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BCA1 7002
Nov 6, 2023
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Question 45 (42 minutes) [Chapter 15] Kitchener Pant Sales Ltd. (KPSL), a retailer of men's ready-to-wear pants, commenced operations in 2020 with a December 31 year-end. The retail market is highly competitive. Due to KPSL's lack of funds for adequate advertising and lack of good supply contracts, the corporation incurred losses in its first two years of operations as follows: non-capital losses net capital losses December 31, 2020 $200,000 Nil December 31, 2021 250,000 $10,000 On October 1, 2022, 55% of the common shares of KPSL were purchased by Frugal's Ltd. (FL). FL has been very successful for a number of years in the business of wholesaling and retailing men's and women's jeans. FL has two divisions, one for wholesaling and one for retailing. FL intends to inject additional capital and retrain the management of KPSL. FL is confident that with its expertise and track record it will be able to turn KPSL's business around and make it profitable within two years. A financial statement was prepared for KPSL for the nine months ended September 30, 2022. From this statement, it was determined that KPSL had incurred a business operating loss for tax purposes of $54,000 for the period. The financial statement and tax records also revealed the following values of the assets owned by KPSL on September 30, 2022: Cost UCC FMV Marketable securities $11,000 N/A $ 5,000 Inventory 50,000 N/A 45,000 Land 550,000 N/A 750,000 Building 95,000 $75,000 115,000 Store fixtures and equipment 35,000 35,000 27,000 On November 15, 2022, FL transferred its retailing division to KPSL which continued to carry on its business of retailing men's ready-to-wear pants. At its year ended December 31, 2022, KPSL had net income of $282,000, all of which was earned in the period after September 30, 2022. The income was derived from the following sources: men's ready-to-wear pants $(75,000) men's and women's jeans 350,000 taxable capital gains on marketable securities 7,000 $282,000 In the 2022 taxation year, it is expected that KPSL will earn $600,000 of which $100,000 will be from the retailing of men's ready-to-wear pants.
Required: (a) Compute taxable income and the appropriate loss balances, ACB, and UCC amounts under the following assumptions: (i) full advantage of all elections and options is taken, and (ii) a minimum amount is elected under paragraph 111(4)( e ) to utilize expiring losses. (36 minutes) (b) Comment on the deductibility of losses for the taxation years ended December 31, 2022 and 2023, assuming that men's and women's jeans retailing is considered to be similar to men's ready-to-wear pants retailing, and indicate with reasons which of the two options in (a) would be better in this situation. Relate your comments to the specific facts of this case. (6 minutes) Show all calculations whether or not necessary to the final answer.
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