chap04 - CHAPTER 4 Income from Business: General Concepts...

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CHAPTER 4 Income from Business: General Concepts and Rules Problem 1 [ITA: 9; IT-218R] A piece of land was purchased by Yacumflastor Corporation Ltd. for the purpose of constructing a high-rise residential building. Plans were made for the development of the property, surveys were made and the land was stripped and excavated in preparation for construction. Subsequent to this work on the land, it was determined that the location was not suitable for the intended purpose, due to heavy truck traffic in the area. As a result, the property was listed for sale with the realtor who acted in the original purchase. The sale at a substantial profit took place approximately six months from the purchase. The corporation had been newly formed when the above land was purchased. At about the same time, another piece of land was purchased and was developed into a commercial/industrial plaza which the corporation continues to own as a rental property. The principal shareholder of the corporation, Jake Yacumflastor, owns and operates an electrical contracting business. The Articles of Incorporation of the corporation contain the following statement of objects: ... to purchase, lease, acquire, hold, manage, develop, operate, pledge and mortgage, either absolutely as owner or by way of collateral security or otherwise, alone or jointly with others and either as principal or agent, property, real or personal, and assets generally of any and every kind of description. No mention is made of the purchase and sale of land as a business activity. REQUIRED Write a memo for the Yacumflastor Corporation Ltd.’s file evaluating the issue of whether the sale of the land should be treated as a receipt of income or capital gain for tax purposes. Arrive at a conclusion consistent with your analysis of the facts, but indicate the basis for any areas of potential opposition to your conclusion. 55
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Introduction to Federal Income Taxation in Canada Solution 1 Intention of the Taxpayer (A) Primary intention: The corporation intended to construct an apartment building on the property, not to purchase the property itself for resale at a profit. Unexpected circumstances resulted in the sale of the property. These statements of intention must be substantiated by facts which can be observed objectively, as discussed below. (B) Secondary intention: The question of whether the corporation intended, at the time of purchase and as a motivation for the purchase, to resell the property at a profit if the primary intention was frustrated must be answered by reference to other factors discussed below. Factors Used to Substantiate the Intention of the Taxpayer (A) Relationship of the transaction to the corporation’s business: The corporation was not normally in the business of buying and selling land. This was a relatively new corporation at the time of the transaction. In addition to the land which it sold, it purchased another property which it has developed into a commercial/industrial plaza and which it holds as a rental property. Furthermore, the principal shareholder of the
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This note was uploaded on 03/10/2010 for the course ACC ACC742 taught by Professor Sydor during the Spring '10 term at Ryerson.

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chap04 - CHAPTER 4 Income from Business: General Concepts...

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