Chapter 7 - Odd numbered problem solutions

Chapter 7 - Odd numbered problem solutions - Solution 1...

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Unformatted text preview: Solution 1 (Basic) All residences qualify as principal residences according to the definition in section 54 because they are housing units that are ordinarily inhabited by Mr. Hart, a Canadian resident, at any time during the year. The fact that the Florida condominium is outside Canada does not affect its status as a principal residence. Since all residences were bought after 1981, only paragraph 40(2)( b ) applies. The minimum amount of taxable capital gains that Mr. Hart will have to report in 2011 is $26,000 ($10,000 + $16,000 + nil). The calculation of this amount is set out below. Toronto home Farm in Quebec Condominium in Florida P of D ..................................... $240,000 $ 148,000 $ 186,000 ACB ....................................... (160,000) (100,000) (150,000) Gain ....................................... $ 80,000 $ 48,000 $ 36,000 Years of ownership ................ 8 (2004 2011) 6 (2006 2011) 3 (2009 2011) Gain per year ......................... $ 10,000 $ 8,000 $ 12,000 Optimal allocation of years (see analysis below) ......... 5 (2004 2008) 1 (2009) 2 (2010-2011) Principal residence exemption (PRE) ............. K 60 $ K 80 $ 8 1 5 K 16 $ K 48 $ 6 1 1 K 36 $ K 36 $ 3 1 2 Capital gain (Gain - PRE) ...... $80K - $60K = $20K $48K - $16K = $32K $ 36K - $36K = Nil Taxable capital gain ( 1 / 2 capital gain) ..................... $ 10,000 $ 16,000 Nil Analysis Because of the one-plus rule, the maximum number of years that needs to be designated to totally exempt a gain is always one less than the number of years of ownership. The years of the residence with the highest gain per year are designated first. The condominium in Florida has the highest gain per year ($12,000 gain per year) and two out of three years are designated in respect of it. (The actual years chosen could be any two of 2009, 2010, and 2011.) The next residence to look at is the Toronto home, which has been owned since 2004 (eight years), with a gain per year of $10,000, rather than the Quebec farm, which has been owned since 2006 (six years), with a gain per year of $8,000. Initially, it seems to make sense to allocate all of the six remaining years to the Toronto home because it has the higher gain per year. However, because of the one-plus rule, designating one year for the Quebec farm gets you two, that is, it shelters two years of gain. The year 2009 is chosen for the Quebec farm. (The year designated could have been one of any of the years of ownership that were left over from the condominium: 2006 to 2009.) The remaining five years (2004 to 2008 shown in the calculation above) are designated in respect of the Toronto home....
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Chapter 7 - Odd numbered problem solutions - Solution 1...

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