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Chapter 17

ACTG 3120 Chapter Notes - Chapter 17: Tax Avoidance, Arrack, Deferred Tax

Course Code
ACTG 3120
Elizabeth Farrell

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Chapter 17: Tax Losses
If a taxable loss exists, the corporation is entitled to offset the loss against past and future
taxable income as follows:
the loss can be carried back for 3 years for a refund of tax previously paid
any remaining loss can be carried forward for up to 20 years to reduce tax that would
otherwise be payable
If the loss is not used through either of these methods, it expires and the benefit is lost
issues with carryforward
o amount of loss
o realization of loss
Key words
Tax loss - final number of taxable loss on tax return
Tax benefit - present and future benefit through reduction income taxes paid to
tax benefit = tax loss multiplied by tax rate
tax loss is gross amount; tax benefit is tax savings
Loss Carryforward
the income tax recovery is recognized on the I/S as a tax recovery in the loss year, if it is
probable that the losses will be able to be applied against future profits
entitles a company to recover income tax actually paid in the previous 3 years
Normally, the loss is carried back to the earliest (oldest) year first, and then applied to
succeeding years until the loss is used up.
The tax rate in the year of the loss is irrelevant for determining the amount of tax
recoverable via the carryback
Income Tax Receivable xx
Income Tax Expense xx
(Income Tax Recovery)
choice of carryback year
o company can maximize its recovery by applying more of the carryback to the
year with the highest tax rate
o there is no requirement in the Income tax Act to apply the carryback sequentially
o this is a viable strategy but a gamble because if a loss occurs in a later year, the
company can’t carryback to the full potential of a year
some years will be out of reach of the 3 year period
companies usually carryback sequentially for this reason
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