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Homework Problem 8-4

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

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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)

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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
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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 year’s 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 year’s reserve into income as capital gain and calculate a new reserve. By the fourth year after the sale, he will include the previous year’s 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....
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Homework Problem 8-4 - Thus Mr Rhodes would realize the...

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