1. Tax Solutions YOURLOGO Start Lecture
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2. Solution (Example Problem Integration)
Income earned personally
Business income $100,000
Less: Personal tax: ($100,000 x 33%) ($33,000)
 After-tax income $67,000
Income earned through corporation
Business income $100,000
Corporate tax-federal ($100,000 x 10.5%)* ($10,500)
After-tax retained earnings (RE) $89,500
* federal corporate tax rate = 38% - 10% (abatement) – 17.5% (small business deduction) = 10.5%
Initial tax saved by incorporating (i.e., tax deferral): $89.5k - $67k $22,500

3. Solution (Example Problem Integration) (cont)
Personal tax (if retained earnings paid as a dividend)
Dividend = after-tax RE ($89,500 x 1.17)** $104,715
Tax (before DTC; $104,715 x 33%) $34,556
Federal DTC: 21/29 x $15,215 (gross-up) ($11,018)
Personal tax (deferred until payment of dividend) $23,538
** Not an eligible dividend since all corporate income is eligible for the SBD
The gross-up and DTC for non-eligible dividends was different prior to 2016
Net federal tax cost of incorporation in 2016 ($23,538 - $22,500) = $1,038
Hence there is not perfect integration (with perfect integration there would be no net savings or cost of incorporation). Note: if provincial taxes were included the answer would be much closer to integration (i.e., a net tax savings/cost of closer to zero).

4. Solution (Example Problem Business Income)
(a) Net income (loss) for accounting purposes ($8,000) Add: Personal rent expense $9,500 Depreciation expense $10,000 Interest expense re: late income taxes $400 Safety deposit box fees $100 Accrued bonus $8,000 [Not deductible in year of accrual since unpaid within 180 days. Will be deductible in the year paid, i.e., We should instruct our client to pay this amount within 180 days of year-end.] Professional fees re: purchase of furniture and equipment $1,500 Contingent loss $2,000

5. Solution (Example Problem Business Income) (cont)
[Loss will be deductible only when paid/refunded to customer. Note: sales are final and goods sold are not refundable, hence 20(1)(m) reserve is likely not applicable.] Deduct: CCA: Purchases (CCA Class 8) $50,000 Plus related prof. fees $1,500 $51,500 x 20% x ½ ($5,150) Net income for tax purposes $18,350 [Note: the personal rent expense of $9,500 paid by S Inc. would be a shareholder benefit to Sue.]

6. Solution (Example Problem Business Income) (cont)
(b) GST owing on sales (5% x $140,000) $7,000 Less: input tax credits (ITCs) COGs (5% x $35,000) ($1,750) Rent expense (5% x $20,500) ($1,025) Capital asset purchase (5% x $50,000) ($2,500) Legal and accounting fees (5% x $9,000) ($450) GST liability $1,275 S Inc.’s GST return is due 3 months after year-end (i.e., March 31, 2017). Taxpayer’s with sales less than $1.5M are annual filers (if sales exceed $1.5M but are less than $6M GST returns are due quarterly, and if sales exceed $6M GST returns are due monthly). If GST owing is $3,000 or more than GST instalments are required.

7. Solution (Example Problem Business Income) (cont)
Also note the following re: GST:
Taxpayers charge and remit GST based on their sales but get an input tax credit (ITC) on any GST paid (including any GST paid on capital asset purchases). The difference between the GST collected and the ITCs is what they remit to the government (or their GST refund);
There is no GST charged on exports (none in this case);
There is no GST on residential rent (there is GST on commercial rent);
There are no ITCs for salaries, depreciation, interest expense or contingent losses;
If there were meals and entertainment the ITC is limited to 50% of the expenditure (none in this case); and
Items that are not deductible for income tax purposes are not eligible for an ITC. For example, in this case there are safety deposit box fees paid (that are not deductible) and any GST paid on these fees would not be eligible for an ITC. Similarly, any GST paid on recreational facilities or club dues are not eligible for an ITC. Also any ITC for GST paid on a luxury vehicle (i.e., one costing more than $30,000/ leased for more than $800 per month) is limited to the GST paid on $30,000/ $800 per month.

8. Solution (Example Problem CCA/CECA)
Building
Capital gain on sale of building: P of D ($900k) less ACB ($820k) = $80,000
Taxable capital gain (1/2 x $80k) $40,000
Recapture (business income) on sale of building: Lesser of: P of D ($900k) and cost
($820k); i.e., 820k less UCC ($700k) = $120,000
[Note: the question said to ignore the replacement property rules, which are covered later in these notes. Purple Co. can (and should) use the replacement property rules to defer all the tax on the capital gain and recapture on the sale of the building since a replacement building was purchased within the 1 year deadline and all the proceeds received (and more) were spent on the replacement building. The question also said to ignore the capital dividend account (also covered later in these notes). Since Purple Co. is a private company the non-taxable half of the capital gain on the sale of the building will add to its capital dividend account balance.]

9. Solution (Example Problem CCA/CECA) (cont)
Software
Terminal loss (business loss) on sale of computer software:
P of D ($1.2k) less UCC ($2k) = ($800)
[Recall: there cannot be a capital loss on depreciable assets]
2016 CCA
Class 8 $50k x 20% = ($10,000)
Class 10 $60k x 30% = ($18,000)
Purchases:
Building (separate class 1, must elect) $1,000,000 x 6% = $60,000
CCA (after half-net rule) (1/2 x $60,000) ($30,000)
New computers (class 50) $100,000 x 55% = $55,000

10. Solution (Example Problem CCA/CECA) (cont)
CCA (after half-net rule) (1/2 x $55,000) ($27,500)
Airplane (class 9)* $1,400,000 x 25% = $350,000
CCA (after half-net rule) (1/2 x $350,000) ($175,000)
*Note: you would probably have to look up this CCA class since you likely would not have this one memorized. When deciding whether to look something up you need to use your judgment. Ask yourself how much time do you have available? And ask yourself how important is this item that you are considering looking up?
CEC 2017 (CCA)
Starting January 1, 2017 new rules apply to CEC. The December 31, 2016 CEC balance of $69,750 will be added to a new CCA asset class and the old CEC rules will no longer apply. As a transitional measure a 7% CCA rate can be claimed (for up to 10 years). Any new CEC purchases will go into a CCA asset class with a 5% CCA rate.
Accordingly the 2017 CCA on the CEC opening balance will be 7% x $69,750 = $4,883

11. Solution (Example Problem Employee Stock Options)
Janice’s Employment Income Inclusion
(Stock price – Exercise price) x # of options exercised
($10 - $6) x 1,000 = $4,000
Less: 110(1)(d) deduction ½ x $4000 = $2,000
Taxable income inclusion ($4,000 - $2,000) $2,000
Janice can get the 110(1)(d) deduction since she deals at arm’s length with her employer and the options were not in-the-money when granted.
Because the employer is a CCPC and Janice and Teak Inc. are dealing at arm’s length the employment income inclusion will be included in Janice’s income in the year that she sells her shares.
The ACB of Janice’s 1,000 shares of Teak Inc. is $10,000 [i.e., exercise price $6,000 (i.e., $6 x 1,000) + employment income inclusion $4,000].

12. Solution (Example Problem Personal Tax)
Salary $100,000 Taxable benefits: Standby charge: $25k x 2% x 12 months = $6,000 Note: she used the car 67%, i.e., more than 50%, for business use; i.e., 8,000 / (8, ,000) Hence standby charge is reduced by personal use km / 20,004 to: $6,000 x (4,000 / 20,004) = $1,200 Operating benefit: since more than 50% business use can use: lesser of: (a) 26 cents x 4,000 km = $1,040; and (b) ½ of standby charge (1/2 x $1,200) = $600 (must inform employer by Dec. 31) $600

13. Solution (Example Problem Personal Tax) (cont)
Employment income $101,800 Less: RRSP contributions ($22,000) RRSP Contribution Room Unused RRSP room carried forward $8,500 Plus: lesser of: (a) $25,370; and (b) 18% x prior year’s earned income ($90,000) = $16,200 $16,200 RRSP contribution room $24,700 Robin has sufficient RRSP contribution room available. Capital gains are not considered earned income for RRSP purposes. Less: childcare deduction ($5,000)

14. Solution (Example Problem Personal Tax) (cont)
Childcare Expenses
Deduction from income is limited to the least of:
Actual amount spent $12,000;
$5,000 x 1 (one child between the age of ) $5,000; and
2/3 x earned income ($101,800) $67,867
Earned income for childcare deduction purposes is her employment income of $101,800.
Less: moving expenses ($2,000)
Moving Expenses
Robin has moved more than 40 km closer to her new work location and her income from the new work location exceeds $2,000.
Net income for tax purposes $72,800

15. Solution (Example Problem Shareholder Loans)
$100,000 Loan re: shares
The principal (i.e., $100,000) must be included in Randy’s income in the year that the loan was received (i.e., 2016).
Because the loan was received by virtue of his shareholdings.
Unless Randy repays the loan within one year from the company’s year-end (i.e., by December 31, 2017).
Since the principal is included in income:
There is no low-interest taxable benefit; and
Randy can deduct loan repayments (in the year of repayment).
$40,000 Loan re: car
The principal (i.e., $40,000) will not have to be included in income, because:
The loan was received by virtue of employment. The loan was received by virtue of employment because other senior employees were granted similar loans for similar amounts;

16. Solution (Example Problem Shareholder Loans) (cont)
The loan meets the specified purpose test. Randy is a specified shareholder because he owns more than 10% of any class of shares (i.e., 100%). The loan meets the specified purpose test because it was used to buy a car to be used for employment duties; and
There are bona fide arrangements for repayment within a reasonable time. There is a written loan agreement and the loan principal must be repaid within a reasonable time (i.e., monthly payments over 3 years).
A low interest (taxable) benefit will have to be included in Randy’s income.
2016 Taxable benefit $40,000 x 2% x (31/366) = $68.
[Note: the low interest taxable benefit is deemed to be interest paid. Hence, Randy can deduct the portion of reasonable car expenses related to “business use”, including this interest “paid”, as an employment expense. Also 2016 is a leap year.]

17. Solution (Example Problem Principal Residence)
The gain per year on the house is higher, i.e., $20,000 per year ($100,000 / 5 years of ownership); while the gain per year on the cottage is $5,000 ($10,000 / 2 years of ownership). Hence Ted should allocate all years, except one (due to the “plus one” in the formula) to the house, i.e., 4 years, 2012 to 2015; and one year, 2016, to the cottage. Hence all of the house's capital gain of $100,000 will be exempt from tax due to the principal residence exemption [$100,000 × (1 + 4) / 5] = $100,000. Also, all of the gain on the cottage will be exempt from tax due to the principal residence exemption [i.e., $10,000 × (1+1) / 2] = $10,000. Hence Ted’s principal residence exemption in 2016 is $110,000 ($100k + $10k) and hence he won’t pay income tax in 2016 on his capital gains of $110,000. Note: Ted has already claimed the year 2016 for his principal residence exemption (for his cottage). Hence, in the future when Ted disposes of his new condo he will not be able to claim the year 2016 for the condo.

18. Solution (Example Problem Capital Gains Exemption)
FMV % of Total FMV
Accounts receivable $15,000
Inventory $190,000
Depreciable assets $160,000
Unrecorded goodwill $145,000
Subtotal $510, %
Investment in Subsidiary $400,000
Subtotal $910, %
Investments (not active business assets) $350,000
Total $1,260,000

19. Solution (Example Problem Capital Gains Exemption) (cont)
SBC Test Company is: (a) a CCPC; and (b) has at least 90% of the FMV of its assets either used principally in an active business carried on primarily in Canada and/or invested in shares or debt of a connected SBC. M Co. is a CCPC with 72.2% (computed above) of its assets used in an active business and/or invested in shares or debt of a connected SBC. M Co. and subsidiary are connected since M Co. controls the subsidiary. Conclusion: SBC Test is not met since 72.2% is less than 90%. Holding Period Test Since Michael has owned the shares throughout the past 24 months this test is met.

20. Solution (Example Problem Capital Gains Exemption) (cont)
Basic Asset Test
Throughout the 24 month holding period the company is a CCPC with more than 50% of the FMV of its assets used principally in an active business carried on primarily in Canada.
Conclusion: this test is not met since only 40.5% of its assets have been used in an active business.
Modified Basic Asset Test
This test can be used if the basic asset test is not met (and it allows shares and debt invested in a connected CCPC to be included).
This test is met since 72.2% is more than 50% (and company was a CCPC and asset values have remained stable for the past 24 months).
One of the parent or subsidiary must meet a 90% test** and the other must meet a more than 50% test.**

21. Solution (Example Problem Capital Gains Exemption) (cont)
** This means that throughout the past 24 months at least 90%/more than 50% of the FMV of its assets are used either principally: in an active business carried on primarily in Canada; and/or are invested in shares or debt of a connected CCPC. The 90%/50% test is met (and hence we can use the modified basic asset test) since: 91% of the subsidiary’s assets qualify (i.e., the 90% test is met by the subsidiary); and 72.2% of M Co.’s assets qualify (i.e., the more than 50% test is met by M Co.) Overall conclusion The M Co. shares are not qualified small business corporation shares because the SBC Test is not met. M Co. should purify itself so that this test is met and so Michael can get the capital gains exemption when he sells his shares of M Co.

22. Solution (Example Problem Capital Gains Exemption) (cont)
Purify M Co.
Must sell (and do something with) at least this amount of long-term investments:
$248, [i.e., $1,260,000 - $1,011,111; Note: $910,000/0.9 =$1,011,111]
This sale will trigger capital gains for M Co.
Can invest in active business assets and/or pay a dividend (to use up cash)*
May wish to sell (and do something with) more than the minimum amount computed above (perhaps sell all of the long-term investments) since asset values can fluctuate and we want to ensure that the SBC test is met at the time of sale.
* Paying off debt is not really an option since there is no debt (aside from a small amount of accounts payable).

23. Solution (Example Problem Attribution)
Attribution will apply on the income earned by Mervin from the $25,000 loan. Hence Jen (not Mervin) will include the $750 of interest income in her income.
Corporate attribution also applies because all of the following conditions are met:
An individual, Jen, has lent money to a corporation;
Jen’s spouse, Mervin, is a specified shareholder, since he owns 10% or more (i.e., 100%) of the pref. shares
One of the main purposes of the loan was to: reduce Jen’s income and benefit a designated person (i.e., income split); and
The corporation is not a small business corporation (SBC), since only 83% (not 90% or more) of its assets are used in an active business carried on in Canada.
Hence, Jen will also have to include an imputed interest benefit in her income in 2016 of:
$75,000 x 2% (prescribed interest rate) = $1,500.

24. Solution (Example Problem Corporate Taxes Payable)
Net income for tax purposes $417,000
Less: Division C deductions:
Canadian dividends ($20,000 + $30,000) ($50,000)
Net-capital loss carryover ($10,000)
Taxable income $357,000
Federal tax 38% x taxable income ($357,000) $135,660
Less: Federal abatement 10% x taxable income ($357,000) (35,700)
Aggregate investment income (AII)
Taxable capital gains $15,000
Interest income $25,000
Foreign investment income $27,000
Less: net capital loss carryforward ($10,000)
AII $57,000 
ART- 6 2/3% x $57,000 (AII) ,800

25. Solution (Example Problem Corporate Taxes Payable) (cont)
Small business deduction- 17.5% of the least of: (a) Canadian active business income ($300,000); and (b) annual business limit ($500,000); 17.5% x $300,000 (52,500) [Note: no general rate reduction since $357k (taxable income) – $300,000 (amount eligible for SBD) - $57,000 (AII) = 0] Part I federal tax payable $51,260 Part IV tax ($30,000 x 1/3) 10,000 Dividend refund (see *) (20,000) Federal income taxes payable for 2016 $41,260

26. Solution (Example Problem Corporate Taxes Payable) (cont)
* RDTOH balance
Opening balance $11,000
Refundable Part I tax
26 2/3% x $57,000 (AII) $15,200
Part IV tax $10,000
RDTOH balance $36,200
Dividend refund= lesser of: (a) $20,000 (i.e., 1/3 x $60,000); and (b) RDTOH closing balance of $36,200. Hence dividend refund = $20,000.
[This $20,000 dividend refund will reduce ZHI’s RDTOH balance in 2017.]

27. Solution (Example Problem Capital Dividend Account)
Private Co.’s CDA balance is: Capital dividends received $10,000 Plus: the tax-free portion of capital gains of $20,000 (i.e., $40,000 x ½) minus the non-allowable portion of capital losses of $30,000 (i.e., $60,000 x ½) = $0 (cannot be negative) $0 Less: capital dividends paid ($3,000) Private Co. can pay a tax-free capital dividend of (must first file an election): $7,000

28. Solution (Example Problem Wind-Up)
Asset
FMV
Active bus.
Income
Invest.
CDA
RDTOH
Opening balances
A/R
(140k - 155k)
Should file a section 22 (joint) election Market. Sec.
(180k - 100k)/2
Inventory
(300k - 270k)
Comp. Equip.
(60k - 50k)
Goodwill (ECP)
(500k - 0k)/2
Liabilities:
A/P
$140,000
$180,000
$300,000
$60,000
$500,000
($75,000)
($15,000)
$30,000
$10,000
$250,000
$40,000

29. Solution (Example Problem Wind-Up) (cont)
Asset
FMV
Active bus.
Income
Invest.
CDA
RDTOH
LT debt
Tax rate
Taxes payable
Tax liability
(49.5k + 18k)
(40k x 26 2/3%)
Sum (CDA and RDTOH)
Div. refund
Funds available for distribution
($100,000)
($67,500)
$15,667
$953,167
$275,000
18%
$49,500
$40,000
45%
$18,000
$300,000
$10,667

30. Solution (Example Problem Wind-Up) (cont)
Note: that if the corporation sold all its assets and did not wind-up the chart above would be used to calculate the tax consequences re: the corporation selling its assets (i.e., Assets vs. Shares). If Tanya just sold her shares to someone else she would have a C.G. (i.e., P of D - ACB), and if the shares are QSBC shares she could claim the capital gains exemption. TI should file an election to pay a tax-free capital dividend of $300,000 to Tanya. This leaves cash of $953,167 - $300,000 = $653,167 to pay to Tanya (on the share redemption)

31. Redemption of Tanya’s Shares
Step 1
P of D $653,167
Less: PUC ($5,000)
Deemed dividend $648,167
The deemed dividend is greater than 3 x RDTOH balance (3 x $15,667 = $47,001); hence TI will get a dividend refund equal to its RDTOH balance of $15,667 (as already assumed above)
Step 2
P of D $653,167
Less deemed dividend ($648,167)
Adjusted P of D $5,000
Less: ACB ($5,000)
Capital gain $0

32. Solution (Example Problem Section 85)
* Note: $0 is not considered an amount. Accordingly, you pick a small number, like $1, as the elected amount.
Asset
FMV
Tax Value
Elected Amount
Debt
Pref. shares
Equipment
Inventory
Goodwill
Total
$100,000
$300,000
$200,000
$70,000
$150,000 $0
$1*
$220,001
$80,000
$30,000
$220,000
$450,000

33. Solution (Example Problem Section 85) (cont)
2016 tax consequences to Mr. Trump
Mr. Trump has a disposition of his assets at the elected amount:
Hence Mr. Trump must report $0.50 as business income in 2016 (i.e., ½ the gain on sale of goodwill is taxable as business income).
Proceeds
UCC/ACB
Income
Equipment
Inventory
Goodwill
$70,000
$150,000 $1 $0
$0.50

34. Solution (Example Problem Section 85) (cont)
Mr. Trump (Cost of consideration) Debt receivable worth $150,000 with an ACB of $150,000 Preferred shares worth $450,000 with an ACB and PUC of: Elected amount of: $220,001 less boot of: $150,000 = $70,001 TC (tax attributes of acquired assets) Equipment (acquired at elected amount) $70,000 Inventory (acquired at elected amount) $150,000 Goodwill (acquired at elected amount) $1 ¾ adds to CEC account ($1 x ¾) $0.75 [Note: non-arm’s length restrictions found in subsections 14(5) and 85(5) are not discussed due to complexity]

35. Solution (Example Problem Section 86 and Estate Freeze)
Max will freeze the value of his assets at $7M and hence freeze his eventual tax liability on death. His assets will now consist of preferred shares that are redeemable and retractable for $7M in total, hence they will not grow in value. The future growth of MKI will accrue to Max’s child (who is younger than Max). Fred will eventually pay tax on any future growth when he disposes of the new common shares. (Fred’s ACB and PUC of his new common shares is $500 in total.)
The February 1, 2016 reorganization of capital will be tax-free since section 86 of the Act will apply and lead to an automatic tax-free rollover.
Section 86 applies because all the conditions are met:
Max’s shares are capital property;
Max is exchanging all his (common) shares (worth $7M); and
Max is receiving new preferred shares (worth $7M).
The ACB of Max’s new preferred shares will be $3 million in aggregate (i.e., equal to the old shares’ ACB).
The PUC of Max’s new preferred shares will be $2,000 in aggregate (i.e., equal to the old shares’ PUC).

36. Solution (Example Problem Section 86 and Estate Freeze) (cont)
[Note: you can also do an estate freeze using section 85 of the Act (not used in this question). One added benefit of using section 85 is that you can crystalize your capital gains exemption if you are selling QSBC shares (as discussed above). Also, if Max’s child was young or not responsible with money then Max could use a trust. Max would pick a responsible person to be the trustee. The trustee would manage the trust’s assets for the benefit of beneficiaries chosen by Max (e.g., his child). If a trust was used, then the trust would subscribe for the new common shares.

37. Solution (Example Problem Section 85.1)
Paul’s 2016 sale of SI shares will be a tax-free rollover under section Section 85.1 applies automatically since all of the conditions are met:
Shares of Purchase Inc. (a Canadian company) are being issued in exchange for shares of SI (another Canadian company);
Paul and Purchase Inc. are not related both before and after the exchange;
The SI shares are capital property; and
No non-share consideration is received.
Paul will own 20% of Purchase Inc. after the exchange which is not control; i.e., 15,000 / (60, ,000) = 20%.
Paul’s proceeds of disposition for his SI shares, due to section 85.1, is $100,000 (i.e., at ACB, hence no capital gain).
Paul acquires 15,000 Purchase Inc. shares with an: aggregate ACB of $100,000; and an aggregate PUC of $25,000 initially (i.e., new shares’ ACB/PUC is limited to the old shares’ ACB/PUC). The PUC will be averaged with the existing Purchase Inc. shares’ PUC

38. Solution (Example Problem Amalgamation)
The predecessor companies, PRI and Y Inc. will have deemed year-ends immediately before the amalgamation, i.e., on August 31, The new company can then pick a new year-end, which cannot exceed 53 weeks, i.e., it can pick August 31, 2017 as its new year-end. (Hence, in this case there will not be a short taxation year and there will not be 2 tax years in one calendar year). The amalgamation will lead to a tax-free rollover. Patty’s shares of PRI will be disposed of at cost (hence no capital gain/loss is triggered) and her new shares in the amalgamated company will have the same ACB/PUC as her old (PRI) shares. The predecessor companies will dispose of their assets (and liabilities) at tax cost (hence no capital gain/loss is triggered) and the new (amalgamated) company will acquire all assets (and liabilities) at that same tax cost(s). Also, 88(1)(d) will apply and Y Inc.’s marketable securities and land (i.e., non-depreciable capital property) can be bumped up. The maximum bump is to FMV*.

39. Solution (Example Problem Amalgamation) (cont)
*Technically the 88(1)(d) bump formula is the lesser of:
ACB of Y Inc. shares $265k
Less: dividends received ($0)
$265k
Less: tax cost of Y Inc.’s net assets $220k
$45k
Y Inc.’s:
Marketable securities: FMV (at acquisition) $125k
Less: tax cost ($100k)
$25k
Land: FMV (at acquisition) $105k
Less: tax cost ($101k)
$4k
Sum ($25k + $4k) $29k

40. Solution (Example Problem Amalgamation) (cont)
Hence: the ACB of the marketable securities (formerly owned by Y Inc.) can (and should) be bumped up by $25k (to $125k); and the ACB of the land (formerly owned by Y Inc.) can (and should) be bumped up by $4k (to $105k). Note: how some of the potential bump is lost (due to the lesser of formula).

41. Solution (Example Problem Acquisition of Control)
Matt Inc. has an AOC on October 1, 2016 since more than 50% of its shares have been acquired by an unrelated person. Matt Inc. will have a deemed year-end on September 30, 2016 (i.e., a short taxation year).
Matt Inc.
Net-capital losses
December 31, $50,000
September 30, 2016 stub period:
Marketable securities, capital loss ($55k-$45k) = $10, Allowable capital loss ($10k x ½) $5,000
Both net capital losses expire immediately after September 30, 2016 (if not used).
Matt Inc. can (and should) elect to dispose of the land, in its September 30, 2016 deemed year-end, in order to trigger a taxable capital gain to offset the net-capital losses that will expire. The maximum elected amount is FMV of $300,000 which will trigger a taxable capital gain of: $300,000 less $220,000 (ACB) = $80,000 x ½ = $40,000. The existing capital losses will be used to offset this taxable capital gain (hence, no taxes will be owing).

42. Solution (Example Problem Acquisition of Control) (cont)
Hence, some capital losses will expire. After the election the land will have an ACB of $300,000. Matt Inc.’s non-capital losses will not expire immediately since the same business is carried on and there is a reasonable expectation of profit. These losses can be carried forward and used against Matt Inc.’s future taxable income.

43. Solution (Example Problem Acquisition of Control) (cont)
Non-capital losses
December 31, $100,000
Expires immediately after December 31, 2034, if not used. Note: there is a 20 tax year carryforward period for non-capital losses, and there are 2 tax years in 2016 (i.e., September 30, 2016 and the new year-end of December 31, 2016).
September 30, 2016 stub period:
Loss from business operations $160,000
Loss on accounts receivable ($110k - $103k) $7,000
Deemed CCA “Terminal loss” on building ($343.5k - $340.5k) $3,000
Deemed CECA “Terminal loss” on CEC [$76k – $60k (i.e., ¾ x $80k)] $16,000
$186,000
Expires immediately after December 31, 2035, if not used.