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Tax - Ch7 Solutions II

Tax - Ch7 Solutions II - CHAPTER 7 INCOME FROM PROPERTY...

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CHAPTER 7 INCOME FROM PROPERTY Solution to P 7-2 Property income : Interest Share of interest earned by partnership (25% of $8,000) [ITA 12(1)(l)] $ 2,000 Interest from daughter [ITA 12(1)(c), 74.1(2)] 1,000 Investment certificate (note 1) 3,000 6,000 Dividends [ITA 12(1)(j), (k), 82(1)] Stock dividend ($40 x 100 = $4,000 x 141% (2011)) $5,640 Brickbase Enterprises ($12,000 x 125%) 15,000 Canadian public corporations ($6,000 x 141% (2011)) 8,460 Foreign dividends ($9,000 + tax of $1,000) 10,000 39,100 Less: Interest on bank loan [ITA 20(1)(c)] (15,000 ) Interest on house mortgage [ITA 20(1)(c)] $100,000 x $30,000/$100,000 (3,000 ) Life insurance – collateral on Brickbase shares fully deductible [ITA 20(1)(e.2)] (1,000 ) 20,100 Rental Rental Income $30,000 Recapture on sale of warehouse ($130,000 - $110,000) Note 2 20,000 50,000 Deduct: Interest on mortgage (21,000 ) CCA ($350,000 x .06 x 1/2) * (10,500 ) Legal fees to register mortgage (cost of arranging financing 1/5 of $5,000) [ITA 20(1)(e)] (1,000 ) 17,500 43,600 Deduct Safety deposit box (100 ) Investment counsel fees [ITA 20(1)(bb)] (1,000 ) (1,100 ) NET INCOME FROM PROPERTY $42,500 * Non-residential buildings built after March 18, 2007 qualify for an additional allowance of 2% increasing the CCA rate to 6%. To receive the additional
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allowance the taxpayer must elect to place the building in a separate Class 1. Note 1 Investment certificate - No interest is paid until the end of four years. The annual accrual method requires that interest be recognized on each one year anniversary date. In this case one year of interest must be recognized by June 30, 20X1 -10% of $30,000 = $3,000 [ITA 12(4)]. Note 2 Sale of Building and CCA - The warehouse building although used by Brickbase Enterprises to conduct its business is, nevertheless, a rental property to Potman who rents it to the corporation. The building falls into a separate CCA class [Reg. 1101(1ac)] and therefore results in a recapture on sale even though another building was acquired in the same year. Old building: UCC $110,000 Sale ($165,000 - credit pool With original cost of $130,000) (130,000 ) Recapture [ITA 13(1)] $ (20,000 ) New building: Addition [ITA 13(21)] $350,000 CCA 20X1 ($350,000 x .06 x ½ ) (10,500 ) UCC $339,500 In addition, the sale of the property will result in capital gains on the land and building to the extent the selling price exceeds the cost. These gains are not part of property
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