Solution%20to%20Assignment%20Problem%20Ch16%28I%29

Solution%20to%20Assignment%20Problem%20Ch16%28I%29 -...

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Solution to Assignment Problem Sixteen - 1 Part A - Transfer Under ITA 85(1) As the $807,000 elected value was equal to the tax value of the property, there would be no tax consequences associated with the rollover. The tax consequences of selling the common stock would be calculated as follows: Total Elected Value $ 807,000 Non-Share Consideration Nil Adjusted Cost Base - Common Stock (Residual) $ 807,000 Proceeds Of Disposition $1,200,000 Adjusted Cost Base - Common Stock ( 807,000) Capital Gain $ 393,000 Inclusion Rate 1/2 Taxable Capital Gain $ 196,500 Part B - Comparison To Direct Sale The tax consequences of selling the property directly would be as follows: Land Building Proceeds Of Disposition $300,000 $900,000 Adjusted Cost Base/Capital Cost ( 225,000) ( 725,000) Capital Gain $ 75,000 $175,000 Inclusion Rate 1/2 1/2 Taxable Capital Gain $ 37,500 $ 87,500 Based on these calculations, the overall tax effect of the direct sale would be as follows: Taxable Capital Gain On Land $ 37,500 Taxable Capital Gain on Building 87,500
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Recapture On Building ($725,000 - $582,000) 143,000 Total Tax Effect $268,000 The reason for the difference lies in the type of income that the two approaches produce. The total amount of income, before consideration of preferential treatment, that you would expect on this transaction is $393,000 ($1,200,000 - $807,000). When ITA 85(1) is used, this full amount is received as a capital gain, resulting in an income inclusion of $196,500. In contrast, with the direct sale, only $250,000 of the total income is received as a capital gain, with the remaining $143,000 ($393,000 -
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Solution%20to%20Assignment%20Problem%20Ch16%28I%29 -...

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