chap06 - CHAPTER 6 Income from Property Problem 1 [ITA:...

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CHAPTER 6 Income from Property Problem 1 [ITA: 12(1)( g ); IT-462] The Country Pie is a highly recognized baker of quality pies in Beamsville, Ontario. The current proprietor, Rudolph Strudel, started the business about 20 years ago with an initial purchase of equipment of $150,000 and built up the name of the company by closely supervising the pie production process. Many have said that it is this attention and his recipes that have made the business a success. Rudolph has decided to sell his business and move to the coast to get away from the pressures of running a business. An offer has been made for the assets of The Country Pie by Big Food Corporation Ltd. (“BFC”). There was a meeting of the minds as to the value of the fixed assets of The Country Pie. However, there was considerable dispute as to the value of The Country Pie name in generating pie sales after a purchase by BFC. Consequently, it is proposed that the full proceeds be determined in part by future sales. The BFC offer is for $50,000 cash; $60,000 to be paid on the basis of sales over the next three years with any balance of the $60,000 remaining at the end of the third year payable at that time; and 25% of gross sales in the next five years. As part of the agreement, Rudolph would provide consulting services to BFC as needed during the next three years. REQUIRED Discuss the income tax implications to Rudolph of the proposal from BFC. 109
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Introduction to Federal Income Taxation in Canada Solution 1 (A) As a fixed sum, the $50,000 cash payment is treated as proceeds of disposition for the assets of the business. [IT-462, par. 5( b )] (B) The $60,000 paid on the basis of sales over the next three years with any balance remaining at the end of the third year payable at that time is not subject to paragraph 12(1)( g ). Hence, the amount is also considered to be proceeds of disposition for the assets. It is not the amount of this receipt, but the timing of the instalments of the $60,000 that is dependent on production or use (i.e., sales). [IT-462, par. 8] (C) The receipt of 25% of the gross sales over the next five years is dependent on production or use and, hence, must be included in property income when received [par. 12(1)( g )]. It is neither a capital receipt nor proceeds of disposition for goodwill. (D) Fees earned for consulting services by Rudolph would be taxable as either employment income or business income from self-employment, depending on whether he is considered an employee or a self-employed individual in respect of the consulting services. 110
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Solutions to Chapter 6 Assignment Problems Problem 2 [ITA: 15(2), (2.3), (2.4), (2.6); 20(1)( j ); 80.4; ITR: 4300(7)] In 2004, Sunshine Publishing Ltd., a book publishing company with a fiscal year-end on December 31, made a loan of $100,000 to Stuart Sunshine, the president and majority shareholder. Both Stuart and Sunshine Publishing Limited are Canadian residents. This is the first loan that Stuart ever received from the company, and it helped him finance the purchase of a
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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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chap06 - CHAPTER 6 Income from Property Problem 1 [ITA:...

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