The tax cost of the property would not be changed in the hands of Jonathan Flex. The capital cost of the building would remain at $1,200,000 ($1,500,000 - $300,000), the adjusted cost base of the land would remain at $300,000, and the UCC of the building would be unchanged at $960,000. Any income on the property while it is held by her spouse would be attributed back to Ms. Vaughn. At the time of a subsequent sale of the property by Jonathan Flex for $2,500,000 ($100,000 more than its fair market value at the time of the gift), the income attribution rules of ITA 74.1(1) would apply. This would result in the following amounts being attributed to Ms. Vaughn at that time: Land Building Proceeds Of Disposition $400,000 $2,100,000 Adjusted Cost Base/Capital Cost ( 300,000) ( 1,200,000) Capital Gain $100,000 $ 900,000 Inclusion Rate 1/2 1/2 300 Canadian Tax Principles 2014/15 Edition – Solutions Manual
Solution to Assignment Problem Five - 2 Taxable Capital Gain $ 50,000 $ 450,000 Capital Cost Of Building $1,200,000 UCC ( 960,000) Recapture Of CCA $ 240,000 Rental Property - Gift To Children There is no exemption from the general rules of ITA 69 for transfers of property to children. As a consequence, Ms. Vaughn would be subject to taxation based on a disposition of the property at its fair market value of $2,000,000 for the building and $400,000 for the land. This would result in following amounts of income for Ms. Vaughn at the time of transfer. 301 Canadian Tax Principles 2014/15 Edition – Solutions Manual
Solution to Assignment Problem Five - 3 Land Building Proceeds Of Disposition $400,000 $2,000,000 Adjusted Cost Base/Capital Cost ( 300,000) ( 1,200,000) Capital Gain $100,000 $ 800,000 Inclusion Rate 1/2 1/2 Taxable Capital Gain $ 50,000 $ 400,000 Capital Cost Of Building $1,200,000 UCC ( 960,000) Recapture Of CCA $ 240,000 The cost to either of the children for capital gains purposes would be $2,000,000 for the building and $400,000 for the land. For CCA and recapture purposes, the building’s value would be limited to $1,600,000 [$1,200,000 + (1/2)($2,000,000 - $1,200,000)]. Any rental income on the property while it is held by her 15 year old son Biff would be attributed back to Ms. Vaughn until the son reaches 18 years of age. This would not be the case if the gift were to her 27 year old daughter. There would be no attribution of capital gains on a gift to either child. If the children subsequently sold the building for $2,100,000, there would be a taxable capital gain on the building of $50,000 [(1/2)($2,100,000 - $2,000,000)] that would be taxed in their hands. There would not be a taxable capital gain on the sale of the land. As no CCA was taken on the building subsequent to the gift date, there would be no recapture of CCA. Farm Land - Gift To Spouse In the case of the farm land, since Ms. Vaughn does not elect out of ITA 73(1) there will be no tax consequences at the time of the transfer. The tax cost to Jonathan Flex will be unchanged from her tax cost of $800,000. Any income generated by the farm would be considered business income rather than property income. This means that it will not be subject to the income attribution rules and will be taxed in the hands of Jonathan.
- Winter '10
- Accounting, .........