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Unformatted text preview: IN-CLASS PROBLEMSINCOME FROM PROPERTYPROBLEM 1Following the purchase of a home in Florida, a Canadian resident taxpayer found a local firm to attract tenants, manage, and maintain the property. He financed the acquisition with loans and a mortgage in excess of the value of the property. All monetary transactions were conducted with a bank in Florida.Annual rental revenue in the first three years was $7,000, $9,000 and $12,000. Expenses, including interest, were $9,000, $11,000, and $15,000. Annual interest expense was $7,200, $7,100 and $7,000.The taxpayer personally used the property for approximately four weeks per year.REQUIRED: Can the taxpayer deduct his losses? Explain.NO - The CRA has administratively determined that where mortgage interest constitutes the largest percentage of expenditures, the losses are not deductible, as they are essentially capital or personal in nature. Furthermore, the extent of interest (and CCA, if deducted) is considered by the CRA to indicate the venture did not possess a reasonable expectation of profit. This policy is invoked frequently in rental situations.PROBLEM 2Outline the tax consequences of the following:(a) $2,250 interest received on December 28, 20X2 by Colin, age 15. The investment certificate on which the interest was paid was made out in Colin’s name by Albert, his father, when Albert purchased the certificate on December 28, 20X1....
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- Spring '11
- Taxation in the United States, ITA