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Tax Treatment Evaluation for Various Scenarios

Question 1
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.

Question 2

Frederick Fence owned 300,000 shares of ABC Ltd., a publicly traded Canadian corporation. These shares, including brokerage fees, were acquired at a cost of \$600,000. Based on current trading values, these shares are now worth \$990,000.

The following four cases make different assumptions as to the identity of the purchaser, the circumstances of the sale, and the proceeds of disposition. In each case, assume that the purchaser immediately resold the shares for their fair market value of \$990,000.

Case 1

Because Frederick needed funds to acquire a house for his father, he sold the shares to an arm’s length party for \$990,000.

Case 2

Frederick gifted the shares to his 16-year-old daughter.

Case 3

Frederick sold the shares to his brother for \$150,000 to create a loss, as Frederick had realized significant capital gains during the current year. Since his brother had no other source of income, Frederick’s brother would be taxed on the gain from the resale at the minimum federal rate.

Case 4

Frederick’s mother had realized a large amount of capital gains during the current year. To help his mother, Frederick sold the shares to her for \$1,200,000. Frederick’s mother planned to use the loss on the immediate resale to offset her capital gains.

Required:

For each of the cases, advise Frederick of the tax consequences that will result from the disposition, and indicate the tax consequences to the purchaser of the shares when they are resold. In addition, in cases 3 and 4, indicate whether the stated tax planning objective was achieved.

Question 3

The following five independent cases made assumptions with respect to Ms. Wanda Withers’ marital status and her number of dependants. All cases relate to 2017 information. In addition, the five cases provide other information that is relevant to the determination of Ms. Wanda Withers’ 2017 income tax payable. In all cases, her employer withheld the required EI premiums and CPP contributions.

Case A

Mrs. Wanda Withers, age 55, had employment income of \$90,000. She was married to Mr. John Withers, also age 55, who had \$8,000 income. Their daughter, age 20, lived at home, and she had \$3,600 net income for tax purposes for 2017. Mrs. Wanda Withers and Mr. John Withers had medical expenses totaling \$5,400, and their daughter had \$7,000 medical expenses