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Chapter7Solutions

Chapter7Solutions - Chapter 7 Solution 2 Capital Property A...

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Chapter 7 - Solution 2 Capital Property A reserve is available [spar. 40(1)( a )(iii)] for that proportion of the gain that is attributable to proceeds not due in the year. This reserve is restricted to a five-year period and on a cumulative basis at least 20% of the gain must be brought into income each year. 2007 Proceeds of disposition ..................................................................................................... $ 160,000 Adjusted cost base ............................................................................................................ (4,0000) Gain .................................................................................................................................. $ 156,000 Reserve — lesser of: (a) $156,000 × $120,000/$160,000 = $117,000 (b) ( 1 / 5 × $156,000) × (4 – 0) = $124,800 .................................................................. (117,000) Capital gain ....................................................................................................................... $ 39,000 Taxable capital gain ( 1 / 2 ) ................................................................................................... $ 19,500 2008 Prior year’s reserve ........................................................................................................... $ 117,000 Reserve — lesser of: (a) $156,000 × $100,000/$160,000 = $97,500 (b) ( 1 / 5 × $156,000) × (4 – 1) = $93,600 .................................................................... (93,600) Capital gain ....................................................................................................................... $ 23,400 Taxable capital gain ( 1 / 2 ) ................................................................................................... $ 11,700 2009 Prior year’s reserve ........................................................................................................... $ 93,600 Reserve — lesser of: (a) $156,000 × $80,000/$160,000 = $78,000 (b) ( 1 / 5 × $156,000) × (4 – 2) = $62,400 .................................................................... (62,400) Capital gain ....................................................................................................................... $ 31,200 Taxable capital gain ( 1 / 2 ) ................................................................................................... $ 15,600 2010 Prior year’s reserve ........................................................................................................... $ 62,400 Reserve — lesser of (a) $156,000 × $60,000/$160,000 = $58,500 (b) ( 1 / 5 × $156,000) × (4 – 3) = $31,200 .................................................................... (31,200) Capital gain ....................................................................................................................... $ 31,200 Taxable capital gain ( 1 / 2 ) ................................................................................................... $ 15,600 2011 Prior year’s reserve ........................................................................................................... $ 31,200 Reserve — lesser of (a) $156,000 × $40,000/$160,000 = $39,000 (b) ( 1 / 5 × $156,000) × (4 – 4) = 0 ............................................................................... (0) Capital gain ....................................................................................................................... $ 31,200 Taxable capital gain ( 1 / 2 ) ................................................................................................... $ 15,600
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Note how the capital gain of $156,000 is effectively spread over the five years 2007 to 2011, inclusive [i.e., $39,000 + $23,400 + (31,200 × 3)]. Income Property (Inventory) A reserve is available [par. 20(1)( n )] for that proportion of the profit on the sale of land that is attributable to proceeds due after the year. 2007 Sale proceeds .................................................................................................................... $ 160,000 Cost ................................................................................................................................... (4,000) Profit ................................................................................................................................. $ 156,000 Reserve: $156,000 × $120,000/$160,000 = ...................................................................... (117,000) Income .............................................................................................................................. $ 39,000 2008 Prior year’s reserve ........................................................................................................... $ 117,000 Reserve: $156,000 × $100,000/$160,000 = ...................................................................... (97,500) Income .............................................................................................................................. $ 19,500 2009 Prior year’s reserve ........................................................................................................... $ 97,500 Reserve: $156,000 × $80,000/$160,000 = ........................................................................ (78,000) Income .............................................................................................................................. $ 19,500 2010 Prior year’s reserve ........................................................................................................... $ 78,000 Reserve: limited by ssec. 20(8) ......................................................................................... (0) Income .............................................................................................................................. $ 78,000 Note how the profit of $156,000 is effectively spread over the four years 2007 to 2010, inclusive [i.e., $39,000 + ($19,500 × 2) + $78,000]. Summary of Cash Flows Capital property Inventory Year Cash received Tax @ 50% Net cash Tax @ 50% Net cash 2007 $ 40,000 $ (9,750) $ 30,250 $ (19,500) $ 20,500 2008 20,000 (5,850) 14,150 (9,750) 10,250 2009 20,000 (7,800) 12,200 (9,750) 10,250 2010 20,000 (7,800) 12,200 (39,000) (19,000) 2011 20,000 (7,800) 12,200 20,000 2012 20,000 20,000 20,000 2013 20,000 20,000 20,000 $ 160,000 ($ 39,000) $ 121,000 $ (78,000) $ 82,000
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Solution 3 All residences qualify as principal residences according to the definition in section 54 because they are housing units that are ordinarily inhabited by Mr. Hart, a Canadian resident, at any time during the year. The fact that the Florida condominium is outside Canada does not affect its status as a principal residence. Since all residences were bought after 1981, only paragraph 40(2)( b ) applies. The minimum amount of taxable capital gains that Mr. Hart will have to report in 2007 is $26,000 ($10,000 + $16,000 + nil). The calculation of this amount is set out below. Toronto home Farm in Quebec Condominium in Florida P of D ..................................... $240,000 $ 148,000 $ 186,000 ACB ....................................... (160,000) (100,000) (150,000) Gain ....................................... $ 80,000 $ 48,000 $ 36,000 Years of ownership ................ 8 (2000 – 2007) 6 (2002 – 2007) 3 (2005 – 2007) Gain per year ......................... $ 10,000 $ 8,000 $ 12,000 Optimal allocation of years (see analysis below) ......... 5 (2000 – 2004) 1 (2005) 2 (2006, 2007) Principal residence exemption (PRE) ............. K 60 $ K 80 $ 8 1 5 = × + K 16 $ K 48 $ 6 1 1 = × + K 36 $ K 36 $ 3 1 2 = × + Capital gain (Gain – PRE) ..... $80K – $60K = $20K $48K – $16K = $32K $ 36K – $36K = Nil Taxable capital gain ( 1 / 2 capital gain) .....................
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