Each of the following independent cases describes a situation with a proposed tax treatment. For each case, indicate whether the treatment is correct, and justify your conclusion.
Case A:
In 2000, George Marker bought a 500-acre parcel of land for $400,000. He was going to build a home on the property. However, in 2018, he received an offer of $900,000 for 220 acres of the property. Because these 220 acres of land were waterfront and had better road access, he thought the fair market value of the remaining 280 acres was only $240,000. He accepted the offer of $900,000. In filing his 2018 income tax return, he was going to use a $315,600 adjusted cost base {[$400,000 X [$900,000/ ($900,000 + $240,000)} in calculating his gain.
Case B:
Cathy Conrad sold a property with an adjusted cost base of $35,000 for $150,000. She provided a warranty on the property that she estimates would cost her about $15,000 to service. As a result, she calculated her capital gain to be $100,000.
Case C:
Roger Fell sold a sofa to his son for $1,400 and a painting to his daughter for $900. These selling prices equaled their estimated fair market value. Several years ago, Roger Fell purchased the sofa for $1,700 and the painting for $600. He did not report any capital gain or loss on his 2018 individual income tax return.
Case D:
Lorraine Lurch purchased a cottage in 2013 for $275,000. She rarely used the cottage, since she preferred to live in her Vancouver condo. The cottage’s current value is $700,000 in 2018. In 2018, she decided to convert the cottage into a rental property. Lorraine Lurch has told everyone that, in 2018, she will report all of her rental income, but she does not intend to recognize a gain or loss on the conversion of the property, since no disposition has occurred.
Case E:
In 2018, Joe Solo sold a non-depreciable capital asset for $560,000. The adjusted cost base of the asset was $250,000, resulting in a capital gain of $310,000. Under the terms of the sale, he received $56,000 (10% of the proceeds) in 2018, with the remainder being paid in 2019. Thus, he is going to report $31,000 capital gains on his 2018 income tax return, calculated as follows: 10% X $310,000.
Case A:
The computation of cost of land is incorrect. Adjusted cost base is the sum total of cost of acquisition and any improvements. Since in the present case there are no improvements, the cost of $400,000 has to be evenly distributed. Thus the cost of 220 acres of land shall be = ($400,000/500)*220=$176,000
Case B:
The computation of capital gain is correct. Capital gain tax is computed as = Sale proceeds (-) adjusted cost base (-) Cost of sale
Since the warranty provided on the property is an expense incurred to make the sale happen, the same can be deducted from the sale proceeds in order to compute the capital gain tax.
Case C:
The computation of capital gain is correct. Capital gain tax is computed as = Sale proceeds (-) adjusted cost base
Since the sale price offered equalled their fair value, the loss on sale of sofa is correct and can be adjusted against the gain on sale of painting. (assuming that depreciation is not applicable.
Case D:
The decision of Lorraine Lurch to defer the recognition of capital gain is correct. She can defer the capital gain tax as the property being exchanged is an eligible property. Had there been loss, she would not have been able to defer the loss.
Case E:
The tax computation is correct. The asset being eligible for instalment method for recognising capital gain, it shall recognise capital gains as and when it receives them.
Each of the following independent cases describes a situation with a proposed tax treatment. For each...