3. Capital Gains Capital Losses with Solutions (3)

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Jun 21, 2024

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ACCT 328 Business Income Mr. Ludvig disposed of a capital property for $100,000 on July 1, Year 1. The sales proceeds are payable in 3 instalments: $30,000 at the time of the sale, $35,000 on July 1, Year 2 and $35,000 on Ju Other information: The ACB of the property for Mr. Ludvig was $20,000 Required: Calculate the capital gain that will be reported, if any, by Mr. Ludvig in Years 1, 2 and 3. Solution: In each year the reserve is the lesser of: (i) (POD not received in year/total POD) x capital gain; or (ii) (20%)(capital gain)(4 - number of preceding taxation years after disposition) Calculation of Capital Gain: Year 1 Year 2 Year 3 Proceeds of disposition $ 100,000 Adjusted cost base $ (20,000) Capital Gain $ 80,000 $ 56,000 $ 28,000 for years 2 & 3, the prio Capital Gains reserve $ (56,000) $ (28,000) $ - Net capital gain $ 24,000 $ 28,000 $ 28,000 Inclusion rate 0.50 0.50 0.50 Taxable capital gain $ 12,000 $ 14,000 $ 14,000 Total Taxable Capital Gain (over 3 years) $ 40,000 equivalent to the total t

uly 1, Year 3. Year 1 Year 2 Year 3 $ 56,000 $ 28,000 NA $ 64,000 $ 48,000 NA NOTE: No capital gains reserve is allowed in year 3 as all proceeds have been received by end of year 3. or year's reserve is included in income as a capital gain taxable capital gain on sale of property [(100,000 - 20,000) x 1/2]

ACCT 328 Business Income Sarah Smith purchased some vacant land on February 1, Year 1 for $30,000, hoping to build a on the land when she had saved enough money for construction of the cabin. While she was saving her money, Sarah rented the land in Year 1 (entire year) to a farmer as for an annual rent of $1,000. During this year, Sarah also paid $300 in property taxes and $4,000 in interest on funds borrowed to purchase the land. At the beginning of Year 2, construction began on a six-lane highway that will intersect the neighbouring property to Sarah’s vacant land. Due to the close proximity of the new highway, Sarah decided to sell the land for proceeds of disposition of $20,000. and Year 2 resulting from the transactions described above. Solution: In Year 1, Sarah rented the land: Gross rents $1,000 Less rental expenses $4,300 property tax and interest Excess costs ($3,300) This excess property tax and interest wil Sarah will report net rental income/loss of nil. In year 2, Sarah sold the land: Calculation of Capital Gain: Year 2 Proceeds of disposition $ 20,000 Adjusted cost base $ (33,300) Capital Gain (loss) $ (13,300) Capital Gains reserve $ - Capital Loss $ (13,300) Inclusion rate 0.50 Allowable capital loss $ (6,650) Required : Calculate the Net Income (Loss) For Tax Purposes to be reported for each of Year 1

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a cabin pasture f ll be added to the cost base of the land

ACCT 328 Business Income Mr. X has incurred a large amount of capital gains during the year. Therefore, Mr. X decides to sell securities with an accrued loss during the year, which will offset his large capital gain balance on his tax return (in order to reduce his overall net income for tax purposes). On December 1 of the current year, Mr. X sells securities with an adjusted cost base of $15,000 for proceeds of disposition of $10,000. In the long term Mr. X thinks these securities will increase in value and would like to hold on to them for their potential future earnings; therefore, Mr. X purchases identical securities on December 15, of the current year for $8,000. Solution: Proceeds of disposition $10,000 Adjusted cost base ($15,000) Capital Loss ($5,000) Superficial loss Reported on tax return $0 Loss is denied Instead the denied loss is added to the cost base of the new property: ACB (new) $8,000 Superficial loss $5,000 New ACB $ 13,000 Required : Calculate the tax impact of Mr. X's transactions.

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ACCT 328 Business Income Sharon Slotten purchased shares in ATCO Ltd. during the current year as follows: Jan. 1: 200 shares for $25 per share April 2: 300 shares for $30 per share July 1: 100 shares sold for $45 per share Sept. 8: 500 shares for $24 per share On December 22, of the current year Sharon sells 200 ATCO Ltd. shares for $35 per share and pays $100 in sales commission. paragraph 3(b) of the Income Tax Act. Solution: Date No. of shares Cost in Pool Jan.1 200 $ 25.00 $ 5,000 Apr.2 300 $ 30.00 $ 9,000 Subtotal 500 $ 28.00 $ 14,000 1-Jul -100 $ (28.00) $ (2,800) Sept.8 500 $ 24.00 $ 12,000 Total 900 $ 25.78 $ 23,200 Calculation of Capital Gain: 1-Jul Dec.22 Proceeds of disposition $ 4,500 $ 7,000 Selling costs $ - $ (100) Adjusted cost base $ (2,800) $ (5,156) Capital Gain (loss) $ 1,700 $ 1,744 Capital Gains reserve $ - $ - Capital Gain $ 1,700 $ 1,744 Inclusion rate 0.50 0.50 Taxable capital gain $ 850 $ 872 Total $ 1,722 Required : Calculate the taxable capital gain or loss included in Sharon’s NET INCOME under Cost per share

ACCT 328 Business Income Bob sold the following assets in the current year: A piece of furniture purchased for $900 and sold for proceeds of $750 A car (for his personal use) originally purchased for $4,000 and sold for proceeds of $1, A gold chain with a cost of $800 was sold for proceeds of $1,500 Solution: Calculation of Capital Gain: Furniture (PUP) Car (PUP) Gold Chain (LPP) Proceeds of disposition $ 750 $ 1,500 $ 1,500 Adjusted cost base $ 900 $ 4,000 $ 800 POD (applying $1,000 rule) $ 1,000 $ 1,500 $ 1,500 ACB (applying $1,000 rule) $ 1,000 $ 4,000 $ 1,000 Capital Gain (Loss) $ - $ (2,500) $ 500 Inclusion rate 0.50 0.50 0.50 Allowable capital loss $ - $ (1,250) $ 250 Loss is denied Gain is subject to tax Required : What is Bob’s tax impact of the sale of assets?

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,500

ACCT 328 Business Income Mr. Bob McPipe owns a home in Edmonton as well as a cottage at Pigeon Lake. He purchased the house originally for $250,000, and the cottage was purchased for $120,000. Bob lived in the Edmonton house during the year, but spent six weeks each summer at the cottage. During the current year, both properties sold: the house for $400,000 and the cottage for $250,000. Bob informs you that he owned the house for 16 years and the cottage for 13 years. in the current year? Solution: Bob has sold two properties that qualify as his principal residence during the current year. He one has his principal residence for each year he owned it. To minimize taxes, he should choos the property with the largest capital gain per year owned as his principal residence. House Cabin Capital Gain per Year of Ownership $ 9,375.00 $ 10,000.00 Bob McPipe should claim the cabin at the lake as his principal residence for all years owned since this Bob should claim the cabin as his principal residence for 12 years (one year less than the number of years Exempt Gain = (1+12) / 13 x $130,000 = $ 130,000.00 The full amount of the gain is exempt from tax. Now, Bob can only claim is home in Edmonton as his principal residence for years in which he did not clai the cabin as his principal residence because you can only claim one property per family unit as your portion of the gain on the Edmonton home is: Exempt Gain = (1+4) / 16 x $150,000 = $ 46,875.00 Calculation of Capital Gain: House Proceeds of disposition $ 400,000 Adjusted cost base $ (250,000) Capital Gain (loss) $ 150,000 Principal Residence Exempt. $ (46,875) Capital Gain $ 103,125 Inclusion rate 0.50 Taxable capital gain $ 51,563 Required : What is the minimum capital gain Bob must report on the sale of the two properties property has a larger capital gain per year, as compared to the house in Edmonton. This means that he owned it). By doing this, Bob will completely eliminate the gain on the sale of the cabin as follows: principal residence each year. The remaining years in which the Edmonton home can be designated as th principal residence are: 16 years - 12 years claimed for cabin = 4 years. The calculation of the exempt

e can only claim se to designate s im s he

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John Smith owns securities with an ACB of $200,000 and a FMV of $350,000. John would like to sell the securities to his brother. For each of the following situations, calculate the transferor’s capital gain or loss and the transferee’s new adjusted cost base under the rules of ITA S 69, depending on the transfer price chosen. Part A: John sells the property to his brother for $350,000. Part B: John sells the property to his brother for $250,000. Part C: John sells the property to his brother for $500,000. Part D: John gifts the securities to his brother. Solution: John Smith Part A. Part B. Part C. Part D. Proceeds of disp. $ 350,000 $ 350,000 $ 500,000 $ 350,000 Adjusted Cost Base $ (200,000) $ (200,000) $ (200,000) $ (200,000) Capital Gain $ 150,000 $ 150,000 $ 300,000 $ 150,000 Inclusion rate 0.50 0.50 0.50 0.50 Taxable capital gain $ 75,000 $ 75,000 $ 150,000 $ 75,000 John's Brother Adjusted cost base $ 350,000 $ 250,000 $ 350,000 $ 350,000 Total $ - ACCT 328 Business Income: Not required

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