Chapter 8 Solutions for Questions 2, 3 and 6

Chapter 8 Solutions for Questions 2, 3 and 6 - Chapter 8 -...

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Unformatted text preview: Chapter 8 - Question #2 Recap of Key Info: ACB: 4,000 POD: 160,000 Expected Receipts of POD: 2009 40,000 2010 20,000 2011 20,000 2012 20,000 2013 20,000 2014 20,000 2015 20,000 Total 160,000 Required: Determine the tax implications to Len (vendor) on sale of land under both scenarios of: 1) the sale is in account of capital 2) the sale is in account of income Analysis: Scenario 1 -Sale is on account of capital ITA Ref. 2009 (year of disposition) i) Capital Gain = POD - ACB Ssec 40(1) = 160,000 - 4,000 = 156,000 POD not fully received in year of disposition -> Capital Gains Reserve? Par. 40(1)(a) ii) Capital gains reserve deduction in the year of disposition Lesser of: (C) Proportion of (total) Capital Gain equal to Proportion of (total) POD payable after current tax year (D) 1/5 of capital gain * (4 - # of preceeding years after disposition) (C) = (160,000 - 40,000)/ 160,000 * 156,000 = 117,000 (D) = 1/5 * 156,000 * (4 - 0) = 4/5 * 156,000 = 124,800 Cap gains reserve ded'n = Lesser of (C) and (D) = 117,000 iii) Net capital gain = Capital Gain less deduction allowed Par. 40(1)(a) = 156,000 - 117,000 = 39,000 iv) Taxable Capital Gain = 1/2 * net capital gain Sec 38 = 1/2 * 39,000 = 19,500 Yes -> the gain will be taken into income over several years which means that we need to calculate the gain for each year individually first then total them up to determine the total taxable amount under this scenario Subpar. 40(1) (a)(iii) 2010 (1 year after disposition) i) Capital gains reserve deduction for the current year Lesser of: (C) Proportion of (total) Capital Gain equal to Proportion of (total) POD payable after current tax year (D) 1/5 of capital gain * (4 - # of preceeding years after disposition) (C) = (160,000 - 40,000 - 20,000)/ 160,000 * 156,000 = 97,500 (D) = 1/5 * 156,000 * (4 - 1) = 3/5 * 156,000 = 93,600 Cap gains reserve ded'n = Lesser of (C) and (D) = 93,600 ii) Net capital gain = Reserve claimed in the immediately preceeding year less current year reserve = 117,000 - 93,600 = 23,400 iii) Taxable Capital Gain = 1/2 * net capital gain Sec 38 = 1/2 * 23,400 = 11,700 Subpar. 40(1) (a)(iii) Subpar. 40(1) (a)(ii) 2011 (2 years after disposition) i) Capital gains reserve deduction for the current year Lesser of: (C) Proportion of (total) Capital Gain equal to Proportion of (total) POD payable after current tax year (D) 1/5 of capital gain * (4 - # of preceeding years after disposition) (C) = (160,000 - 40,000 - 20,000 - 20,000)/ 160,000 * 156,000 = 78,000 (D) = 1/5 * 156,000 * (4 - 2) = 2/5 * 156,000 = 62,400 Cap gains reserve ded'n = Lesser of (C) and (D) = 62,400 ii) Net capital gain = Reserve claimed in the immediately preceeding year less current year reserve = 93,600 - 62,400 = 31,200 iii) Taxable Capital Gain = 1/2 * net capital gain Sec 38 = 1/2 * 23,400 = 15,600 Subpar. 40(1) (a)(iii) Subpar. 40(1) (a)(ii) 2012 (3 years after disposition) i) Capital gains reserve deduction for the current year Lesser of: (C) Proportion of (total) Capital Gain equal to Proportion of (total) POD payable after current tax year...
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Chapter 8 Solutions for Questions 2, 3 and 6 - Chapter 8 -...

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