Solution to Assignment Problem Nine - 11 PDF

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Solution to Assignment Problem Nine - 11...

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Solution to Assignment Problem Nine - 11 Part 1 - Tax Consequences To Valerie At Time Of Gift The tax consequences associated with gifting each property would be as follows: Nixon Distributors Shares If this property is given to Bunny and Valerie does not elect out of ITA 73(1), there would be no tax consequences at the time of the gift. If this property is given to either of her children, there would be a taxable capital gain calculated as follows: Proceeds Of Disposition Adjusted Cost Base

(

$1,800,000 823,000)

Capital Gain Inclusion Rate

$

977,000 1/2

Taxable Capital Gain

$

488,500

If this property is given to Bunny and Valerie does not elect out Royal Bank Shares of ITA 73(1), there would be no tax consequences at the time of the gift. If this property is given to either of her children, there would be a taxable capital gain calculated as follows: Proceeds Of Disposition Adjusted Cost Base

$1,230,000 ( 1,050,000)

Capital Gain Inclusion Rate

$ 180,000 1/2

Taxable Capital Gain

$

90,000

Farm Land If this property is given to Bunny and Valerie does not elect out of ITA 73(1), there would be no tax consequences at the time of the gift. In addition, ITA 73(3) permits the transfer of farm property used by the taxpayer or her family to a child on a tax free basis. This means that would be no tax consequences for Valerie at the time of the gift to either child. If this property is given to Bunny and Valerie does not elect out of Rental Property ITA 73(1), there would be no tax consequences at the time of the gift. If this property is given to either of her children, Valerie would be subject to taxation based on a disposition of the property at its fair market value. This would result in the following amounts of income for Valerie at the time of transfer. Land

Building

Proceeds Of Disposition Adjusted Cost Base/Capital Cost

$600,000 ( 400,000)

$1,300,000 ( 900,000)

Capital Gain Inclusion Rate

$200,000 1/2

$ 400,000 1/2

Taxable Capital Gain

$100,000

$ 200,000

Capital Cost Of Building UCC Recapture Of CCA

$900,000 ( 749,124) $150,876

Part 2 - Tax Cost Of The Property To The Recipient The required tax costs for each property would be as follows: Nixon Distributors Shares As Valerie did not elect out of ITA 73(1), the tax cost of these shares for Bunny would be Valerie's tax cost of $823,000. For either child, the tax cost would be the $1,800,000 fair market value at the time of transfer. Royal Bank Shares As Valerie did not elect out of ITA 73(1), the tax cost of these shares for Bunny would be Valerie's tax cost of $1,050,000. For either child, the tax cost would be the $1,230,000 fair market value at the time of transfer. With the use of ITA 73(1) and ITA 73(3), no gain would be recognized if Farm Land the land was gifted to any of the three possible recipients. Given this, each recipient's tax cost would be equal to Valerie's original cost of $650,000. Rental Property As Valerie did not elect out of ITA 73(1), the tax costs for Bunny would be Valerie's tax costs. This means $400,000 for the land and $900,000 for the building. The building's UCC for Bunny is equal to Valerie's UCC of $749,124. For either child, the capital cost of the land would be $600,000 and the capital cost of the building would be $1,300,000. However, for CCA purposes, ITA 13(7)(e) would limit the UCC value to $1,100,000, calculated as follows: Original Cost Of Building Fair Market Value At Transfer Original Cost

$1,300,000 ( 900,000)

Excess Fraction

$ 400,000 1/2

$

Value For CCA Purposes

900,000

200,000 $1,100,000

Part 3 - Income Subsequent To The Gift The required information for each property would be as follows: Nixon Distributors Shares If the shares are gifted to Bunny, any dividend income she receives subsequent to the transfer would be attributed back to Valerie. This would also be the situation if she gives the shares to her 14-year-old son, Richard. However, as her daughter Patricia is over 18, income would not be attributed to her if she is the recipient of the shares. Note To Instructor On Gift To Patricia Because dividends paid by private companies to individuals who are under 18 are subject to the tax on split income, such dividends would not be attributed back to Ms. Nixon. However, the tax on split income is not covered until Chapter 11 of the text. Given this, indicating the dividends would be attributed back to Ms. Nixon would be an acceptable alternative answer at this point in the text. If the shares are gifted to Bunny, any dividend income she Royal Bank Shares receives subsequent to the transfer would be attributed back to Valerie. This would also be the situation if she gives the shares to her 14-year-old son, Richard. However, as her daughter Patricia is over 18, income would not be attributed to her if she is the recipient of the shares.

Farm Land Farm income is considered business income rather than property income. As there is no attribution of business income, any farm income that accrues subsequent to the gift will be taxed in the hands of the recipient. Rental Property If the gift is to either Bunny or Richard, any rental income that accrues subsequent to the gift will be attributed back to Valerie. If the gift is to her 19-year-old daughter Patricia, any rental income that accrues subsequent to the gift would not be attributed back to Valerie, but would be included in Patricia's income. Part 4 - Tax Consequences Of Subsequent Sale The required tax consequences can be described as follows: Nixon Distributors Shares If Bunny is the recipient of the gift, her tax cost would be $823,000. Based on this, the subsequent sale would have the following tax consequence: Proceeds Of Distribution ($1,800,000 + $100,000) Adjusted Cost Base Capital Gain Inclusion Rate Taxable Capital Gain

(

$1,900,000 823,000) $1,077,000 1/2 $

538,500

This gain would be attributed back to Valerie. If either child is the recipient of the gift, their tax cost would be $1,800,000. Based on this, the subsequent sale would have the following tax consequence: Proceeds Of Distribution ($1,800,000 + $100,000) Adjusted Cost Base

$1,900,000 ( 1,800,000)

Capital Gain Inclusion Rate

$ 100,000 1/2

Taxable Capital Gain

$

50,000

This gain would be taxed in the hands of the recipient child and would not be attributed back to Valerie. Royal Bank Shares If Bunny is the recipient of the gift, her tax cost would be $1,050,000. Based on this, the subsequent sale would have the following tax consequence: Proceeds Of Distribution ($1,230,000 + $100,000) Adjusted Cost Base

$1,330,000 ( 1,050,000)

Capital Gain Inclusion Rate

$ 280,000 1/2

Taxable Capital Gain

$

140,000

This gain would be attributed back to Valerie. If either child is the recipient of the gift, their tax cost would be $1,230,000. Based on this, the subsequent sale would have the following tax consequence:

Proceeds Of Distribution ($1,230,000 + $100,000) Adjusted Cost Base

$1,330,000 ( 1,230,000)

Capital Gain Inclusion Rate

$ 100,000 1/2

Taxable Capital Gain

$

50,000

This gain would be taxed in the hands of the recipient child and would not be attributed back to Valerie. Farm Land The tax cost for each of the 3 potential recipients would be $650,000. Based on this, the sale of the farm land would result in a taxable capital gain calculated as follows: Proceeds Of Distribution ($960,000 + $100,000) Adjusted Cost Base

(

$1,060,000 650,000)

Capital Gain Inclusion Rate

$

410,000 1/2

Taxable Capital Gain

$

205,000

If the gift was to Valerie's 19-year-old daughter Patricia, the gain would be taxed in her hands and not attributed back to Valerie. Alternatively, if the gift was to either Bunny or Richard, the gain would be attributed back to Valerie. While there is usually no attribution of capital gains related to transfers to minors, there is an exception to this when farm property is transferred on a tax free basis. If Bunny is the recipient of the gift, her adjusted cost base for the Rental Property land would be $400,000 and her capital cost and UCC of the building would be $900,000 and $749,124 respectively. Based on this, the sale would have the following tax consequences: Land Proceeds Of Disposition ($1,300,000 + $100,000) Adjusted Cost Base/Capital Cost

Building

$600,000 ( 400,000)

$1,400,000 ( 900,000)

Capital Gain Inclusion Rate

$200,000 1/2

$ 500,000 1/2

Taxable Capital Gain

$100,000

$ 250,000

Capital Cost Of Building UCC

$900,000 ( 749,124)

Recapture Of CCA

$150,876

Both the taxable capital gain and the recapture would be attributed back to Valerie. The capital cost for either child would be $600,000 for the land and $1,300,000 for the building. Based on this, there would be no taxable capital gain on the sale of the land. However, there would be a taxable capital gain on the building as follows: Proceeds Of Disposition Capital Cost

$1,400,000 ( 1,300,000)

Capital Gain Inclusion Rate

$ 100,000 1/2

Taxable Capital Gain

$

50,000

The taxable capital gain would be taxed in the hands of the gift recipient. It would not be attributed to Valerie. The capital cost for either child of $1,100,000 was calculated in Part 2 of the solution. There would be no recapture, as no CCA was taken by the recipient of the gift. UCC Lesser Of: Proceeds Of Disposition = Capital Cost = $1,100,000 Recapture Of CCA

$1,100,000 $1,400,000 ( 1,100,000) Nil...