both cases is the same....