Buckwold and Kitunen, Canadian Income Taxation, 2010-2011 Ed.

CHAPTER 10
INDIVIDUALS: DETERMINATION OF TAXABLE INCOME
AND TAXES PAYABLE
Review Questions
1.

Briefly explain the difference, for individuals, between net income for tax purposes and taxable income.

2.

Explain the difference between an allowable capital loss and a net capital loss.

3.

Describe the tax treatment of net capital losses.

4.

Explain how a non-capital loss is created and how it is treated for tax purposes.

5.

Is it always worthwhile to utilize a net capital loss or a non-capital loss as soon as the opportunity arises? Explain.

6.

Is it possible for taxpayers to pay tax on more income than they actually earned over a period of …show more content…

[Note the carry forward for non-capital losses incurred in taxation years that end prior to March 22, 2004 is seven years. For noncapital losses incurred in taxation years ending between March 23, 2004 and December 31,
2005 the carry forward is ten years.]

R10-5.

It is not always desirable to utilize a loss carry-over as soon as possible. The decision to use the loss carry-over must consider both the timing and the amount of the tax savings that will occur. Obviously, the sooner they are used, the sooner after-tax cash flow will be increased.
However, consideration must also be given to the rates of tax that are applicable in the particular year. By forgoing the use of a loss carry-over in a year of relatively low income in order that it can be used in a subsequent year when income is anticipated to be high (and therefore subject to a higher rate of tax) the amount of tax saved will be greater. The decision to delay the use of a loss carry-over must consider both the time value of money as well as the degree of certainty for the anticipated earnings.

R10-6.

Yes, it is possible to pay tax on more earnings than were actually achieved over a period of time. Because non-capital losses have a defined and restricted time period in which they can be used, it is possible that they will remain unused indefinitely. For example, if a taxpayer earns taxable income before the three year carry-back and after the