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This question was created from Assignment 3 Problems - Fall 2015


Assignment Problem Eight - 2 (Identification Of Capital Gains And Reserves)
CL Ltd. is a long distance moving company. In 2013, CL purchased a 40 acre tract of vacant
land in an industrial park near Calgary. The cost of this land was $11.8 million.
It was the intention of Casper Lopez, president and driving force of CL Ltd., to relocate all of
CL's operations to this site in about 4 to 5 years. He planned to add furniture storage and self
storage facilities. However, Casper was aware that he had purchased this land at a very favour-
able price. It was his belief that, if the plans changed, CL would be able to make a significant
gain by reselling the land. He informed the property manager of the industrial park that he
might be interested in selling part of the land if the price was right.
Early in 2015, Casper is informed that he has terminal cancer. Shortly afterwards, CL receives
an unsolicited offer of $4.3 million for 10 acres of the Calgary site which Casper accepts. In
order to facilitate the sale, CL takes back a $2.8 million first mortgage on the property. The
mortgage will be repaid in 4 annual instalments of $700,000 each, beginning in 2016.
CL still intends to move its current operations to this site. However, because of Casper's
illness, future plans to use the remainder of the site for new storage facilities are unlikely to
move forward. CL is considering whether more of the land should be sold as it does not appear
it will be needed. There are three purchasers who are interested in buying 1 to 2 acres each.
Required: CL has sought your advice as the appropriate tax treatment of the sale transac-
tion. Provide the required advice.

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