Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition

Solution to Assignment Problem Five-2

Item 1 - Class 53
The required information for Class 53 would be calculated as follows:
January 1, 2021, UCC $462,000
Addition 106,000
AccII Adjustment [(100%)($106,000)] 106,000
CCA Base $674,000
CCA [(50%)($674,000)] (337,000)
AccII Adjustment Reversal (106,000)
January 1, 2022, UCC Balance $231,000

Item 2 - Class 50
The required information for Class 50 can be calculated as follows:
January 1, 2021, UCC $ 82,000
Additions 15,600
AccII Adjustment [(50%)($15,600)] 7,800
CCA Base $105,400
CCA [(55%)($105,400)] (57,970)
AccII Adjustment Reversal (7,800)
January 1, 2022, UCC $ 39,630

Item 3 - Class 10
The required information for Class 10 would be calculated as follows:
January 1, 2021, UCC $142,000
Additions [(3)($22,000)] $66,000
Disposition of Truck - Lesser Of
• Capital Cost = $43,000
• Proceeds Of Disposition = $21,000 (21,000) 45,000
AccII Adjustment [(50%)($62,000)] 22,500
CCA Base $209,500
CCA [(30%)($209,500)] (62,850)
AccII Adjustment Reversal (22,500)
January 1, 2022, UCC Balance $124,150

Item 4 - Class 10.1

In the case of Class 10.1, there can be no recapture or terminal losses. However, in the year
of disposition, 50% of the usual CCA, that could have been claimed had there been property
remaining in the class on the last day of the taxation year, can be deducted. This would be
$2,475 [(50%)(30%)($16,500)]. The January 1, 2022, UCC balance would be nil.

The 2019 leasehold improvements are being written off over 10 years, the original term of
the lease (8 years), plus the renewal option of 2 years. This means that the CCA rate for
these improvements is 10%. Based on this and applying the AccII means that, during the
years 2019 and 2020, 25% of the leasehold improvements’ capital cost was claimed, leaving
a balance of 75% (100% – 25%)] at the beginning of 2021.

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Item 5 - Class 13
The original capital cost of the leasehold improvements was $136,000 ($102,000 ÷ .75).
Based on this the required calculations would be as follows:

January 1, 2021, UCC $102,000

Additions 52,000
CCA Base CCA: $154,000
• 2019 ($136,000 ÷ 10) ($13,600)
• 2021 Improvements Including AccII
Adjustment [(150%)($52,000) ÷ 8] (9,750) (23,350)
January 1, 2021, UCC Balance $130,650
Item 6 - Class 8
The required calculations for Class 8 would be as follows:

January 1, 2021, UCC $96,000

Additions $146,000
Dispositions - Lesser Of:
• Capital Cost = $85,000
• Proceeds Of Disposition = $56,000 (56,000) 90,000
AccII Adjustment [(50%)($90,000)] 45,000
CCA Base $231,000
CCA [(20%)($231,000)] (46,200)
AccII Adjustment Reversal (45,000)
January 1, 2022, UCC Balance $139,800

Item 7 - Class 3
The required information for Class 3 is as follows:

January 1, 2021, UCC $326,000

Dispositions - Lesser Of:
Capital Cost = $285,000
Proceeds Of Disposition = $310,000 (285,000)
CCA Base $ 41,000
CCA [(5%)($41,000)] (2,050)
January 1, 2022, UCC $ 38,950

There would also be a taxable capital gain on the disposition of $12,500 [(1/2)($310,000 –
$285,000)].

Item 8 - Class 1
The new building would be a Class 1 property. As it is a new building, at least 90% of the
floor space will be used for manufacturing and processing, and an election has been filed to
include it in a separate class, it is eligible for the enhanced CCA rate of 10%. Given this, the
UCC and CCA are determined as follows:
January 1, 2021, UCC Nil
Additions ($1,327,000 − $270,000) $ 1,057,000
AccII Adjustment [(50%)($1,057,000)] 528,500

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CCA Base $ 1,585,500

CCA [(10%)($1,585,500)] (158,550)
AccII Adjustment Reversal (528,500)
January 1, 2022, UCC $ 898,450

Summary Of The Results (Not Required)

The maximum CCA for the year ending December 31, 2021, and the January 1, 2022, UCC
balances can be summarized as follows:

Maximum CCA UCC

Class 53 337,000 231,000
Class 50 57,790 39,630
Class 10 62,850 124,150
Class 10.1 2,475 Nil
Class 13 23,350 130,650
Class 8 46,200 139,800
Class 3 2,050 38,950
Class 1 158,550 898,450

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 Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition

Solution to Assignment Problem Five-4

Class 1 - Building
There were no additions or dispositions in this class. Because the building was purchased
new, was used solely for manufacturing and processing and an election was made to include
it in a separate class, it is eligible for the enhanced rate of 10%. As a consequence, the
maximum 2021 CCA would be $34,200 [(10%)($342,000)]. The January 1, 2022, UCC
balance would be $307,800 ($342,000 – $34,200).

Class 8 - Office Furniture

The required calculations for this class would be as follows:
Opening UCC Balance $66,000
Additions $12,000
Dispositions - Lesser Of:
• Capital Cost = $35,000
• Proceeds Of Disposition = Nil Nil 12,000
AccII Adjustment [(50%)($12,000)] 6,000
CCA Base $84,000
2021 CCA [(20%)($84,000)] (16,800)
AccII Adjustment Reversal (6,000)
January 1, 2022, UCC Balance $61,200

Note that the proceeds of disposition from the donation are nil.

Class 10 - Vehicles
The required calculations for this class would be as follows:

Opening UCC $2,25,000

Additions $1,15,000
Disposition of Truck Traded-In - Lesser Of:
• Capital Cost = $53,000
• Proceeds Of Disposition = $15,000 15,000
Disposition of Sunk Truck - Lesser Of:
• Capital Cost = $45,000
• Proceeds Of Disposition = $30,000 (30000) 70,0000
AccII Adjustment [(50%)($70,000)] 35,000
CCA Base $330,000
2021 CCA [(30%)($3,30,000)] (99,000)
AccII Adjustment Reversal (35,000)
January 1, 2022, UCC Balance $196,000

Note that the amount received from the insurance company on the truck is treated as
proceeds of disposition.

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Class 10.1
The BMW was put into a separate Class 10.1 in 2020. In Class 10.1, the recapture and
terminal loss rules do not apply. This means that the $50,000 in proceeds of disposition can
be ignored in calculating 2021 business income. Note that the company is permitted to claim
50% of the year’s CCA in the year of disposition as if the disposition had not occurred.

2021 CCA [(1/2)(30%)($16,500)] $2,475

The January 1, 2022, UCC balance for Class 10.1 would be reset to nil.

Class 12 - Tools

Tools that cost $500 or less are included in Class 12 where they are not subject to the old
half-year rule. This means that they are eligible for the 100% rate in the year of purchase. As
a consequence, the entire $17,000 can be deducted as CCA for 2021, leaving a nil January
1, 2022, UCC balance.

Class 13 - Leasehold Improvements

In general, leasehold improvements will be written off over the term of the lease on a straight
line basis. For purposes of applying this calculation, the term of the lease would include the
first renewal option, beginning in a period after the improvements were made. In the case of
the original improvements, the period to be used is eight years. With respect to the
improvements during 2020, the write-off period will be five years. This is two years remaining
on the original lease and the first three-year renewal option. The required calculations are as
follows:

Opening UCC Balance $26,125

Additions 22,000
CCA Base $48,125
2021 CCA
• 2018 Improvements ($38,000 ÷ 8) ($4,750)
• 2021 Improvements Including AccII
Adjustment [(150%)($22,000 ÷ 5)] (6,600) (11,350)
January 1, 2022, UCC Balance $36,775

Class 14.1 - Intangible Assets

The required calculations for this class are as follows:
Opening UCC Balance Nil
Disposition - Lesser Of:
• Capital Cost = Nil
• Proceeds Of Disposition = $100,000 Nil
January 1, 2022, UCC Balance Nil

Proceeds Of Disposition $100,000

ACB (i.e. Capital Cost) Nil
Capital Gain $100,000
Inclusion Rate 1/2
Taxable Capital Gain $ 50,000

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Class 50 - Computer Hardware

The required calculations are as follows:

Opening UCC Balance $48,000

Additions 11,000
AccII Adjustment [(50%)($11,000)] 5,500
CCA Base $64,500
2021 CCA [(55%)($64,500)] (35,475)
AccII Adjustment Reversal (5,500)
January 1, 2022, UCC Balance $23,525

Class 53 - Manufacturing Equipment

The required calculations are as follows:
Opening UCC Balance $126,000
Dispositions - Lesser Of:
• Capital Cost = $450,000
• Proceeds Of Disposition = $27,000 (27,000)
Ending Balance With No Remaining Property $ 99,000
2021 Terminal Loss (99,000)
January 1, 2022, UCC Balance Nil

After all the Class 53 property has been sold there remains a positive $99,000 UCC balance.
This results in a terminal loss that is fully deducted from the business income of Bostik
Manufacturing Company.

Other Income Effects (Recapture, Terminal losses and Taxable capital gains)
In addition, the following income effects resulted from the information provided in the problem:

Taxable Capital Gain On Class 14.1 property $50,000

Terminal Loss On Class 53 property (99,000)
Total impact on 2021 net income ($49,000)

Summary Of CCA And UCC Results (Not Required)

The maximum 2021 CCA and the January 1, 2022, UCC balances can be summarized as
follows:
Maximum CCA UCC
Class 1 $34,200 $307,800
Class 8 16,800 61,200
Class 10 99,000 196,000
Class 10.1 2,475 Nil
Class 12 17,000 Nil
Class 13 11,350 36,775
Class 14.1 Nil Nil
Class 50 35,475 23,525
Class 53 Nil Nil

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 Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition

Solution to Assignment Problem Five-7

Furniture - Class 8
The tax consequences of the sale of furniture can be analyzed as follows:

January 1, 2021 UCC Balance $24,000

Dispositions - Lesser Of:
• Capital Cost = $52,000
• Proceeds Of Disposition = $36,000 (36,000)
Negative Ending Balance ($12,000)
2021 Recaptured CCA 12,000
January 1, 2022, UCC Balance Nil

No CCA could be claimed for the year because the UCC balance at December 31, 2021 was
not a positive amount. CCA claims (with the exceptions of Classes 10.1 and 14.1) require
both property in the class on the last day of the taxation year and a positive UCC balance. In
addition, there are no AccII adjustments since there is no “net addition” to this class in 2021.

New Building - Separate Class 1

As all of the floor space of the building is used for non-residential purposes, that is not
manufacturing and processing, and an election was filed to include the building in a separate
Class 1 the CCA rate is 6%.
Capital Cost ($325,000 – $75,000) $250,000
AccII Adjustment [(50%)($250,000)] 125,000
CCA Base $375,000
2021 CCA [(6%)($375,000)] (22,500)
AccII Adjustment Reversal (125,000)
January 1, 2022, UCC Balance $227,500

Old Buildings - Class 1

CCA on the old Class 1 Buildings would be calculated as follows:
January 1, 2021 UCC Balance $562,000
Dispositions - Lesser Of:
• Capital Cost = $135,000 ($335,000 – $200,000)
• Proceeds Of Disposition = $152,000
($352,000 - $200,000) (135,000)
Amount Subject To CCA $427,000
2021 CCA [(4%)($427,000)] (17,080)
January 1, 2022, UCC Balance $409,920

Since the old building was not acquired after March 18, 2007 the CCA rate remains at 4%.

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In addition, the sale of the building would result in a taxable capital gain that would be
calculated as follows:

Proceeds Of Disposition ($352,000 – $200,000) $152,000

ACB ($335,000 – $200,000) (135,000)
Capital Gain $ 17,000
Inclusion Rate 1/2
2022 Taxable Capital Gain $ 8,500

Automobiles - Class 10
The tax consequences of the sale of the automobiles can be analyzed as follows:
January 1, 2021 UCC Balance $220,000
Dispositions - Lesser Of:
• Capital Cost = $315,000
• Proceeds Of Disposition = $185,000 (185,000)
Ending Balance no property remaining In the Class $ 35,000
2021 Terminal Loss (35,000)
January 1, 2022, UCC Balance Nil

This terminal loss is deducted in calculating business income for the 2021 taxation year. As
a consequence, no Class 10 CCA can be claimed for the year. CCA claims (with the
exceptions of Classes 10.1 and 14.1) require both property in the class on the last day of the
taxation year and a positive UCC balance.

Other Income Effects

In addition to CCA, the following income tax effects resulted from the information provided in
the problem:
Recapture On Class 8 property $12,000
Taxable Capital Gain On Class 1 Building 8,500
Terminal Loss On Class 10 property (35,000)
Net decrease in net income ($14,500)

Summary Of The CCA Results (Not Required)

The maximum CCA for the year ending December 31, 2021, and the January 1, 2022, UCC
balances can be summarized as follows:

Maximum CCA UCC

Class 8 Nil Nil
Class 1 $17,080 $409,920
Class 1 (Separate Class) 22,500 227,500
Class 10 Nil Nil

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 Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition

Solution to AP 6-9
The minimum Net Income would be calculated as follows (the related item number in the
problem precedes the adjustment):

Accounting Income $576,183

Add:
I/S Total Income Tax Expense ($182,000 + $35,000) $217,000
I/S Amortization Expense 550,000
1 Accounting Bad Debt Expense (Note 1) 16,750
1 2020 Doubtful debt reserve 13,000
2 Charitable Donations 27,000
2 Bonus Payments (Paid within 180 days of year end) Nil
2 Golf Club Membership Dues ($12,000 + $2,400) 14,400
2 Business Meals And Entertainment [(1/2)($32,000)] 16,000
2 Personal Meal Costs 5,000
2 Staff BBQ (Fully Deductible – special events) Nil
2 Production Sponsorships (Deductible) Nil
2 Advertising To U.S. Market (Deductible) Nil
2 Software Purchases (Capital Costs - Class 12 and 50) 38,000
2 Costs Related To Amending Articles Of Incorporation
(Note 4) 6,000
2 Thailand Convention Expenses (Note 2) 17,000
3 Non-Deductible Penalty And Interest Expense 2,000
3 Other Interest Expense (Deductible) Nil
4 Non-Deductible Travel Costs (Note 3) 1,215
6 Net Accounting Loss On Franchise 17,000
8 Taxable Capital Gain On Sale Of Shares (Note 5) 76,354 1,016,719
Deduct:
1 Actual Bad Debt Write-Offs For 2021 (Note 1) ($ 11,750)
1 2021 Doubtful debt reserve (Note 1) (15,000)
5 Maximum CCA (Note 6) (183,593)
5 Terminal Loss (Note 6) (5,000)
7 Landscaping Costs Capitalized For Accounting (35000)
Purposes (250,343)
2021 Net Income $1,342,559

Note 1 While this would be unusual in practice, the accounting figure for bad debt
expense is different from the income tax figure. Given this, we have added back the
accounting deduction of $16,750 and included the appropriate amounts for tax
purposes.

Note 2 It is likely that the CRA would argue that a convention in Thailand is not
consistent with the territorial scope of the corporation. However, an argument could be
made that, given it deals with costume design and is an annual convention, it should
be deductible.
Note 3 Since the kilometre-based allowances were non-taxable, the deductible
mileage is $0.59 for the first 5,000 kilometres per employee and $0.53 for additional
kilometres. The non-deductible automobile expenses are calculated as follows:

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Actual mileage paid:

[($0.62)(7 employees @ 4,000) + (1 @ 7,500)] $22,010
Deductible portion:
{[($0.59)(7 @ 4,000 + 1 @ 5,000)] + [$0.53 @ 2,500]} (20,795)
Non-deductible portion $1,215

Note 4 The cost of amending the articles of incorporation would be added to Class
14.1 (see CCA calculations).
Note 5 The capital gain was credited to retained earnings in error. It is necessary to
add the taxable portion of $76,354 [(1/2)($152,708)] to income in order to calculate net
income.
Note 6 The CCA and terminal loss for the year ending December 31, 2020, can be
calculated as follows:
Class 1 - Existing Building
Opening UCC $650,000
Rate (Class 1) 4%
Class 1 CCA $ 26,000

Class 1 - New Building - Separate Class

Opening UCC Nil
Addition $475,000
AccII Adjustment [(50%)($475,000)] 237,500
CCA Base $712,500
Rate (Class 1 > 90% used for manufacturing) 10%
Class 1 CCA $ 71,250

Class 6 - Fence
Opening UCC Nil
Addition $52,000
AccII Adjustment [(50%)($52,000)] 26,000
CCA Base $78,000
Rate (Class 6) 10%
Class 6 CCA $ 7,800

Class 8 - Office and Other Equipment

Opening UCC $95,000
Addition 1,200
Disposition - Lesser Of:
Capital Cost = $5,000
Proceeds Of Disposition = $3,500 (3,500)
AccII Adjustment (no positive net addition) Nil

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CCA Base $92,700

Rate (Class 8) 20%
Class 8 CCA $18,540

Class 10.1 - Existing Automobile

Opening UCC And CCA Base $17,850
Rate (Class 10.1) 30%
Class 10.1 Full CCA $ 5,355
Claim (50 Percent In Year Of Disposition) 50%
Class 10.1 CCA On Sold Automobile $ 2,678

Class 10.1 - Replacement Automobile

Opening UCC Nil
Addition, Limited To $30,000 $30,000
AccII Adjustment [(50%)($30,000)] 15,000
CCA Base $45,000
Rate (Class 10.1) 30%
Class 10.1 CCA $13,500

Class 12 - Applications Software

Opening UCC Nil
Addition $13,000
First Year One-Half Rule (No AccII) (6,500)
CCA Base $ 6,500
Rate (Class 12) 100%
Class 12 CCA $ 6,500

Class 14 - Limited Life Intangibles

Opening UCC $68,000

Disposition − Lesser Of:
Capital Cost = $95,000
Proceeds Of Disposition = $63,000 (63000)
Positive Ending Balance With No Assets = Terminal Loss $ 5,000

Class 14.1 - Goodwill and Unlimited Life Intangibles

Opening UCC Nil
Addition (Amendment Of Incorporation Articles) $6,000
AccII Adjustment [(50%)($6,000)] 3,000
CCA Base $9,000
Rate (Class 14.1) 5%
Class 14.1 CCA $ 450

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Class 44 - Limited Life Patent

Opening UCC And CCA Base $65,000
Rate (Class 44) 25%
Class 44 CCA $16,250

Class 50 - Systems Software

Opening UCC Nil
Addition $25,000
AccII Adjustment [(50%)($25,000)] 12,500
CCA Base $37,500
Rate (Class 50) 55%
Class 50 CCA $20,625

Summary of CCA

Class 1 CCA - Existing Building $ 26,000

Class 1 CCA - New Building, separate class 71,250
Class 6 CCA 7,800
Class 8 CCA 18,540
Class 10.1 CCA ($2,678 + $13,500) 16,178
Class 12 CCA 6,500
Class 14 CCA (Terminal Loss) Nil
Class 14.1 CCA 450
Class 44 CCA 16,250
Class 50 CCA 20,625
Total CCA $183,593
Terminal Loss - Class 14 $ 5,000

Factors Not Affecting Solution (Not Required)

• The bonuses paid June 15, 2021, are fully deductible as they were paid within
180 days of the end of the year in which they were accrued.
• The cost of the annual barbeque for all staff is fully deductible.
• Sponsorship of various themed theatre productions that use Angie’s costumes
is fully deductible as an advertising expense.
• Advertising in a U.S. theatre magazine to promote the business to U.S.
customers is a deductible cost.
• The interest expense amounts related to operations and late payment of
municipal property taxes are fully deductible.

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 Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition

Solution to AP 6-11
The appropriate advice on each of the expenditures described in the problem would be as
follows:
1. Both the insurance payments for coverage of her office and contents and for
malpractice coverage would be deductible as business expenses as a result of ITA 9.
The life insurance premiums, unless the insurance was required to obtain financing,
would not be deductible as a result of ITA 18(1)(b).

2. The payments to the collection agency are a legitimate cost of carrying on the
business of operating a professional practice and, as such, are deductible. ITA 9

3. While the contributions to registered charities will qualify Dr. Sweet for an income tax
credit against Tax Payable, they cannot be deducted in the computation of Net or
Taxable Income for an individual. ITA 18(1)(a).

4. Assuming that Mr. Sweet is in fact an employee of the business and that the amounts paid
for the services provided are reasonable then the amounts would qualify as a business
expense. ITA 9 and 67

5. Convention expenses that are capital in nature are denied by ITA 18(1)(b) but allowed
to the extent of ITA 20(10). If the purpose of attending the convention is to learn about
new research, techniques, procedures and products then the convention costs would
be subject to ITA 20(10) which allows the expenses of two conventions per year. The
convention costs related to Dr. Sweet’s attendance at the convention would be
deductible. In most situations, the costs associated with an accompanying spouse
would not be deductible as they would be considered personal and denied by ITA
18(1)(a) and (h). If challenged by the CRA Dr. Sweet would have to justify that the
expenses related to her spouse were primarily in connection with her business. Any
expenses for meal and entertainment would be subject to the 50% limitation of ITA
67.1.

6. The membership fee of $1,000 would not be deductible (ITA 18(1)(l)). However, the
payments for court time spent with patients would be deductible, subject to the 50%
limitation of ITA 67.1 that is applicable to business meals and entertainment costs.
The deduction that could be claimable would be $260 [(50%)(40%) ($1,300)].

7. As Dr. Sweet was involved in fighting a reassessment, the accounting and legal fees
would be deductible however the amounts expensed are not business expenses. ITA
60(o) allows a deduction for the costs of defending against a reassessment. ITA 4(2)
prohibits such amounts from being applied against a source of income such as a business.
Therefore while Dr. Sweet is entitled to deduction it not a business expense. In addition the
expense is only allowed in the year in which it is actually paid and not on an accrual basis.
However, the interest resulting from late payment of taxes would not be deductible
because of ITA 18(1)(t).

8. The cost of the lottery tickets has nothing to do with her business and would be
considered personal in nature and disallowed as a result of ITA 18(1)(a) and (h).

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Solution to AP12-2
The Taxable Income of Cabrera Digital would be calculated as follows:

Operating Income ($1,234,000 – $962,000) $272,000

Dividends Received ($23,600 + $61,300) 84,900
Taxable Capital Gain [(1/2)($312,000)] 156,000
Net Income $512,900
Deductions:
Dividends Received ($84,900)
Donations To Registered Charities (Note 1) (241,000)
Net Capital Loss Carry Forward (Note 2) (156,000) (481,900)
Taxable Income Before Non-Capital Loss Carry Forward $ 31,000
Non-Capital Loss Carry Forward (Note 3) (31,000)
Taxable Income Nil

Note 1 There are no adjustments required with respect to the donations as this is not a
reconciliation from accounting Net Income. The donations to registered Canadian charities total
less than the 75% of net income limitation of $384,675 [(75%)($512,900)] and are therefore
fully deductible in the calculation of taxable income.
Note 2 The 2019 net capital loss balance can only be deducted to the extent of the $156,000
taxable capital gain (ITA 111(1)(b)).
Note 3 The 2015 non-capital loss balance can only be deducted to the extent of the amount
required to reduce Taxable Income to nil. It would have been possible to carry forward the
donations instead, but the non-capital loss carry forward period is greater than the five year
donation carry forward.

Loss Carry Forwards

At the end of the current year, Cabrera will have:
 a 2019 net capital loss balance of $106,000 ($262,000 – $156,000). Since the
problem states that no future capital gains are anticipated, the maximum amount
of the net capital loss carry forward was claimed first.
 a 2015 non-capital loss balance of $162,000 ($193,000 – $31,000).

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Solution to AP 12-5
2018 Analysis
Net And Taxable Income
Net Income and Taxable Income would be calculated as follows:
Net Taxable capital gains [(1/2)($10,000)] $ 5,000
Dividends 11,000
ITA 3(c) amount $ 16,000
Less: Business Loss 75,000
Net Income $ Nil
Dividends (11,000)
Charitable Donations No Claim
Taxable Income $ Nil

This would leave a 2018 non-capital loss balance of $70,000, calculated as follows:

Amount E ($75,000 + $11,000) $86,000

Amount F Income Under ITA 3(c) (16,000)
2018 Non-Capital Loss $70,000

Note – the non-capital loss: The $11,000 adjustment for dividends is designed to recognize
that although included in ITA 3(c) the dividends are not actually taxable since they are
deducted in full in determining Taxable Income. It is possible to quickly verify the accuracy of
the non-capital loss in this case by simply ignoring the dividends – the result would be a
business loss of $75,000 minus the $5,000 of net taxable capital gains (e.g., the ITA 3(b)
amount), which equals $70,000.

2018 Carry Forwards

The following carry forward balances are available at the end of 2017:
• 2018 Charitable Donations $25,000
• 2018 Non-Capital Loss Carry Forward $70,000

Note – the donations: There is a limitation that restricts the amount of charitable donations
that the company can deduct to 75% of Net Income. Since the 2018 Net Income is nil no
amount would be allowed as a deduction.

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2019 Analysis
Net And Taxable Income
Both Net Income and Taxable Income would be determined as follows:

Business Income $38,000

Net Taxable Capital Gains Nil
Dividends 21,000
ITA 3(c) amount $59,000
Less: ITA 3(d) amounts Nil
Net Income $59,000
Dividends (21,000)
Taxable Income Before Carry Forwards $38,000
2017 Donations (25,000)
2018 Donations (13,000)
Taxable Income $ Nil

Note – Donations: Deductions for donations are limited to 75% of net income of $59,000 or
$44,250. In addition donations must be deducted in chronological order (ITA 110.1(1.1)). As a
result only $38,000 of deductions are required to reduce Taxable Income to nil. This results in
fully utilizing all of the 2018 donations and all but $2,000 of the 2019 donations.
2019 Carry Forwards
The following carry forward balances are available at the end of 2018:
• 2018 Non-Capital Loss $ 70,000
• 2019 Net Capital Loss [(1/2)($27,000)] $ 13,500
• 2019 Charitable Donations ($15,000 – $13,000) $ 2,000

Carry Back of the 2019 Net capital loss to 2018 – Loss carryback request
The facts create an interesting opportunity to carry back $5,000 of the 2019 net capital to 2018 to
offset the net taxable capital gains of $5,000. When there is both a business loss and net taxable
capital gains in the same year as well as a net capital loss balance that can be claimed in that same
year the effect is to increase the non-capital loss at the expense of the net capital loss on a dollar for
dollar basis. This is preferable given that a non-capital loss can be deducted against any type of
income whereas a net capital loss is restricted to net taxable capital gains (e.g., the ITA 3(b) amount).
The loss carryback request to 2018 would result in the following:

2018 Net And Taxable Income

Net Income and Taxable Income would be calculated as follows:
Net Taxable capital gains [(1/2)($10,000)] $ 5,000
Dividends 11,000
ITA 3(c) amount $16,000
Less: Business Loss 75,000
Net Income $ Nil
Dividends (11,000)
2018 Net Capital Loss (5,000)
Charitable Donations No Claim
Taxable Income $ Nil

This would leave a 2018 non-capital loss balance of $75,000, calculated as follows:
Amount E ($75,000 + $11,000 + $5,000) $ 91,000
Amount F Income Under ITA 3(c) (16,000)
2018 Non-Capital Loss $ 75,000

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Revised 2018 & 2019 Carry Forwards

The following amended carry forward balances are available at the end of 2019:
• 2018 Non-Capital Loss ($70,000 + $5,000) $75,000
• 2019 Charitable Donations $ 2,000 Unchanged
• 2019 Net Capital Loss [($13,500 – $5,000)] $ 8,500

Note: Carrying the 2019 net capital loss of $5,000 to 2018 resulted in an increase in the 2018
non-capital of $5,000 and a corresponding reduction of the 2019 net capital loss by the same
amount.
2020 Analysis
Net And Taxable Income
Both Net Income and Taxable Income would be determined as follows:
Business Income $178,000
Net Taxable Capital Gains Nil
Dividends 33,000
ITA 3(c) amount $211,000
Less: ITA 3(d) amounts Nil
Net Income $211,000
Donations (20,000)
Dividends (33,000)
Taxable Income Before Carry Forwards $158,000
2018 Non-capital loss (75,000)
2019 Donations (2,000)
Taxable Income $ 81,000
2020 Carry Forwards
The following carry forward balances are available at the end of 2020:
• 2019 Net Capital Loss $8,500
• 2020 Net Capital Loss [(1/2)($9,000)] $4,500

2021 Analysis
Net And Taxable Income
Net Income and Taxable Income would be calculated as follows:

Net Taxable capital gains [(1/2)($23,000)] $ 11,500

Dividends 42,000
ITA 3(c) amount $ 53,500
Less: Business Loss 200,000
Net Income $ Nil
Charitable Donations No Claim
Dividends (42,000)
Taxable Income Before Carry Forwards $ Nil
2019 Net Capital Loss (8,500)
2020 Net Capital Loss (3,000)
Taxable Income $ Nil

This would leave a 2020 non-capital loss balance of $200,000, calculated as follows:

Amount E ($200,000 + $42,000 + $8,500 + $3,000) $253,500

Amount F Income Under ITA 3(c) (53,500)
2021 Non-Capital Loss $200,000

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Note – 2019 & 2020 Net capital losses deducted: Once again the facts have created a
situation where we can apply net capital losses to the extent of the 2021 ITA 3(b) amount of
$11,500. Since loss carry overs must be applied in chronological order (ITA 111(3)), we have
applied all of the 2019 remaining net capital loss first and enough of the 2020 net capital
loss to completely offset the $11,500. No loss requests are necessary when losses are being
carried forward from earlier years. Loss carry back requests are only necessary when applying
losses back to an earlier year in which the tax return for that year has already been filed and
assessed.

2021 Carry Forwards

The following carry forward balances are available at the end of 2021:

• 2021 Charitable Donations $ 14,000

• 2020 Net Capital Loss ($4,500 – $3,000) $ 1,500
• 2021 Non-Capital Loss $200,000

Carry Back of the 2021 Non-Capital Loss to 2020 – Loss carry back request
The 2020 Taxable Income is $81,000. We can reduce that amount to nil with the 2021 non-capital
loss only. Since there are no net taxable capital gains in 2020, we cannot carry back and deduct the
remaining amount of the 2020 net capital loss of $1,500. Donations can be carried forward for five
years but cannot be carried back; therefore we cannot apply any of the 2021 donations. The revised
2020 taxable income would be as follows considering the carry back request:

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Revised 2020 Net And Taxable Income after Loss Request

Both Net Income and Taxable Income would be determined as follows:

Business Income $178,000

Net Taxable Capital Gains Nil
Dividends 33,000
ITA 3(c) amount $211,000
Less: ITA 3(d) amounts Nil
Net Income $211,000
Donations (20,000)
Dividends (33,000)
Taxable Income Before Carry Forwards $158,000
2021 Non-capital loss (81,000)
2018 Non-capital loss (75,000)
2019 Donations (2,000)
Taxable Income $ Nil

2021 Carry Forwards

The following carry forward balances are available after the loss request and application to 2020:
• 2021 Charitable Donations $ 14,000
• 2020 Net Capital Loss ($4,500 – $3,000) $ 1,500
• 2021 Non-Capital Loss ($200,000 – $81,000) $119,000

Loss Reconciliation (Not required)

2020 Net Capital Loss: It is possible to reconcile the net capital loss balance by first adding the
capital losses for 2019 and 2020 that total $36,000 [($27,000 + $9,000)] and subtracting the capital
gains for 2018 and 2021, which total $33,000 [($10,000 + $23,000)]. The difference of $3,000
[($36,000 – $33,000)] is then multiplied by 50% resulting in a balance of $1,500, which matches our
carry forward amount.

2021 Non-Capital Loss: In this case the non-capital loss balance of $119,000 can be verified by
adding the business profits of $38,000 from 2019 and $178,000 from 2020 then subtracting the
business losses of $75,000 from 2018 and $200,000 from 2021. The net result is $59,000. Then
adjust for donations claimed over the four year period of $60,000 [($25,000 + $15,000 + $20,000)].
The total is $119,000.

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Solution to AP 12-7
Based on the facts the corporation has a permanent establishment in each province (e.g. a
warehouse (fixed location) in which an employee is provided with general authority to contract on
behalf of the company). As a consequence, the allocation to each of the five provinces would be
based on the following calculations:
Gross Revenues Salaries And Wages
Province Amount Percent Amount Percent
Alberta $ 1,886,940 18% $ 261,870 21%
British Columbia 2,306,260 22% 274,340 22%
Nova Scotia 1,362,790 13% 174,580 14%
Saskatchewan 1,257,960 12% 99,760 8%
Ontario 3,669,050 35% 436,450 35%
Total $10,483,000 100% $1,247,000 100%

The province by province average of the two percentages calculated above and the allocation of the
total Taxable Income of $1,546,000 would be as follows:

Taxable
Province Revenues Wages Average Income
Alberta 18% 21% 19.5% $ 301,470
British Columbia 22% 22% 22% 340,120
Nova Scotia 13% 14% 13.5% 208,710
Saskatchewan 12% 8% 10% 154,600
Ontario 35% 35% 35% 541,100
Total 100% 100% 100% $1,546,000

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Solution to AP 12-9
The minimum Taxable Income for Lorne Inc. would be calculated as follows:

Net Income $340,500

Deductions:
Dividends ($28,100)
Charitable Donations (31,400)
2019 Non-Capital Loss (29,300) (88,800)
Taxable Income $251,700

Based on this, the company’s Tax Payable would be calculated as follows:

Base Amount Of Part I Tax [(38%)($251,700)] $ 95,646

Federal Tax Abatement [(10%)($251,700)] (25,170)
Small Business Deduction (Note 1) (23,750)
M&P Deduction (Note 2) (11,219)
General Rate Reduction (Note 3) (5,252)
Part I Federal Tax Payable $ 30,255

Note 1 The small business deduction is based on the least of the following:

Active Business Income $312,400

Taxable Income (no foreign tax credit adjustment needed) 251,700
Annual Business Limit [(1/4)($500,000)] 125,000

The small business deduction is equal to $23,750 [(19%)($125,000)].

Note 2 The base for the M&P Deduction would be the lesser of:

M&P Profits (Given) $211,300

Amount Eligible For The SBD (125,000) $ 86,300

Taxable Income $251,700

Amount Eligible For The SBD (125,000) $126,700

Based on these figures, the deduction would be equal to $11,219 [(13%)($86,300)].

Note 3 The general rate reduction would be calculated as follows:

Taxable Income $251,700

Amount Eligible For The SBD (125,000)
Amount Eligible For The M&P Deduction (86,300)
Full Rate Taxable Income $ 40,400
Rate 13%
General Rate Reduction $ 5,252

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Solution to Assignment Problem Fourteen-3

Part A
There are three types of control which apply for the purposes of the associated corporation
rules – legal control, de facto control and other miscellaneous concepts of control. Legal
control requires that a person or a group of persons own sufficient voting shares to be able
to elect the majority of a corporation’s Board of Directors. A sufficient number of shares
would mean owing at least 51% of the shares where there is only one class of shares. In
addition ITA 256(6.1) applies to ensure that legal and de facto control can occur at
successive stages within a chain of corporations which means control can be direct or
indirect.

As a result since Circle owns 51% of Loop it has legal control and therefore the two
companies are associated by ITA 256(1)(a) because one controls the other, The same
analysis would apply to Loop and Ring which would also be associated by ITA
256(1)(a)because Loop has the required 51% and therefore controls Ring. Loop and Ring
would also be associated because of ITA 256(1)(b) because they are both controlled by
Circle. In summary all three corporations are associated with each other.

Part B
Gerald controls Rock Ltd. since he owns at least 51% of its shares. In a similar manner
Gerald controls Boulder with his ownership of 85% of its shares. Since both
corporations are controlled by the same person they are associated with each other as a
result of ITA 256(1)(b).

Part C
Control for associated corporation purposes can exist where one person owns sufficient
shares to control or where a group of persons together own sufficient shares to control two
or more corporations. Where none of the various rules that deem a person to own shares not
actually owned by that person apply, determining whether two or more corporations are
associated begins with first determining whether it is possible to identify a single person who
controls the corporations. Where this single person control does not exist, the next step is to
determine whether there is a group of persons who together own sufficient shares (e.g.,
more than 50%) to control the corporations. Since a person can be considered a member of a
group of persons simply by owning shares, the answer to this question means identifying
persons who own shares in both corporations. If those persons together own more than 50% of
the shares of the two corporations then the two corporations would be associated as a result
of ITA 256(1)(b).

In this case the shares of each corporation are owned by four individuals. You could identify
numerous controlling groups for Jukebox that exceed 50% (e.g., Jewel & Ming/Roger &
Ming/all four, etc). You could do the same for Vending; however, since association of the two
corporations is only possible if the “same group of persons” has sufficient shares of both
corporations, you can see that the only possibility is the group of Jewel, Roger, and Kari.
That group together own 55% of the shares of Jukebox and 68% of the shares of Vending.
As a result the two corporations are associated as a result of ITA 256(1)(b).

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Part D
Each of the ITA 256(1) paragraphs covers a very specific situation. ITA 256(1)(a) requires
that one corporation control another while ITA 256(1)(b) requires that two corporations are
controlled by the same person or group of persons. When none of these situations exist you
must look to ITA 256(1)(c), (d), or (e). ITA 256(1)(c) applies where one corporation is
controlled by one person and the other corporation controlled by a different person, The
provision, however, requires that the two separate persons are related and one of them owns
at least 25% of the shares of the other corporation. It is this last 25% cross-ownership
condition that prevents us from associating Fowl and Capon.

ITA 256(1)(e) applies where two corporations are controlled by related groups of persons.
Since only Pullet is controlled by a related group of persons, ITA 256(1)(e) cannot be used to
associate any of the three companies.

This leaves us with ITA 256(1)(d), which applies to associate two corporations where one is
controlled by one person and the person who controls that one corporation is related to each
member of a group of persons that controls the other corporation. In general this latter test
would be met if that other corporation were controlled by a related group. The last condition
requires that the single person controlling the first corporation owns 25% or more of the
shares of that other corporation. The result is that ITA 256(1)(d) could be helpful in
determining whether (1) Fowl and Pellet are associated and (2) whether Capon and Pullet
are associated.

Fowl and Pullet

Fowl Ltd. and Pullet Ltd. are associated under ITA 256(1)(d) because:
 Rainer controls Fowl;
 Rainer is related to each member of a group (all four family members or any three of
them since their combined shares would equal 75%) that controls Pullet. Technically
a person cannot be related to themselves, however a special rule in ITA 256(1.5)
deems a person to be related to themselves, and
 Rainer owns at least 25% of the shares of Pullet.

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Capon and Pullet

In similar fashion, Capon and Pullet are associated under ITA 256(1)(d) because:
 Beatrice controls Capon;
 Beatrice is related to each member of a group (all four family members or any three
of them since their combined shares would equal 75%) that controls Pullet; and
 Beatrice owns at least 25% of the shares of Pullet.

Fowl and Capon

As explained above, none of the paragraphs of ITA 256(1) apply to associate Fowl and
Capon. When this occurs it is important to look to ITA 256(2), which applies to associate two
corporations when ITA 256(1) does not apply and the two corporations being analyzed are
each associated with a third company. When these conditions are met ITA 256(2) deems the
two corporations to be associated to each other. Since Fowl and Capon are each associated
with Pullet and are not associated with each other under ITA 256(1), then ITA 256(2) deems
them to be associated.

Note – elective option: Pullet can elect to break the association between Fowl and
Capon. The election however does not break the separate association between Fowl
and Pullet and Capon and Pullet. Because of that continuing association the Adjusted
Aggregate Investment Income and Taxable Capital Employed in Canada of Pullet will
be added separately to each of Fowl and Capon that could result in a reduction to the
small business limit of both Fowl and Capon.

Part E
There are two ways to approach this problem, both of which will lead to the conclusion that the
two companies (McLain and Chatelaine) are associated as a result of ITA 256(1)(b) since both
are controlled by the same person, Ryan McLain.
The first approach relies on a concept of control and not on a specific associated corporation
rule. This concept looks to identify who controls a corporation. In this instance Ryan controls
McLain with a 62% shareholding. The concept establishes that if a person controls a corporation
they also control any shares owned by that same corporation. Since Ryan controls McLain he is
considered to control the 18% shares owned by McLain in Chatelaine. Adding the 18% to
his personally owned shares of 40% in Chatelaine gives him control over 58% of the Chatelaine
shares and therefore he controls both corporations.
The second approach looks to apply the associated corporation rule in ITA 256(1.2)(d) that
would deem Ryan to own shares of Chatelaine that are owned by McLain equal to the
proportionate fair market value (FMV) of his interest in McLain. Based upon the facts, the
application of that rule would deem Ryan to own 11.16% [(62%)(18%)] shares of Chatelaine.
Adding the 11.16% shares to the shares he personally owns of 40% results in him being
considered to own 51.16% of the shares of Chatelaine. The result is that he would then have
control of both corporations and ITA 256(1)(b) would apply to associate the two corporations.
Either approach works to associate the two companies; however, if we decrease the Chatelaine shares
owned by McLain to 16% the second approach would no longer work since the combined percentage
would be 49.92% [(62%)(16%)] whereas the first approach would continue to cause the two
companies to be associated. This is why the first approach is preferable in these type of situations.

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Part F
Andrews Ltd. and Statler Ltd. are associated corporations. There are two ways to associate
the two companies.

ITA 256(1)(c) applies to associate two corporations if (1) each company is controlled by one
person;
(2) the two persons are related to each other; and (3) either of the two own at
least 25% of the shares of the corporation they do not control. In this case Melissa controls
Andrews with 75% and Jeremy controls Jeremy with 75%. Melissa and Jeremy are related to
each other as they are brother and sister. Each of Melissa and Jeremy owns 25% of the
shares of the other corporation (even though the conditions only require one of them to do
so). The result is that all of the conditions have been met and the two companies are
associated because of ITA 256(1)(c).

The two companies would also be associated because of ITA 256(1)(b), given that the same
“group of persons” being Melissa and Jeremy control both companies. Note that had both
Melissa and Jeremy owned 24% of the other corporation’s shares such that the shareholding
for each was 76/24 instead of 75/25, then ITA 256(1)(c) would not have applied but ITA
256(1)(b) would continue to associate the two corporations as they would be considered the
”same group of persons”.

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Solution to Assignment Problem Fourteen-4

Case A
Sarnen Inc. and Barxo Ltd. are associated under ITA 256(1)(b) as they are both controlled
by Mr. Bond.
As Mr. Bond controls Sarnen Inc. through his 55% holding of the company’s shares, he
controls that company’s 40% interest in Barxo Ltd. However, as Mr. Bond does not control
Hax Ltd., his indirect interest of Barxo through Hax is the product of the two ownership
percentages. In addition, he is deemed to own the shares held by his 10 year old daughter.
Mr. Bond’s indirect control of Barxo Ltd. is calculated as follows:

Indirect Interest Through Sarnen 40.0%

Indirect Interest Through Hax [(14%)(54%)] 7.6%
Minor Daughter’s Holdings 6.0%
Total Interest = Control 53.6%

Hax and Barxo are also associated by ITA 256(1)(a) since Hax owns more than 50%
of the shares of Barxo.

Finally Hax and Sarnen are associated as a result of ITA 256(2) since they are each
associated to the same third company, Barxo. An election would be required by
Barxo to break the associated connection between Hax and Sarnen.

Case B
Mr. Jones and Mr. Long are a group that controls Anix Inc. However, as a group they do not
control Brex Ltd., as Mr. Knight (not a member of the group that controls Anix Inc.) and owns
50% of the shares. Therefore, Anix Inc. and Brex Ltd. are not associated.

Case C
Sam Scully, by virtue of his 60% ownership, controls Scully Inc. A related person, Susan
Wilson, controls Wilson Ltd. Susan also owns more than 25% of Scully Inc. Given this, Scully
Inc. and Wilson Ltd. are associated under ITA 256(1)(c). In addition, they would also be
considered associated under ITA 256(1)(b) as both companies are controlled by the same
group (e.g. they each own shares in both corporations that together exceed 50%).

Case D
The Lartch sisters are related. In addition, under ITA 256(1.5) a person who owns shares in
two or more corporations shall be, as a shareholder of one of the corporations, deemed to be
related to him or herself as a shareholder of the other corporation(s).
Given this, JL Inc. and Meadow Ltd. are associated under ITA 256(1)(d). Joan Lartch
controls JL Inc., is a member of a related group (Joan and Sarah Lartch) that controls
Meadow Ltd., and owns more than 25% of the shares of Meadow Ltd.
In similar fashion, SL Inc. is associated with Meadow Ltd. under ITA 256(1)(d). Sarah Lartch
controls SL Inc., is a member of a related group (Joan and Sarah Lartch) that controls

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Meadow Ltd., and owns more than 25% of the shares of Meadow Ltd.
Based on these associations, JL Inc. and SL Inc. are associated under ITA 256(2), as they
are both associated with a third corporation, Meadow Ltd. Meadow Ltd could break the
association between JL Inc. and SL Inc. with an electing not to be associated with each of
the two corporations. Note that the election does not sever the associated between SL and
Meadow and between JL and Meadow.

Case E
Jomay Inc. is controlled by a group that is made up of John, May, and Beth Carp. Besa Ltd.
is controlled by a group that is made up of Serge and Beth Carp. Each of the members of
one of the related groups is related to all of the members of the other related group. Finally,
one person who is a member of both related groups (Beth Carp) owns more than 25% of
each corporation. Jomay Inc. and Besa Ltd. are associated under ITA 256(1)(e).

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Solution to AP 13-2
Part A - Refundable Portion Of Part I Tax Payable
The interest earned on the investment in temporary cash balances required for the business
is considered incidental to the business and is therefore active business income and not
investment income. The aggregate investment income is equal to the taxable capital gain of
$9,000
The Part I refundable tax is the least of the following amounts:
Aggregate Investment Income $ 9,000
Rate 30 – 2/3%
ITA 129(4)(a)(i) $ 2,760
Taxable Income $ 62,800
Amount Eligible For Small Business Deduction (40,000)
Total $ 22,800
Rate 30 – 2/3%
ITA 129(4)(a)(ii) $ 6,992
ITA 129(4)(a)(iii) Part I Tax Payable – Given $ 12,560

The refundable portion of Part I tax is equal to $2,760, which is the least of the preceding
three amounts.

Part B - Part IV Refundable Tax

The Part IV Tax Payable for Burton Investments Ltd. is calculated as follows:
Puligny’s Dividend Refund $12,500
Burton’s Percentage Of Ownership 52%
Part IV Tax Payable On Puligny’s Non-Eligible Dividends $ 6,500
Part IV Tax Payable On Eligible Dividends From
Bank Of Montreal [(38 – 1/3%)($13,480)] 5,167
Part IV Tax Payable $11,667

Part C - RDTOH Balances

The December 31, 2021, balance in the Eligible RDTOH is as follows:

Opening Balance $Nil

Part IV Tax On Eligible Dividends 5,167
Eligible RDTOH - December 31, 2021 $5,167

The December 31, 2021, balance in the Non-Eligible RDTOH is as follows:

Opening Balance $14,426

Part I Refundable Tax 2,760
Part IV Tax On Puligny Non-Eligible Dividends 6,500
Non-Eligible RDTOH - December 31, 2021 $23,686

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Part D - Dividend Refund
The maximum amount of dividends that can be designated as eligible is limited by Burton’s
GRIP balance at the end of 2021. We know that the initial 2021 balance here was nil and
that the $13,480 of eligible dividends received from the Bank of Montreal shares would be
added. There is also the possibility that there would a further amount added as a result of
that part of the corporation’s active business income in excess of that available for the small
business deduction. (This amount cannot be determined based on the information in the
problem.) As a result the balance in GRIP will be, at a minimum, $13,480.
However, given Burton's policy of designating dividends as eligible only when a dividend
refund is available, a further addition to the GRIP is not be relevant in this problem. A
dividend refund will only be available for the balance in the Eligible RDTOH, an amount of
$5,167. ($13,479 ÷ 38 – 1/3%) Based on this, the eligible dividend designation will be for
$13,479, the amount of the eligible dividends received. The refund on these dividends will be
$5,167 ($13,479 ÷ 38 – 1/3%).
The remaining $9,021 ($22,500 – $13,479) will be non-eligible.
The refund on these non-eligible dividends would be $3,458, the lesser of:
 $3,458 [(38 – 1/3%)($9,020)]; and
 $23,686, the balance in the Non-Eligible RDTOH.

The total dividend refund would be as follows:

Dividend Refund On Eligible Dividends $5,167
Dividend Refund On Non-Eligible Dividends 3,458
Total Dividend Refund $8,625

The total dividend refund of $8,625 is 38 – 1/3% of the total dividend of $22,500, and the
result is a remaining amount of $20,228 ($23,686 – $3,458) in the Non-Eligible RDTOH and
a remaining nil balance in the Eligible RDTOH for 2022.

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Solution to AP 13-3
Case 1
Dividend Refund On Eligible Dividends The total dividends of $250,000 are in excess of
the GRIP balance of $150,000. As a result, the maximum eligible dividend designation would
be equal to the GRIP balance. The refund on an eligible dividend of $150,000 is the lesser
of:
 $57,500 (38 – 1/3% of the $150,000 of eligible dividends paid in 2021)
 $38,333 (the balance in the Eligible RDTOH on December 31, 2021)
The lesser figure is the $38,333 balance in the Eligible RDTOH. With $150,000 of dividends
designated as eligible, the remaining $100,000 ($250,000 – $150,000) would be non-eligible.
Dividend Refund On Non-Eligible Dividends Component 1 of the refund on non-eligible
dividends would be the lesser of:

 $38,333 (38 – 1/3% of the $100,000 ($250,000 – $150,000) of non-eligible dividends

paid in 2021)
 $76,667 (the balance in the Non-Eligible RDTOH on December 31, 2021)
As there is no excess of $38,333 [(38 – 1/3%)($100,000)] over the $76,667 balance in the
Non-Eligible RDTOH, Component 2 would be nil.

Total Dividend Refund

The total dividend refund would be as follows:
Dividend Refund On Eligible Dividends $38,333
Dividend Refund On Non-Eligible Dividends 38,333
Total Dividend Refund $76,666

A full dividend refund on a $250,000 dividend payment would have been $95,833 [(38 –
1/3%)($250,000)], $19,167 ($95,833 – $76,666) less than the actual refund. This reflects the
fact that no refund was available on $50,000 ($19,167 ÷ 38 – 1/3%) of the eligible dividends
paid.

Had the corporation insisted on maximizing the dividend refund it should only have paid an
eligible dividend sufficient to fully recover all of its eligible RDTOH. This would have required
designating an eligible dividend of $100,000 only which when multiplied by 38 – 1/3% would
equal the balance in its eligible RDTOH at year end. The result would be that the non-eligible
dividend would account for $150,000 of the $250,000 in taxable dividends paid in 2021. The
calculations would have been as follows:

Dividend Refund On Eligible Dividends The refund on $100,000 of eligible dividends

would be the lesser of:
 $38,333 (38 – 1/3% of the $100,000 of eligible dividends paid in 2021)
 $38,333 (the balance in the Eligible RDTOH on December 31, 2021)

Dividend Refund On Non-Eligible Dividends Component 1 of the refund on non-eligible

dividends would be the lesser of:

Copyright © 2022 Pearson Education Inc. 13-30

  $57,500 (38 – 1/3% of the $150,000 ($250,000 – $100,000) of non-eligible dividends
paid in 2021)
 $76,667 (the balance in the Non-Eligible RDTOH on December 31, 2021)
As there is no excess of $57,500 [(38 – 1/3%)($150,000)] over the $76,667 balance in the
Non- Eligible RDTOH, Component 2 would be nil.
Total Dividend Refund
The total dividend refund would be as follows:
Dividend Refund On Eligible Dividends $38,333
Dividend Refund On Non-Eligible Dividends 57,500
Total Dividend Refund $95,833

In comparison to the first situation this strategy maximizes the dividend refund which is equal
to $95,833 [(38 – 1/3%)($250,000)],

Case 2
Dividend Refund On Eligible Dividends The GRIP balance would allow $400,000 of the
$500,000 of dividends paid to be designated as eligible. However, the Eligible RDTOH will
only support a dividend of $250,000 ($95,833 ÷ 38–1/3%). The policy of only designating
dividends as eligible when a refund is available will limit the eligible designation to $250,000.
The dividend refund on this will be $95,833, the lesser of:

 $95,833 (38 – 1/3% of the $250,000 of eligible dividends paid in 2021)

 $95,833 (the balance in the Eligible RDTOH on December 31, 2021)

Dividend Refund On Non-Eligible Dividends Component 1 of the refund on non-eligible

dividends would be the lesser of:

 $95,833 (38 – 1/3% of the $250,000 ($500,000 – $250,000) of non-eligible dividends

paid in 2021)
 $134,167 (the balance in the Non-Eligible RDTOH on December 31, 2021)
As there is no excess of $95,833 [(38 – 1/3%)($250,000)] over the $134,167 balance in the
Non- Eligible RDTOH, Component 2 would be nil.

Total Dividend Refund

The total dividend refund would be as follows:

Dividend Refund On Eligible Dividends $ 95,833

Dividend Refund On Non-Eligible Dividends 95,833
Total Dividend Refund $191,666

Note that this $191,666 is equal to 38 – 1/3% of the total taxable dividend of $500,000.
This indicates that the dividend refund has been maximized.

Copyright © 2022 Pearson Education Inc. 13-31

Solution to AP 13-5
Part A
The calculation of Net Income For Tax Purposes and Taxable Income would be as follows:
Accounting Net Income $535,568
Additions:
Amortization Expense (Income Statement) $125,489
Charitable Donations (Income Statement) 27,000
Item 1 - Non-Deductible Meals And Entertainment
(50% of $22,490) 11,245
Item 2 - Interest On Late Instalments (Note One) 1,240
Item 3 - Bond Discount Amortization 3,850
Item 4 - See Note Two Nil
Item 5 - Golf Membership Fees 7,285
Item 6 - Articles Of Incorporation Amendment Costs 11,482
Item 7 - See Note Two
Recapture Of CCA ($700,000 – $582,652) 117,348
Taxable Capital Gain On Land
[(1/2)($80,000 – $50,000)] 15,000
Taxable Capital Gain On Building
[(1/2)($770,000 – $700,000)] 35,000
Taxable Capital Gain On Class 8
[(1/2)($210,000 – $185,000)] 12,500
Item 7 - Accounting Loss On Class 10
($98,000 – $43,000) 55,000
Item 10 - Taxable Capital Gain On Investments
[(1/2)($11,000)] 5,500 427,939
Deductions: $963,507
Item 7 - Accounting Gain On Real Property
($850,000 – $696,400) ($ 153,600)
Item 7 - Accounting Gain On Class 8
($210,000 – $185,000) (25,000)
Capital Cost Allowance (Note Two) (228,424)
Item 7 - Class 10 Terminal Loss (Note Two) (32,348)
Item 9 - Landscaping Costs (18,500)
Item 10 - Accounting Gain On Investments (11,000) (468,872)
Net Income For Tax Purposes $494,635
Dividends Received (Income Statement) (123,400)
Charitable Donations (Income Statement) (27,000)
Item 13 - Net Capital Loss Carry Forward Deducted (23,000)
Item 13 - Non-Capital Loss Carry Forward Deducted (36,400)
Taxable Income $ 284,835

Note One While there is a specific prohibition against the deduction of interest on late
income tax instalments (ITA 18(1)(t)), there is no equivalent restriction on interest due
to late municipal taxes therefore these amounts are deductible.
Note Two The cost of the goodwill is added to Class 14.1 where it will be subject to
the usual CCA procedures.

Copyright © 2022 Pearson Education Inc. 13-32

Maximum CCA and other related inclusions and deductions can be calculated as
follows:
Old Building
January 1, 2021, Class 1 Balance $582,652
Disposition - Lesser Of:
• Proceeds = $850,000 – $80,000 = $770,000
• Capital Cost = $700,000 (700,000)
Negative Ending Balance ($117,348)
Recapture Of CCA 117,348
January 1, 2022, UCC Balance Nil
Land Building
POD $80,000 $770,000
ACB (50,000) (700,000)
Capital Gain $30,000 $ 70,000
Inclusion Rate 1/2 1/2
Taxable Capital Gain $15,000 $ 35,000

New Building
Capital Cost ($923,000 – $86,000) $ 837,000
AccII Adjustment 418,500
CCA Base $1,255,500
CCA [(6%)($1,255,500)] (75,330)
Subtotal $1,180,170
AccII Adjustment Reversal (418,500)
January 1, 2022, UCC Balance $ 761,670

Class 8

January 1, 2021, Class 8 Balance $ 575,267

Acquisitions 226,000
Dispositions - Lesser Of:
• Proceeds Of Disposition = $210,000
• Capital Cost = $185,000 (185,000)
AccII Adjustment [(1/2)($226,000 – $185,000)] 20,500
CCA Base $ 636,767
CCA At 20% (127,353)
Subtotal $ 509,414
AccII Adjustment Reversal (20,500)
January 1, 2022, UCC Balance $ 488,914
POD $ 210,000
ACB (185,000)
Capital Gain $ 25,000
Inclusion Rate 1/2
Taxable Capital Gain $ 12,500

Copyright © 2022 Pearson Education Inc. 13-33

 Class 10
January 1, 2021, Class 10 Balance $75,348
Disposition - Lesser Of:
• Proceeds = $43,000 ( 11,000)
• Capital Cost = $142,000 (43,000)
Positive Ending Balance - No Assets Left In Class $32,348
Terminal Loss (32,348)
January 1, 2022, UCC Balance Nil

Class 13
January 1, 2021, Class 13 Balance $88,600
2021 CCA:
2016 Expenditures ($110,000 ÷ 10 Years) (11,000)
2018 Expenditures ($44,800 ÷ 8 Years) (5,600)
January 1, 2022, UCC Balance $72,000

Class 14.1

January 1, 2021, Class 14.1 Balance Nil

Additions ($110,400 + $11,482) $121,882
AccII Adjustment 60,941
CCA Base $182,823
CCA [(5%)($182,823)] (9,141)
AccII Adjustment Reversal (60,941)
January 1, 2022, UCC $112,741

Summary Of CCA Results The maximum 2021 CCA and January 1, 2022, UCC balance
can be summarized as follows:

Class Maximum CCA UCC

Class 1 - Old Building
(Recapture = $117,348) Nil Nil
Class 1 - New Building $ 75,330 $761,670
Class 8 127,353 488,914
Class 10 (Terminal Loss = $32,348) Nil Nil
Class 13 16,600 72,000
Class 14.1 9,141 112,741
Total CCA $228,424

Copyright © 2022 Pearson Education Inc. 13-34

Part B - Part I Tax Payable
The Part I federal Tax Payable can be calculated as follows:

Base Amount Of Part I Tax [(38%)($284,835)] $108,237

Federal Tax Abatement [(10%)($284,835)] (28,484)
Small Business Deduction (Note Three) (47,500)
Additional Refundable Tax On Investment Income (Note Four) 3,716
Manufacturing And Processing Deduction (Note Five) Nil
General Rate Reduction (Note Six) Nil
Part I Tax Payable $ 35,969

Note Three The small business deduction would be equal to 19% of the least of:
1. Active Business Income (Given - Item 15) $300,289
2. Taxable Income (no foreign tax credit adjustments) $284,835
3. Allocated Annual Business Limit (Given) $250,000

The least of the three figures is $250,000 and 19% of this amount is $47,500 .

Note Four The Aggregate Investment Income is calculated as follows:

Taxable Capital Gain On Land $15,000

Taxable Capital Gain On Building 35,000
Taxable Capital Gain On Class 8 property 12,500
Taxable Capital Gain On Investments 5,500
2018 Net Capital Loss Deducted (23,000)
Aggregate Investment Income $45,000

Given this, the ITA 123.3 tax on aggregate investment income (ART) is 10 – 2/3% of the
lesser of:
1. Aggregate Investment Income $45,000

2. Taxable Income $284,835

Less: Amount Eligible For The SBD (250,000) $34,835

The lesser of these amounts is $34,835 and 10 – 2/3% of this amount is $3,716.

Note Five The manufacturing and processing profits deduction is nil as it is based on
the lesser of:

1. Canadian M&P Profits (Given - Item 16) $ 43,000

Deduct: Amount Eligible For SBD (250,000) Nil

2. Taxable Income $284,835

Deduct:
Amount Eligible For The SBD (250,000)
Aggregate Investment Income (Note Four) (45,000) Nil

Copyright © 2022 Pearson Education Inc. 13-35

Given these calculations, the M&P deduction would be nil.
Note Six The general rate reduction is calculated as follows:

Taxable Income $284,835

Amount Eligible For The SBD (250,000)
Aggregate Investment Income (Note Four) (45,000)
Full Rate Taxable Income Nil

Part C - Refundable Part I Tax

Using amounts calculated in Part B, the amount of refundable Part I tax is $10,683, the least
of three amounts, calculated as follows:
• Amount Under ITA 129(4)(a)(i) [(30 – 2/3%)($45,000)] $13,800
• Amount Under ITA 129(4)(a)(ii) [(30 – 2/3%)($284,835 – $250,000)] $10,683
• Amount Under ITA 129(4)(a)(iii) Part I Tax Payable $35,969
The refundable Part I tax for 2020 would be $10,683.

Part D - Part IV Tax Payable

The Part IV tax would be calculated as follows:

Part IV Tax On Eligible Dividends [(38 – 1/3%)($62,300)] $23,882

Part IV Tax On Connected Company’s
Non-Eligible Dividends [(80%)($15,000)] 12,000
Part IV Tax On Wholly Owned Subsidiary’s
Non-Eligible Dividends Nil
Total Part IV Tax $35,882

Since Oland is connected to its wholly owned subsidiary, any dividends received from the
subsidiary would only create a Part IV tax liability if it had been entitled to a dividend refund
in the year the dividend was paid.

Part E - GRIP Balance

The December 31, 2021, GRIP balance can be calculated as follows:

GRIP Balance At Beginning Of 2021 $162,345

Taxable Income $284,835
Income Eligible For SBD (250,000)
Lesser Of:
• Taxable Income = $284,835
• Agg. Investment Income = $45,000 (45,000)
Adjusted Taxable Income $ Nil
Rate 72% Nil
Eligible Dividends Received 62,300
Eligible Dividends Designated in 2020 (12,350)
GRIP Balance At End Of 2021 $212,295

The eligible dividends paid during 2021 will be deducted from the GRIP in 2022.

Copyright © 2022 Pearson Education Inc. 13-36

Part F - RDTOH Balances
The December 31, 2021, balances in the Eligible and Non-Eligible RDTOH accounts would
be as follows:
Opening Balance $39,660
Part IV Tax On Eligible Dividends [(38 – 1/3%)($62,300)] 23,882
Eligible RDTOH - December 31, 2021 $63,542
Opening Balance $ Nil
Part I Refundable Tax 10,683
Part IV Tax On Connected Company’s
Non-Eligible Dividends [(80%)($15,000)] 12,000
Non-Eligible RDTOH - December 31, 2021 $22,683

Part G - Dividend Refund

Given the corporation’s GRIP balance, there is no problem in designating $26,300 of the
$42,300 in dividends paid as eligible.
The remaining $16,000 ($42,300 – $26,300) would be non-eligible dividends. The refund on
the eligible dividends would be $10,082, the lesser of:

 $10,082 [(38 – 1/3%)($26,300)]; and

 $63,542, the balance in the Eligible RDTOH.

The refund on the non-eligible dividends would be $6,133, the lesser of:

 $6,133 [(38 – 1/3%)($16,000)]; and

 $22,683, the balance in the Non-Eligible RDTOH. The total dividend refund would be as
follows:

Dividend Refund On Eligible Dividends $10,082

Dividend Refund On Non-Eligible Dividends 6,133
Total Dividend Refund $16,215

Part H - Net Federal Tax Payable

The minimum federal Tax Payable can be calculated as follows:
Part I Tax (Part B) $35,969
Part IV Tax On Dividends Received (Part D) 35,882
Dividend Refund (Part G) (16,215)
Federal Tax Payable $55,636

Copyright © 2022 Pearson Education Inc. 13-37

Solution to AP 13-6
Part A - Part I Tax Payable
The calculation of Fancom’s Part I Tax Payable would be as follows:
Base Amount Of Part I Tax [(38%)($103,100)] $39,178
Federal Tax Abatement [(10%)(85%)($103,100)] (8,764)
Small Business Deduction (Note 1) (9,645)
Additional Refundable Tax On Investment Income (Note 2) 5,583
Manufacturing And Processing Profits Deduction (Note 3) Nil
General Rate Reduction (Note 4) Nil
Foreign Business Income Credit (Amount Withheld) (6,120)
Foreign Non-Business Tax Credit (Amount Withheld) (7,800)
Part I Tax Payable $12,432

Note 1 The small business deduction is 19% of the least of the following three
amounts:

1. Active Business Income (Given) $ 328,000

2. Taxable Income $103,100

Deduct:
[(100/28)($7,800)] Foreign Non-Business Tax Credit (27,857)
[(4)($6,120)] Foreign Business Tax Credit (24,480) $ 50,763

3. Business Limit $ 500,000

The lowest of these figures is the adjusted taxable income of $50,763, and this gives a small
business deduction of $9,645 [(19%)($50,763)].

Note 2 The Aggregate Investment Income is calculated as follows:

Taxable Capital Gains $16,500
Net Capital Loss Carry Forward Deducted (13,900)
Interest On Long-Term Investments 49,900
Foreign Non-Business Income 31,200
Aggregate Investment Income $83,700

The ITA 123.3 additional refundable tax (ART) is 10 – 2/3% of the lesser of:

1. Aggregate Investment Income $83,700

2. Taxable Income $103,100
Deduct: Amount Eligible For The SBD (50,763) $52,337

The ITA 123.3 tax on aggregate investment income is $5,583 [(10 – 2/3%)($52,337)].

Copyright © 2022 Pearson Education Inc. 13-38

 Note 3 The manufacturing and processing profits deduction is nil. It is equal to 13% of
the lesser of:

1. Canadian M&P Profits (Given) $152,000

Deduct: Amount Eligible For SBD (50,763) $101,237
2. Taxable Income $103,100
Deduct:
Amount Eligible For The SBD (50,763)
[(4)($6,120)] Foreign Business Tax Credit (24,480)
Aggregate Investment Income (Note 2) (83,700) Nil

Given these calculations, the M&P deduction would be nil.

Note 4 The general rate reduction would also be nil, as the full rate Taxable Income is
nil, calculated as follows:

Taxable Income $103,100

Amount Eligible For The SBD (50,763)
Aggregate Investment Income (Note 2) (83,700)
Full Rate Taxable Income Nil

Part B - Refundable Portion Of Part I Tax

The refundable portion of Part I tax would be the least of the following three amounts:
Aggregate Investment Income (Note 2) $ 83,700
Rate 30 – 2/3%
$ 25,668
Deduct Excess Of:
Foreign Non-Business Tax Credit ($7,800)
Over 8% Of Foreign Non-Business Income
[(8%)($31,200)] 2,496 (5,304)
Amount Under ITA 129(4)(a)(i) $ 20,364

Taxable Income $103,100

Deduct:
Amount Eligible For The Small Business Deduction (50,763)
[(100 ÷ 38 – 2/3)($7,800)] Foreign Non-Business Tax Credit (20,172)
[(4)($6,120)] Foreign Business Tax Credit (24,480)
Total $ 7,685
Rate 30 – 2/3%
Amount Under ITA 129(4)(a)(ii) $ 2,357

Amount Under ITA 129(4)(a)(iii) = Part I Tax Payable $ 12,432

The refundable amount of Part I tax is $2,357, the amount determined under ITA
129(4)(a)(ii).

Copyright © 2022 Pearson Education Inc. 13-39

Part C - Part IV Tax Payable
The Part IV Tax Payable on the $21,000 in eligible dividends received would be $8,050
[($21,000)(38 – 1/3%)].
Part D - GRIP Balance
Since Taxable Income is greater than Aggregate Investment Income, the December 31,
2021, GRIP balance would be determined as follows:

Opening GRIP Balance $49,360

Taxable Income $103,100
Income Eligible For SBD (50,763)
Lesser Of:
• Taxable Income = $103,100
• Agg. Investment Income = $83,700 (83,700)
Adjusted Taxable Income Nil
Rate 72% Nil
Eligible Dividends Received 21,000
Eligible Dividends Designated in 2020 (8,700)
GRIP Balance At End Of 2021 $61,660

The eligible dividends paid during 2021 will be deducted from the GRIP in 2022.

Part E - RDTOH Balances

The December 31, 2021, balances in the Eligible and Non-Eligible RDTOH accounts would
be as follows:

Opening Balance $14,000

Part IV Tax On Eligible Dividends [(38 – 1/3%)($21,000)] 8,050
Eligible RDTOH - December 31, 2021 $22,050

Opening Balance $ Nil

Part I Refundable Tax 2,357
Non-Eligible RDTOH - December 31, 2021 $ 2,357

Copyright © 2022 Pearson Education Inc. 13-40

Part F - Dividend Refund
Given the corporation’s GRIP balance, there is no problem in designating $49,300 of the
$223,200 in dividends paid as eligible. The remaining dividends of $173,900 ($223,200 –
$49,300) would be non-eligible.

The refund on the eligible dividends would be $18,898, the lesser of:

 $18,898 [(38 – 1/3%)($49,300)]; and

 $22,050, the balance in the Eligible RDTOH.

Component 1 of the refund on these dividends would be $2,357 the lesser of:

 $66,662 [(38 – 1/3%)($173,900)]; and

 $2,357, the balance in the Non-Eligible RDTOH

With respect to Component 2, there is an excess of 38 – 1/3% of the non-eligible dividends

over the balance in the Non-Eligible RDTOH. The amount of this excess is $64,305 [$66,662
– $2,357]. Given this, Component 2 would be equal to $3,152 the lesser of:

 $64,305, the amount of the excess; and

 $3,152 ($22,050 – $18,898).

The refund on non-eligible dividends would be $5,509 ($2,357 + $3,152).

The total dividend refund would be as follows:
Dividend Refund On Eligible Dividends $18,898
Dividend Refund On Non-Eligible Dividends 5,509
Total Dividend Refund $24,407

Copyright © 2022 Pearson Education Inc. 13-41