Unit 7 FA answers

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1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 1/12 Assessment >> Formal Assessment Assessment: Income Tax Planning Web - Academic Partners Unit 7 Post-Assessment (C115V20U7L0A25Q20) Date Submitted: 01/30/2024 05:37:00 PM Total Correct Answers: 20 Total Incorrect Answers: 0 Your Mark (total correct percentage): 100% 1 Capital appreciation was not always taxable in Canada. Our tax system changed in 1971. Which of the following statements about Canada's tax system are FALSE? 1. The Income Tax Act adequately addresses the fact that a portion of capital appreciation is due to inflation by requiring only 50% of capital gains to be included in taxable income. 2. Holding capital property provides taxpayers with an opportunity for tax deferral. 3. If a taxpayer sells his personal computer system 2 months after he purchased it for 60% of its original cost, he can deduct a portion of the loss from his income. 4. Capital losses realized on investment assets cannot be deducted from all other sources of income. Correct The correct answer: 1 and 3 Your answer: 1 and 3 Solution: The capital gains inclusion rate of 50% fails to adequately account for inflation, particularly in cases where the taxpayer may have held the property for 10 or 20 or even more years, and when inflation has historically been averaging about 5% per year. Accumulated appreciation is not taxed until the taxpayer disposes, or is deemed to dispose, of a capital asset. Therefore, holding capital property provides a taxpayer with one of the few tax deferral opportunities still available. However, capital losses on personal-use property are not deductible from any sources of income, and capital losses on investment assets are only deductible from capital gains realized upon the disposition of other investment assets. (Statement 1 is false.) So, the Income Tax Act does not adequately address the fact that a portion of capital appreciation is due to inflation by requiring only 50% of capital gains to be included in taxable income. (Statement 3 is false.) So, if a taxpayer sells his personal computer system 2 months after he purchased it for 60% of its original cost, he cannot deduct a portion of the loss from his income. 2 Maria operates a mail order gift shop out of her home, as a sole proprietor. She owns many different types of property, including a second house that she rents out. Which of the following properties could NOT potentially give rise to a capital gain upon disposition? 1. the rental house 2. the inventory in her gift shop 3. her shares in Success Ltd., a company listed on the Vancouver Stock Exchange 4. her whole life insurance policy Correct

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 2/12 The correct answer: 2 and 4 Your answer: 2 and 4 Solution: A gain resulting from the disposition of most types of property will be considered a capital gain as long as that gain is not included in the taxpayer's income under any another provision of the Income Tax Act. However, this definition of capital gain specifically excludes gains on the disposition of certain types of property, including: eligible capital property gains on inventory (i.e., profits on goods held for resale) the unpaid interest on bonds that are sold between coupon dates insurance policies (except for gains on related segregated funds) (Statement 2 is false.) So, the inventory in Maria's gift shop could not give rise to a capital gain upon disposition. (Statement 4 is false.) So, Maria's whole life insurance policy could not give rise to a capital gain upon disposition. 3 Brent is employed full time as an office administrator, but he likes to fix up cars in his spare time and sell them at a profit. Because he does the work in his driveway, which is quite small, he never works on more than one car at a time. Last year, Brent worked on 4 cars as follows: Purchase Price Sale Price Car #1 $2,400 $4,600 Car #2 $4,000 $6,500 Car #3 $3,600 $3,000 Car #4 $2,000 $3,600 Total $12,000 $17,700 How much did Brent have to include in his taxable income last year? Correct The correct answer: $5,700 Your answer: $5,700 Solution: Over the years, the Courts have held that the disposal of a true investment (one that yields a return such as interest or rent, or that offers a reasonable expectation of a return in the foreseeable future) is a capital transaction. On the other hand, activities of a speculative nature have often been regarded as adventures in the nature of trade, which gives rise to business income. The disposition of inventory will give rise to business income, not capital gains. (Choice C) Although Brent considers this to be hobby, the Income Tax Act considers it to be a business and thus the net gains that Brent realized must be fully included in his income because he is disposing of inventory, not capital property. Therefore, he must include $5,700 in his income, calculated as (total proceeds - total purchase prices) or ($17,700 - $12,000). 4 Stuart disposed of three capital properties this year. The first one is a piece of land that he purchased in 1978 for $87,000. He sold this land for $176,000. He also sold his cottage for $182,000, which he purchased in 1993 for $196,000. The cottage is a personal use property. Finally, he sold 300 shares of Truegood Corp. for $48 per share plus a 2% commission. He acquired the shares in 1995 for $36 per share and he

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 3/12 also paid a 2% commission at the time of acquisition. What was Stuart's net taxable capital gain this year? Correct The correct answer: $46,048 Your answer: $46,048 Solution: If a taxpayer disposes of capital property during the taxation year, he will realize a capital gain to the extent that the proceeds of the disposition exceed his adjusted cost base and any outlays or expenses that he incurred for the purpose of making the disposition. Taxable capital gains are 50% of capital gains. Similarly, if a taxpayer disposes of capital property, he will realize a capital loss to the extent that the sum of his adjusted cost base and any outlays or expenses that he incurred for the purpose of making the disposition exceed the proceeds of the disposition. However, the disposition of personal-use property cannot give rise to a deductible capital loss. Allowable capital losses are 50% of capital losses. Net taxable capital gains are calculated as the sum of all taxable capital gains - the sum of all allowable capital losses realized during the year. (Choice A) Although Stuart realized a loss on the sale of his cottage, this loss is not a deductible capital loss because the cottage is personal-use-property. His capital gain on the sale of the land is $89,000, calculated as (proceeds - adjusted cost base) or ($176,000 - $87,000). His ACB for the corporate shares is $11,016, calculated as (number of shares x (purchase price x (1 + commission rate))) or (300 x ($36 x (1 + 2%))). His proceeds of disposition were $14,400, calculated as (number of shares x sale price) or ($48 x 300), and he had selling expenses of $288, calculated as (sale price x commission rate) or ($14,400 x 2%). Therefore, he had a capital gain of $3,096 on the disposition of the shares, calculated as (proceeds - (ACB + selling expenses)) or ($14,400 - ($11,016 + $288)). So, Stuart's net taxable capital gain was $46,048, calculated as ((capital gain on land + capital gain on shares) x capital gains inclusion rate) or (($89,000 + $3,096) x 50%). 5 Charles purchased 4 pieces of land in 1974, each for $20,000. He sold the land for different prices at various times over the next 25 years, so the capital gains inclusion rate changed for some of the transactions. Which of the following statements are FALSE? 1. When Charles sold Property A in 1976 for $18,000, he realized an allowable capital loss of $1,000. 2. When Charles sold Property B in 1987 for $36,000, he realized a taxable capital gain of $8,000. 3. When Charles sold Property C in 1989 for $38,000, he realized a taxable capital gain of $9,000. 4. When Charles sold Property D in 1999 for $48,000, he realized a capital gain of $21,000. Correct The correct answer: 3 and 4 Your answer: 3 and 4 Solution: Taxable capital gains are calculated as (capital gains x capital gains inclusion rate). The capital gains inclusion rate was 50% from 1971 through 1987, two thirds for 1988 and 1989, and 75% for dispositions between January 1, 1990 and February 27, 2000. The capital gains inclusion rate dropped back down to two thirds for dispositions between February 28, 2000 and October 17, 2000, and down to 50% for dispositions after October 17, 2000. (Statement 3 is false.) The capital gains inclusion rate in 1989 was two thirds. So, Charles had a taxable capital gain of $12,000 on Property C, calculated as ((proceeds - ACB) x capital gains inclusion rate) or (($38,000 - $20,000) x (2 ÷ 3)). (Statement 4 is false.) The capital gains inclusion rate in 1999 was 75%. So, Charles had a capital gain of $28,000 on Property D, calculated as (proceeds - ACB) or ($48,000 - $20,000), and a taxable capital gain of $21,000, calculated as (capital gain x capital gains inclusion rate) or ($28,000 x 75%).

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1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 4/12 6 Martin originally acquired his farm many years ago for $102,000. This year, Martin sold the farm for its fair market value of $425,000 to his adult son, Jasper. He allowed Jasper to give him a down payment of $50,000 and told him that he could pay the rest in equal annual installments of $25,000 over the next 15 years. Martin was unable to make use of the lifetime capital gains exemption for qualified farm properties because he had already used it in a previous transaction. How much can Martin claim as a capital gains reserve in the year of the sale? Correct The correct answer: $285,000 Your answer: $285,000 Solution: When a taxpayer sells a capital property, he usually receives full payment at that time. However, sometimes he will receive the proceeds in installments over a number of years and this is called an installment sale. When this situation occurs, he may claim a capital gains reserve that allows him to defer, within limits, reporting a portion of the capital gain to the year in which he receives the proceeds of the disposition. If a taxpayer wants to claim a reserve, he still calculates his capital gain in the regular way, as the proceeds of the disposition minus the sum of the ACB and any outlays or expenses. From this amount, he deducts the amount of reserve that he is claiming for the year. The result is the amount that he must report as his capital gain for the year of disposition. In the case of farm property disposed of to a child of the taxpayer, the capital gain may be spread over a 10-year period provided that the sale proceeds are not received in less than 10 years (ITA 40(1.1)). For these types of property, the maximum reserve that can be claimed in any one year is restricted to the lesser of: a) (outstanding proceeds ÷ total proceeds) × capital gain and b) 1/10 of capital gain × (9 - n); where: n is the number of years since the property was sold. (Choice C) Martin realized a capital gain of $323,000, calculated as (sale price - ACB) or ($425,000 - $102,000). However, this is an installment sale and Martin is owed outstanding proceeds of $375,000, calculated as (sale price - down payment) or ($425,000 - $50,000). Because he is selling a farm to a child, he can spread a portion of the resulting capital gain out over 10 years. So, the maximum reserve that he can claim in the year of the sale is $285,000, calculated as the lesser of: a) $285,000, calculated as (outstanding proceeds ÷ total proceeds) × capital gain) or (($375,000 ÷ $425,000) × $323,000); and b) $290,700, calculated as (one-tenth of the capital gain × (9 - the number of years since the sale) or (0.10 × $323,000 × (9 - 0)) 7 Eric originally acquired 400 shares of Sample Corp. at a cost of $15 per share. This year, at a time when the shares were actively trading at $28 per share, he completed the following transactions: he gifted 100 shares to his mother he sold 100 shares to his sister for $20 per share he sold 100 shares to his brother for $35 per share he transferred the remaining 100 shares to an inter vivos trust with his infant son named as the beneficiary What is Eric's taxable capital gain? Correct The correct answer: $2,950 Your answer: $2,950

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 5/12 Solution: An individual will realize a disposition for tax purposes if he or she sells capital property. If the disposition is to a person with whom the individual does not deal at arm's length for proceeds less than fair market value, the individual is deemed to have received proceeds equal to the fair market value. The purchaser is deemed to have acquired the shares for the less than fair market value price he or she paid. If an individual disposes of property to someone with whom he or she does not deal at arm's length for proceeds in excess of fair market value, he or she is deemed to have received proceeds equal to the greater than fair market value sale price. The person who acquired the property is deemed to do so at the actual fair market value of the property. An individual will also realize a deemed disposition for tax purposes if he or she gifts capital property to anyone other than his or her spouse or common-law partner or, if he or she transfers capital property to a trust, other than a spousal trust or certain other rollover trusts. A tax-deferred rollover is not available for gifts to a child of the taxpayer, with the exception of certain farm properties. Eric disposed of 200 shares by way of an actual sale (i.e. the shares he sold to his brother and to his sister). Eric is deemed to have disposed of the shares that he gifted to his mother and that he transferred to a trust. Therefore, all four transactions have tax implications. As a result of the gift and the transfer to a trust, Eric is deemed to have disposed of the shares at fair market value. On these shares, he will realize a capital gain of $2,600, calculated as (deemed proceeds of disposition - ACB) x (number of shares gifted to mother + number of shares transferred to trust)) or [($28 - $15) x (100 + 100)]. As he sold the other shares to non-arm's length parties, special rules apply. For the shares that he sold to his brother at a price above fair market value, he is deemed to have received proceeds equal to the actual sale price. Therefore, Eric will realize a capital gain of $2,000 on these shares, calculated as [(deemed proceeds of disposition - ACB) x number of shares sold to brother] or [($35 - $15) x 100). His brother is deemed to have acquired the shares at their fair market value of $28 and that becomes the adjusted cost base for the shares going forward. For the shares that he sold to his sister at a price below fair market value, Eric is deemed to have received proceeds equal to the fair market value. Therefore, his capital gain on these shares will be $1,300, calculated as [(deemed proceeds of disposition - ACB) x number of shares sold to sister] or [($28 - $15) x 100]. His sister is deemed to acquire the shares for the below fair market value price of $20 she paid and this becomes the adjusted cost base for her shares going forward. Based on his four transactions, Eric has realized a taxable capital gain of $2,950, calculated as (sum of all capital gains x capital gains inclusion rate) or [($2,600 + $2,000 + $1,300) x 50%]. 8 In addition to his principal residence, Veryl owns a cottage in Canada and a hunting lodge in Montana. He is the sole shareholder of his own online distribution company, Verco Ltd. and he also holds 10% of the shares in a private corporation, Bobco Ltd., owned and operated by his brother, Bob. In each case, the current fair market value is greater than the adjusted cost base of the asset. Since he does all of his business over the Internet, Veryl can continue to operate his business from almost anywhere in the world. He is considering the possibility of moving permanently to the Bahamas to take advantage of the more favourable tax climate there. If he does, what statement is FALSE ? Correct The correct answer: Veryl would not realize a capital gain on the deemed disposition of his shares of Verco as a result of his move to the Bahamas. Your answer: Veryl would not realize a capital gain on the deemed disposition of his shares of Verco as a result of his move to the Bahamas. Solution: An individual who ceases to be a Canadian resident would face a deemed disposition on almost all capital property, except for taxable Canadian property (TCP) [e.g. real estate located in Canada and property owned by a business carried on by the taxpayer through a permanent establishment located in Canada (but, not shares in that business)]. Real property situated in Canada can still give rise to a capital gain that is taxable in Canada, even if the owner is non-resident.

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 6/12 Based on this, Veryl would realize a capital gain on the deemed disposition of his shares in Verco and Bobco. 9 Jerome is the sole shareholder of a very successful operating company. He originally started the company with savings of $20,000 and today it is worth $840,000. In preparation for retirement, Jerome wants to eventually pass the business to his children upon his death. In the meantime, he wants to continue to control the business and to receive income from it. He expects the business to continue to appreciate in value, and he is worried that his estate will incur a significant tax bill upon his death. This could force the liquidation of the business, such that it would not pass to the children. His financial advisor suggests that he implement an estate freeze by transferring the assets to a holding company in exchange for preferred shares and a possibly a promissory note. If Jerome decides to follow this strategy, what statements is FALSE? Correct The correct answer: To avoid realizing a capital gain, Jerome must take back a promissory note from the holding company. Your answer: To avoid realizing a capital gain, Jerome must take back a promissory note from the holding company. Solution: Section 85 of the Income Tax Act allows a taxpayer to transfer capital property to a corporation without realizing a capital gain, as long as the taxpayer receives at least one share in the transferee corporation. The corporation and the taxpayer can then jointly elect the deemed proceeds to be any amount between the FMV of the property disposed and a lower limit (ITA 85(1)(c.1)). If the taxpayer transfers property to the corporation with an FMV at least equal to its ACB in exchange for a combination of share and non-share consideration, the lower limit is the FMV of the non-share consideration. (Choice A is true.) Jerome could transfer his shares to the holding company without realizing a capital gain by using a Section 85 rollover. (Choice B is false.) To avoid realizing a capital gain, Jerome must receive at least one share in the transferee corporation. So, Jerome does not have to take back a promissory note from the holding company. (Choice C is true.) If Jerome was not able to make use of the capital gains exemption, he may want to elect a lesser amount of deemed proceeds. Because the FMV of the transferred property was greater than its ACB, the lower limit is the FMV of the non-share consideration. So, if Jerome takes the note for $400,000, the least amount of deemed proceeds that he can elect is $400,000. (Choice D is true.) Jerome and the holding company could elect for the transfer to take place at $770,000, which would allow Jerome to make use of the lifetime capital gains exemption for dispositions of qualifying small business shares. 10 Joshua sold his shares in DEF Corp., a public corporation, for $18,000 and his ACB was $12,000. He also sold his shares in JKL Inc., another public corporation, for $24,000 and his ACB was $36,500. Finally, a private small business corporation of which he owned 40% went bankrupt this year. His ACB for the small business corporation shares was $90,000. Joshua has never claimed any capital gains deductions. He had other income in the year of $40,000. What is Joshua's net capital loss at the end of the current tax year? Correct The correct answer: $3,250 Your answer: $3,250 Solution: A net capital loss is calculated as the sum of all allowable capital losses for the year minus all taxable capital gains for the year, plus any allowable business investment losses (ABILs) that were not deductible by the end of the carry forward period. If a taxpayer has an ABIL that is greater than his other income for the

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1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 7/12 year, he will not be able to deduct all of the ABIL in the year it arises, and the remainder is treated as a non-capital loss. An ABIL that is not deducted as a non-capital loss by the end of the 10th year of its carry-forward period becomes a net capital loss at the end of that 10th year (ITA 111(8)). (Choice B) Joshua has a taxable capital gain of $3,000 on his DEF shares, calculated as ((proceeds - ACB) x capital gains inclusion rate) or (($18,000 - $12,000) x 50%). He has an allowable capital loss of $6,250 on the disposition of the JKL Inc., calculated as ((proceeds - ACB) x capital gains inclusion rate) or (($24,000 - $36,500) x 50%). Finally, he has an allowable business investment loss of $45,000 as a result of the bankruptcy of the small business corporation, calculated as ((proceeds - ACB) x capital gains inclusion rate) or (($0 - $90,000) x 50%). Joshua only incurred the ABIL this year. It can be deducted from his current income, and any unused amount can be carried forward for ten years. If he is unable to deduct the remaining ABIL from his income during the carryforward period, it will be converted to a net capital loss at the end of the carryforward period. So, Joshua has a net capital loss of $3,250, calculated as (allowable capital losses - taxable capital gains) or ($6,250 - $3,000). 11 Bonnie owned 20% of the common shares in Toogood Corp., a Canadian-controlled small business corporation, when it went bankrupt this month. She had originally acquired her interest in Toogood for $80,000. After all of the creditors had been paid, there was nothing left for Bonnie. Last year, Bonnie had claimed a capital gains deduction of $17,000 on the disposition of other qualified small business shares. What is the amount of Bonnie's allowable business investment loss? Correct The correct answer: $23,000 Your answer: $23,000 Solution: A taxpayer may realize a business investment loss if she disposes of shares in a small business corporation as long as that disposition is to an arm's length person or that disposition is deemed to have occurred as a result of the recognition of a bad debt or shares of an insolvent company. An allowable business investment loss (ABIL) is calculated as 50% of a business investment loss, but it is reduced by the amount of any capital gains deductions claimed in prior years. (Choice B) Bonnie has a business investment loss of $80,000, calculated as (proceeds - ACB) or ($0 - $80,000) as a result of the bankruptcy of a Canadian-controlled small business corporation. So, Bonnie has an ABIL of $23,000, calculated as ((business investment loss x 50%) - previous capital gains deductions) or (($80,000 x 50%) - $17,000). 12 Sloan sold 500 shares of Bigboy Ltd. on April 15th for $24 each. The shares had an ACB of $42. Which of the following transactions would NOT result in a superficial loss for Sloan? Correct The correct answer: He purchases 500 shares of Bigboy on May 30th. Your answer: He purchases 500 shares of Bigboy on May 30th. Solution: A taxpayer will incur a superficial loss if he disposes of a capital property and he, or an affiliated person, acquires a substituted property, which includes the same property or an identical property, during a period that begins 30 days before and ends 30 days after the date of disposition. (Choice C) Sloan will not realize a superficial loss if he acquires replacement shares on May 30th, because this will be more than 30 days after his disposition of April 15th. 13 Tanya owns 60% of the shares in Brenco Ltd., a Canadian-controlled private corporation. She acquired her interest in the company at a cost of $53,000 and during the time that she held the shares, she received regular dividends of $14,000. Earlier this year, Brenco paid her a capital dividend of $12,000. Tanya then sold her shares to one of the remaining shareholders for $26,000. What is Tanya's capital loss?

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 8/12 Correct The correct answer: $16,100 Your answer: $16,100 Solution: The stop-loss rule state that if an individual, who has control over a private corporation that paid him or her capital dividends, subsequently disposes of those shares and that disposition results in a capital loss, the loss is reduced by the lesser of: the sum of all capital dividends received by the taxpayer on those shares and the loss minus all taxable dividends received by the taxpayer on those shares Tanya owned more than 50% of Brenco so, she had control over that corporation. Tanya has incurred a loss of $27,000, calculated as (proceeds of disposition - ACB) or ($26,000 - $53,000). She received taxable dividend income of $16,100, calculated as (dividends received x gross-up rate for other than eligible dividends) or ($14,000 x 115%). She also received a non-taxable capital dividend of $12,000. According to the stop-loss rule, the capital loss is calculated as [actual loss - ( lesser of the sum of all capital dividends received on those shares and (the actual loss - all taxable dividends received on those shares))]. So, Tanya has a capital loss of $16,100, calculated as [$27,000 - (the lesser of $12,000 and ($27,000 - $16,100))]. 14 Herman purchased a rental property twelve years ago for a total of $260,000 with $58,000 attributed to the land. Over the years, he has claimed total CCA of $46,000 on the building. This year, he sold the property for $357,000 with $74,000 attributed to the land. Remember to take into account the recapture on the building, the capital gain on the building, and the capital gain on the land. What is the total increase in Herman's taxable income as a result of this transaction? Correct The correct answer: $94,500 Your answer: $94,500 Solution: The capital gain on the disposition of depreciable capital property is calculated as the excess of the net proceeds of disposition over the aggregate of the adjusted cost base and the costs of disposition. In the case of depreciable property, the ACB is simply the capital cost of the property (ITA 54). If the proceeds exceed the capital cost, which in turn exceeds the undepreciated capital cost, the difference between the ACB and the UCC will be a recapture of CCA, and the difference between the ACB and the proceeds will be a capital gain. If a rental property is sold, and the sale of the building results in a terminal loss, but the sale of the land results in a capital gain, the terminal loss will be reduced to the extent of any capital gain on the land. The effect of this adjustment is to tax 100% of the capital gain up to the amount of the terminal loss. However, if the sale of the building results in a recapture and the sale of the land results in a capital gain, the taxpayer's total income will be increased by the (recapture on building + (50% x (capital gain on land + capital gain on building)). (Choice C) Herman has disposed of both a depreciable property (the building) and a non-depreciable property. He realized a capital gain of $16,000 on the land, calculated as (proceeds on land - ACB of land) or ($74,000 - $58,000).

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 9/12 He originally bought the building for $202,000, calculated as (total purchase price - amount allocated to land) or ($260,000 - $58,000). He sold the building for $283,000, calculated as (total proceeds - amount allocated to building) or ($357,000 - $74,000). His UCC for the building at the time of the sale was $156,000, calculated as (capital cost - UCC claimed over the years) or ($202,000 - $46,000). Therefore, he has a recapture of $46,000, calculated as (UCC prior to sale - (the lesser of capital cost and FMV)) or ($156,000 - (the lesser of $202,000 and $283,000)). He also has a capital gain on the building of $81,000, calculated as (proceeds - ACB) or ($283,000 - $202,000). So, the total increase in Herman's income would be $94,500, calculated as [recapture on building + (50% x (capital gain on land + capital gain on building))] or [$46,000 + (50% x ($16,000 + $81,000))]. 15 Holly originally purchased a computer for home use for $1,400. This year she sold the system for $400. She also sold the wrought iron patio set that she bought several years ago for $500 for $1,300. Finally, Holly sold a painting that she purchased a few years ago for $900 for $1,600. Which of the following statements is FALSE? Correct The correct answer: Her net capital gain from these three transactions is $500. Your answer: Her net capital gain from these three transactions is $500. Solution: Personal-use property is any property that is owned by the taxpayer and used primarily for his enjoyment or for the use or enjoyment of one or more individuals related to the taxpayer. So, it can include anything from a car, to a stereo, or even a cottage. Although gains on the disposition of personal-use property are subject to capital gains tax, losses from the disposition of personal use property are not deductible from capital gains, or from other sources of income. To eliminate the nuisance factor involved with keeping track of gains and losses on small items, the adjusted cost base on personal-use property is the greater of the adjusted cost base and $1,000. (Choice D is false.) The deemed proceeds from Holly's computer sale is $1,000, which results in a loss of $400, calculated as (deemed proceeds - ACB) or ($1,000 - $1,400). However, because this is personal-use property, the deemed capital loss is $0. The deemed ACB of her patio set is $1,000, so she had a gain of $300 on its sale, calculated as (proceeds - deemed ACB) or ($1,300 - $1,000). Her deemed ACB for the painting is $1,000, resulting in a capital gain of $600, calculated as (proceeds - deemed ACB) or ($1,600 - $1,000). So, Holly's net capital gain from these transactions is $900, calculated as (sum of capital gains - sum of capital losses) or ($600 + $300 - $0). 16 Stella was one of five shareholders in a private corporation. Three years ago, she decided to sell her shares to Arnold, an arm's length purchaser. The shares had a market value of $200,000 and her ACB was $40,000. Because Arnold had little in the way of liquid assets, Stella agreed to receive payment in five equal annual installments of $40,000 each beginning in the year of the sale; she accepted a series of promissory notes for the remaining four payments. After paying the first three installments, this year, Arnold became insolvent. What statement is FALSE? Correct The correct answer: Stella can recognize the bad debt by electing a deemed disposition at the end of this year for proceeds equal to the outstanding amount. Your answer: Stella can recognize the bad debt by electing a deemed disposition at the end of this year for proceeds equal to the outstanding amount. Solution: Capital debts receivable are considered to be capital property, so they can give rise to a capital gain or loss upon their disposition if the taxpayer gets back more or less principal than he loaned out. If the taxpayer is virtually certain that he will not be able to collect debts owing to him, he can elect to recognize the debt as a bad debt. The Income Tax Act may offer some relief to taxpayers who incur bad debts by allowing the resulting loss to be treated as a capital loss for tax purposes. If a taxpayer determines that he has a bad debt at the end of a taxation year, he can elect to recognize a deemed disposition of that debt at the end of the year for proceeds equal to nil. He will also be deemed to have reacquired the debt immediately after the end of the year at a cost equal to nil. When Arnold became insolvent, Stella could recognize the debt as a bad debt by electing a deemed disposition at the end of the year for proceeds equal to nil. So, Stella cannot recognize the bad debt by electing a deemed disposition at the end of this year for proceeds equal to the outstanding amount.

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1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 10/12 17 Ned purchased shares in Americorp for $12,000 US at a time when the exchange rate was 0.74. He later sold the shares for $18,000 US at a time when the exchange rate was 0.68. What is Ned's total taxable capital gain? Correct The correct answer: $5,027.19 Your answer: $5,027.19 Solution: If a taxpayer owns assets denominated in a foreign currency, he can realize a foreign exchange gain or loss as a result of fluctuations in the foreign exchange rate. Normally, if a taxpayer has transactions in a foreign currency that do not form part of business operations or that are merely the result of sundry dispositions of foreign currency, the resulting gain or loss will be deemed to be capital in nature. For transactions that are deemed to be capital in nature, foreign exchange gains and losses in excess of $200 are deemed to be capital gains and losses. (Choice C) When Ned purchased the shares, he paid $16,216.22 CDN, calculated as (purchase price in US$ ÷ original exchange rate) or ($12,000 ÷ 0.74). If the exchange rate had not changed, Ned would have received $24,324.32 CDN when he sold the shares, calculated as (sale price in US$ ÷ original exchange rate) or ($18,000 ÷ 0.74), resulting in a capital gain of $8,108.10, calculated as (sale price - purchase price) or ($24,324.32 - $16,216.22). In fact, Ned received $26,470.59, calculated as (sale price in US$ ÷ new exchange rate) or ($18,000 ÷ 0.68). Therefore, Ned also has a foreign exchange gain of $2,146.27, calculated as ($26,470.59 - $24,324.32), which results in an additional capital gain of $1,946.27, calculated as ($2,146.27 - $200) So, his total taxable capital gain is $5,027.19, calculated as (sum of capital gains x capital gains inclusion rate) or (($8,108.10 + $1,946.27) x 50%). 18 Joyce borrowed some money to create an investment portfolio four years ago, primarily in equities, with the following results: Interest and Taxable Dividend Income Interest Expense 4 years ago $1,200 $4,300 3 years ago $1,600 $3,900 2 years ago $1,000 $3,400 Last year $800 $2,800 Total $4,600 $14,400 As a result of these leveraged investments, Joyce has a cumulative net investment loss (CNIL) of $9,800, calculated as ($14,400 - $4,600). Joyce also owns shares in a qualifying small business corporation. She sold some of the shares in December of last year for $32,000 and her ACB for those shares was $6,400. What amount could Joyce claim as a capital gains deduction last year? Correct The correct answer: $3,000 Your answer: $3,000 Solution: A taxpayer's cumulative net investment loss is defined as the amount by which the aggregate of investment expenses exceeds the aggregate of investment income for all taxation years after 1987. In general, investment income includes property income (i.e., dividends, interest and rent), recaptured capital cost allowance, and taxable capital gains that do not qualify for exemption. Investment expenses generally include allowable deductions from property income and rental losses. When shares in a qualifying small business corporation are sold, the taxpayer must reduce the resulting taxable capital gain by the CNIL balance before applying the capital gains deduction, to arrive at the amount of the taxable capital gain that qualifies for the taxable capital gains deduction.

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 11/12 (Choice B) Joyce has a taxable capital gain of $12,800 as a result of selling some small business shares, calculated as ((proceeds - ACB) x capital gains inclusion rate) or (($32,000 - $6,400) x 50%). She also has a cumulative net investment loss of $9,800, calculated as (cumulative investment expenses - cumulative investment income) or ($4,600 - $14,400). So, the amount of the taxable capital gain that qualifies for the capital gains deduction is $3,000, calculated as (taxable capital gain - CNIL balance) or ($12,800 - $9,800). 19 Tony originally purchased his house in 1993 for $543,000. He sold it in 2020 for $770,000. Tony was not able to designate the property as his principal residence from 2009 through 2015 (inclusive) because he claimed another property as his principal residence during that time. How much will Tony have to include in his taxable income as a result of this transaction? Correct The correct answer: $24,322 Your answer: $24,322 Solution: To determine if a taxable capital gain will arise upon the sale of a principal residence, the owner must first calculate the capital gain. As with any capital property, the capital gain is calculated as the proceeds of disposition minus the sum of the adjusted cost base plus any associated outlays and expenses. The owner may then be able to reduce the gain under the principal residence exemption calculated using the following formula: [((N 1 + 1) ÷ N 2 ) x capital gain)] where: N 1 = number of years designated as principal residence after 1971; and N 2 = number of full or partial taxation years of ownership after 1971 On the sale of his home, Tony has realized a capital gain of $227,000, calculated as (proceeds of disposition- ACB) or ($770,000 - $543,000). He has owned the house for a total of 28 years or partial years after 1971, calculated as (most recent year - earliest year + 1) or (2020 - 1993 + 1). He cannot designate his house as his principal residence for seven of those years, calculated as (2015 - 2009 + 1). Consequently, for the period of ownership, Tony can only designate his house as a principal residence for a total of 21 years, calculated as (28 - 7). Therefore, he can exempt $178,357 of his gain, calculated as [((N 1 + 1) ÷ N 2 ) x capital gain] or [((21 + 1) ÷ 28) x $227,000]. Tony will have to include $24,322 in his taxable income, calculated as [(capital gain - principal residence exemption) x capital gains inclusion rate] or [($227,000 - $178,357) x 50%]. 20 Drake just sold four different stocks that he originally purchased in 1968, as follows: Stock A Stock B Stock C Stock D Original Cost $2,400 $6,300 $1,300 $4,200 V-Day Value $2,700 $7,000 $1,100 $4,500 Proceeds of Disposition $500 $6,800 $10,900 $12,400

1/30/24, 5:36 PM VirtualUniversity.CIFP.ca https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 12/12 In earlier years, he used the tax-free zone method when disposing of pre-1971 properties. What is his total capital gain resulting from his current dispositions? Correct The correct answer: $15,600 Your answer: $15,600 Solution: According to the tax-free zone method, the ACB of properties acquired prior to 1972 is deemed to be the median or middle amount of the original cost, the V-day value and the proceeds. (Choice B) The deemed ACB of Stock A will be $2,400, calculated as the median of ($2,400, $2,700 and $500), resulting in a capital loss of $1,900, calculated as (proceeds - deemed ACB) or ($500 - $2,400). The deemed ACB of stock B will be $6,800, calculated as the median of ($6,300, $7,000 and $6,800), resulting in a capital gain of $0, calculated as (proceeds - deemed ACB) or ($6,800 - $6,800). The deemed ACB of Stock C will be $1,300, calculated as the median of ($1,300, $1,100 and $10,900), resulting in a capital gain of $9,600, calculated as (proceeds - deemed ACB) or ($10,900 - $1,300). Finally, the deemed ACB of Stock D will be $4,500, calculated as the median of ($4,200, $4,500 and $12,400), resulting in a capital gain of $7,900, calculated as (proceeds - deemed ACB) or ($12,400 - $4,500). So, Drake's total capital gain will be $15,600, calculated as (capital gain on Stock C + capital gain on Stock D + capital gain on Stock B - capital loss on Stock A) or ($7,900 + $9,600 + $0 - $1,900). Close CFP ® , CERTIFIED FINANCIAL PLANNER ® and are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning Standards Council is the marks licensing authority for the CFP marks in Canada, through agreement with FPSB. Copyright �2002-2024 www.CIFP.ca. All rights reserved. Powered by 724Learning.net. CP6 (1146416) - 1/30/2024 5:36:28 PM

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