Homework Problem 8-4 - Thus Mr. Rhodes would realize the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Solution to Problem 8-4 Facts : Mr. Rhodes purchased land in Edmonton years ago for $750,000 This April he sold the land to a developer for $2,500,000 o He receives a down payment of $625,000 o He accepts a 25 year, 8% mortgage for the balance of $1,875,000 o Payments on the mortgage, amounting to $75,000 per annum, commence in the second year Mr. Rhodes wishes to use reserves to defer the payment of capital gains What are the tax implications of this arrangement? Solution : Under ITA 40(1)(a)(iii), the amount that can be deducted as a capital gains reserve is equal to the lesser of: (Capital Gain)(Proceeds not yet Due ÷ Total Proceeds) (20%)(Capital Gain)(4 – Number of Years Ending after Disposition)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
In the Year of Sale : Mr. Rhodes could calculate the following reserve on the sale: The lesser of: ($1,750,000)($1,875,000 ÷ $2,500,000) = $1,312,500 (20%)($1,750,000)(4 – 0) = $1,400,000
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Thus Mr. Rhodes would realize the following capital gain: Total Capital Gain $1,750,000 Reserve ( 1,312,500 ) Capital Gain $ 437,500 Taxable Capital Gain (1/2) $ 218,750 In the Second Year: Mr. Rhodes must add the previous years reserve into his income as capital gain and calculate a reserve: Previous Reserve $1,312,500 Maximum New Reserve: (20%)($1,750,000)(4 1) ( 1,050,000 ) Capital Gain $ 262,500 Taxable Capital Gain $ 131,250 In each of the next three years, Mr. Rhodes must include the previous years reserve into income as capital gain and calculate a new reserve. By the fourth year after the sale, he will include the previous years reserve, but the formula [(20%)($1,750,000)(4 4)] will result in no reduction in taxable capital gains and no amounts to carry forward, even though the developer may still be paying Mr. Rhodes for the land....
View Full Document

This note was uploaded on 02/18/2011 for the course ECON 101 taught by Professor Professor during the Spring '11 term at American University of Antigua.

Page1 / 2

Homework Problem 8-4 - Thus Mr. Rhodes would realize the...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online