For many years, Janice Virtue had been a professor of Business Ethics in the Faculty of Business at a major Canadian university. In 2018, while continuing to teach one section of Business Ethics, she established Virtue Ltd. (VL) in order to market her numerous publications and online courses involving the application of ethical principles to business situations.
While the company experienced a net operating loss of $128,000 in the fiscal period ending December 31, 2018, VL experienced rapidly increasing sales during 2019. Because Janice believed the improvement was indicative of the success to come, VL moved to larger premises that were purchased for $423,000. Of this total, $100,000 related to the land, with the remaining $323,000 allocated to the building. Because the building was to be used exclusively for non-residential purposes, it was allocated to a separate Class 1. In selling the previous premises in 2019, VL experienced an allowable capital loss on the land of $36,000. The building was sold at its UCC value.
The Net Income For Tax Purposes of VL for the year ending December 31, 2019, after deducting CCA on the Class 1 building, was $16,000. VL realized no capital gains during the year.
In early 2020, a joint CRA/RCMP operation found that Janice was the mastermind and guiding force behind a network of illegal aliens working throughout Canada. They were selling stolen weapons and preparing thousands of tax returns with large fictitious charitable donations. The fee for the tax return preparation was always paid for in cash, which was not reported to the CRA.
Various charges were laid and, while Janice remains free on bail, a court date has been set for September.
By May 2020, Janice’s lawyer indicated that it is likely that she will be convicted on multiple charges and will spend a significant amount of time in prison. She has also been advised by her employer that her contract to teach Business Ethics will not be renewed in the fall.
Given these circumstances, Janice decides to sell her VL shares. She finds a corporate buyer who is willing to acquire the shares on June 1, 2020. This buyer, Peerzon Books, is a large publicly traded Canadian company. The VL assets include the copyrights to all of her publications. While sales of these publications have fallen off precipitously in 2020, Peerzon believes its crack marketing team will be able to put the proper spin on Janice’s life experiences and sales will take off.
As this acquisition of control resulted in a deemed year end, VL prepared an Ipcome Statement for the period January 1, 2020, through May 31, 2020. This short fiscal period statement showed an additional business loss of $34,000 for this period. There were, however, no further capital losses.
On May 31, 2020, the values of the company’s assets were as follows:
|Asset||Cost||UCC||Fair Market Value|
|Vehicles (Class 10)||36,000||21,420||24,000|
VL will make all possible elections to minimize any net capital and non-capital loss balances. Shortly after taking over VL, Peerzon Books decided that some of the extra space in VL’s facilities could be used for manufacturing electronic reading devices. VL’s income (loss) from the two separate businesses for the period June 1 through December 31, 2020, and for the 2021 taxation year was as follows:
|Business||June 1 to Dec. 31, 2020||2021 Year|
|Electronic Reading Devices||123,000||(26,000)|
A. Determine the amount of the non-capital loss balance that will be carried forward after the acquisition of control by Peerzon Books, and calculate the amount of the net capital losses that will be lost as a result of this change in ownership, if any.
B. Indicate the maximum amount of the non-capital loss carry forward that can be used during the period June 1 through December 31, 2020, and the amount remaining at December 31, 2020.
C. Indicate the maximum amount of the non-capital loss carry forward that can be used during 2021, and the amount remaining at December 31, 2021.
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