chap08 - CHAPTER 8 Capital Gains: The Finer Points Problem...

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Unformatted text preview: CHAPTER 8 Capital Gains: The Finer Points Problem 1 [ITA: 13(4); 44] During its year ended December 31, 2005, Power Boat Corporation Ltd. sold its facilities in downtown Toronto. As the sale occurred in December, business activity was at a low. New facilities were purchased in February 2006 in Parry Sound on the shores of Georgian Bay. The corporation sold its Toronto land and building for $300,000 and $200,000, respectively. This land and building had a cost in 1989 of $50,000 and $100,000, respectively. At the end of 2004, the building had an undepreciated capital cost of $55,000 for income tax purposes. In Parry Sound, the corporation purchased land and building for $75,000 and $350,000, respectively. REQUIRED (A) Prepare two calculations of the income tax consequences of the above move, one without an election under subsection 44(6) and one with this election. (B) If the property disposed of by the corporation in 2005 had been an apartment building held for rental purposes: (i) what would the tax consequences of a sale of the property have been after a replacement of the property with another apartment complex in 2006? (ii) what would the tax consequences on an expropriation have been after a replacement of the property with another apartment complex in 2006? 159 Introduction to Federal Income Taxation in Canada Solution 1 This situation involves a voluntary disposition of a former business property in respect of the land and building. As a result, Power Boat Corporation Ltd. must replace the land and building within the later of 12 months and one taxation year from the end of the December 31, 2005 taxation year (i.e., the taxation year of the disposition), in order to obtain the benefits of the rollover. This is illustrated by the following time line: (A) (i) No subsection 44(6) election Land Building Capital gain section 44 election (file an amended return for 2005): The lesser of: (a) Proceeds of disposition....................................................................... $300,000 $200,000 Adjusted cost base.............................................................................. (50,000) (100,000) Gain.................................................................................................... $ 250,000 $ 100,000 (b) Proceeds of disposition....................................................................... $300,000 $200,000 Replacement cost................................................................................ (75,000) (350,000) Excess, if any...................................................................................... $ 225,000 Capital gain (lesser amount).............................................................................. $ 225,000 Adjusted cost base of replacement property [par. 44(1)( f )]: Replacement cost............................................................................................... $ 75,000 $350,000 Less: excess of (a) over (b) deferred capital gain.........................................Less: excess of (a) over (b) deferred capital gain....
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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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chap08 - CHAPTER 8 Capital Gains: The Finer Points Problem...

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