Tax Consequences Of Share Disposition And Income Tax Payable For Ms. Wanda Withers – Case Scenarios
- December 21, 2023/ Uncategorized
Case 1 – Frederick Fence’s Share Disposition
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Case A. Calculating the amount |
$ |
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Proceeds of Disposition |
900000 |
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Less: |
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Adjusted Cost Base |
315600 |
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Costs of Disposition |
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Capital Gain |
584400 |
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Inclusion Rate |
½ |
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Taxable Capital Gain |
292200 |
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Conclusion and Justification: In case of partial disposition, adjusted cost base is allocated on reasonable basis. Reasonable basis for land means on the basis of acres, unless other factors. Since the 220 acres of land which was sold were waterfront and had better road access, therefore sale value of sold acre of land and fair market value of remaining acres will be considered as reasonable basis for allocation of cost, so in filling income tax return in 2018, George Marker will use adjusted cost base calculated on the basis of sale value of sold area of land and fair market value of remaining acres (Baliamoune-Lutz & Garello, 2014). In the given case allocation made by George Marker in his income tax return is correct and justifiable. Inclusion rate of capital gain in 2017 is ½. Therefore, out of total capital gain of $584400 (900000-315600), total taxable capital gain for George Marker will be $584400*1/2= $29200 |
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Case B. Warranties |
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Proceeds of Disposition |
150000 |
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Less: |
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Adjusted Cost Base |
35000 |
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Capital Gain |
115000 |
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Less: Capital Loss( Warranty) |
15000 |
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Total Capital Gain |
100000 |
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Inclusion Rate |
½ |
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Taxable Capital Gain |
50000 |
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Conclusion and Justification: If a warranty is provided on sale of a capital asset, then payment of such warranty will be included in capital gain and cost of warranty becomes a capital loss and this capital loss (warranty) will be deducted from capital loss to calculate total capital loss (Mendly-Zambo, 2017). In the given case, Cathy Conrad sold property with an adjusted cost base of $35000 for $150000 and the cost of warranty provided with asset by her is costing $15000. Therefore, capital gain of $115000 will include warranty of $15000 and and this warranty cost will be treated as capital loss and will be deducted from $115000 and net capital gain will be $100000. So, it is concluded that capital gain calculated by Cathy Conrad of $100000 is correct and justifiable and taxable capital gain will be $50000(100000*1/2) |
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Case C. |
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Personal Use Property |
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Sofa Set purchase Price |
1700 |
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Selling Price |
1400 |
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Capital Loss |
300 |
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Listed Personal Property-Work of art |
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Painting Purchase Price (ACB) |
600 |
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Selling Price (POD) |
900 |
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Capital Gain |
300 |
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But under $1,000 Rule, Adjusted Cost Base and Proceeds of Disposition are deemed to be greater of $1,000 and actual amounts, so capital gain is nil ($1,000 ? $1,000 = $Nil) Conclusion and Justification: Roger Fell had sold sofa and painting to his daughter for $1400 and $900 respectively which is equal to estimated fair market value. The sofa and painting was purchased by Roger Fell for $1700 and $600 respectively. Sofa set will make a capital loss of $300(1700-1400) and for painting we will have to apply $1,000 Rule, according to this rule, adjusted cost base and proceeds of disposition must be greater or equal to $1000 and in the given situation adjusted cost base and proceeds of disposition are amounting to $600 and $900 respectively which is under $1000. Therefore, both adjusted cost base and proceeds of disposition will be deemed to be equivalent to $1000 and capital gain will be nil ($1,000 ? $1,000 = Nil) (Faccio & Xu, 2018). Action of Roger Fell to not to report capital gain and loss is not justifiable because he has capital loss of $300 in case of sell of sofa set. |
Conclusion and Justification:
As given in case study, Lorraine Lurch rarely used the cottage, since she preferred to live in her Vancouver condo (Assuming that cottage is principal residence). Also, it is given that Lorraine Lurch decided to convert the cottage into a rental property which attracts provision of capital gain regarding conversion of principal residence to rental property (Palan, et. al., 2013).
As per the provisions of Election Under ITA 45(2) such conversion elect to have no change in use on personal to business, hence Lorraine Lurch should defer capital gain taxation i.e. (1/2) ($425000) = $212500, until time of sale. Therefore, as per the provisions of Election Under ITA 45(2), Lorraine Lurch is correct and justifiable (Rugman, 2013).
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Case E. Capital Gains Reserve |
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The provisions of ITA 40(1)(a)(iii) limits the reserve to the lesser of: |
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• [(the total gain) (the proceeds not receivable until after end of the current year ÷ the total proceeds)] |
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• [(20% of the total gain) (4, less the number of preceding taxation years after the disposition)] |
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Maximum Reserve = Lesser Of: |
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($310000) ($504,000 ÷ $560,000) = $279000 |
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($310000) (20%) (4 – 0) = $248000 |
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hence CG reverse would be: $248000 |
Conclusion and Justification:
Jeo Solo had sold non-depreciable asset costing $250000 for $560000 and earned capital gain of $310000. Out of total sales considerations of $560000 he received $56000 only in 2018 and report $31000 as capital gain in 2018 return.
As per provisions of ITA 40(1)(a)(iii) CG reserve to be created lower of follows:
- [(the total gain) (the proceeds not receivable until after end of the current year ÷ the total proceeds)
- [(20% of the total gain) (4, less the number of preceding taxation years after the disposition)]
Therefore, by applying the provisions of ITA 40(1)(a)(iii) in the given problem, maximum amount of capital gain reserve will be amounting of $248000, so capital gain of $62000(310000-248000) is to be reported in 2018 return by Jeo Solo.
And therefore, it is concluded that capital gain reported by Jeo Solo of $31000 is not correct and his action of not reporting capital gain amounting to $62000 is not justifiable.
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Question 2. |
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Case 1. Shares sold to an arm’s length party |
$ |
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Proceeds of Disposition |
990000 |
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Adjusted Cost Base |
600000 |
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Capital Gain |
390000 |
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Inclusion Rate |
½ |
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Taxable Capital Gain |
195000 |
Note: Tax consequences for Mr. Frederick fence: As per Canadian income tax act 39(4), all Canadian securities be treated as capital property, therefore, there shall be a capital gain to the Mr. Frederick fence on disposition of shares acquired. Consequently, he is required to pay taxes on the amount of capital gain which we calculated above. In calculating the taxable capital gain, we shall include brokerage charge in the cost of shares and as a result, adjusted cost base is come. Hence, the above answer is correct as provisions. He has to pay tax as per applicable rates (Reyes-Mariano, 2015).
Tax consequences for purchaser when he resold the purchased shares: If he resold then, he is not liable to pay tax on this transaction, because, there is no capital gain as well as capital loss, because there is same amount of sale proceeds as well as cost of the shares which is $990000 (Faccio & Xu, 2018).
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Case 2. Gifting the shares to his 16-year-old daughter i.e. minor |
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$ |
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Acquisition cost of shares |
600000 |
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Fair market value |
990000 |
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Capital Gain would be taxable in hand of Frederick not in hand of 16-year daughter i.e. Beneficiary |
390000 |
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Inclusion Rate |
½ |
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Taxable Capital Gain |
195000 |
Note: Tax consequences for Mr. Frederick fence: In first transaction when Mr. Frederick fence gifted his share to his daughter, it will not attract any taxable event. Therefore, it is not liable to any tax payable as per the provisions of Canadian income tax act (Rugman, 2013).
But in second transaction, when his daughter resold shares which she acquired through inheritance at a price of $99000 is taxable event. But she is minor, hence her income is clubbed with his father (Fredrick fence) and accordingly Mr. Frederick is liable to pay tax on taxable capital gain which is $195000 as calculated in above.
Tax consequences for purchaser when he resold the purchased shares: In this case, purchaser is his daughter and she is minor. Therefore, she is not liable to tax payment but her income is clubbed with her parents (Reyes-Mariano, 2015). There are no tax consequences in the hands of daughter of Frederick.
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Case 3 |
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In given case Frederick has Proceeds of Disposition of $990000 and a capital gain of $390000 [($990,000 – $600,000)] |
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And his brother has an Adjusted Cost Base of $150,000 |
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Both them is liable for capital gain tax, having potentials for double taxation |
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Hence, Taxable capital gain amount of Frederick’s is $ 195000 ($390000/2) |
Case 2 – Frederick Fence’s Gift of Shares
Note: Tax consequences for Mr. Frederick fence: As per ITA 69, If an individual sold his securities to his relatives at a price which is not arm’s length price or transfer is not arm’s length price, then we shall assume actual arm’s length price as a sale proceed (Palan, et. al., 2013).
In this question Mr. Frederick sales his share to his brother at $150000 which is less than arm’s length price ($990000), hence for calculating taxable capital gain, we shall take $990000 as sales proceeds rather than $150000. accordingly, tax is payable on capital gain of $195000 as calculated above.
Tax consequences for purchaser when he resold the purchased shares: In this case, as per relevant provisions of income tax act of Canada, the adjusted cost base in hand of Frederick’s brother is $150000 and there is a potential of double taxation because when his brother is sold this share then he is liable to tax and his sale proceeds is $990000 and adjusted capital base is $150000 instead of $99000 which is taken on calculation of in Mr. Frederick’s case.
No, in this case, tax planning objective is not achieved and Mr. Frederick is trying to evade the tax, as a result, there is double taxation (Hogg, et. al., 2013).
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Case 4 |
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In given case John has Proceeds of Disposition of $990,000 and a capital gain of $600,000 |
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($1200,000 – $600,000) |
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And his Mother has an Adjusted Cost Base of $990,000 |
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Mr. Frederick Fence is liable for capital gain tax, having potentials for double taxation |
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Hence, Taxable capital gain amount of Frederick’s is $ 300000 ($600000/2) |
Note: Tax consequences for Mr. Frederick fence: In this case, as per ITA 69 of Canada, Mr. Frederick is liable to tax on taxable capital gain which is calculated by taking sales proceeds of $1200000 and adjusted cost base of $600000 and resultant taxable capital gain is $30000. we cannot take $990000 which is fair market value of the shares at the time of selling by Mr. Frederick because there is no provision regarding this in the law if we shall the securities higher than fair market value (arm’s length price) but if assesse is sold this shares at a price less than fair market value then he shall be taken a fair market value not the actual sales proceed due to provision in the law (Fleming, 2017).
Tax consequences for purchaser when he resold the purchased shares: In this case, Mr. Frederick’s mother is not liable to tax payment because there is same amount of both sales proceeds as well as adjusted cost base because in this case, we shall not take $1200000 as adjusted cost base (A.C.B.) we shall take $99000 as A.C.B. And there is no capital loss in the hands of Frederick’s mother (Byrd, 2016).
No, tax planning objective is not achieved and there is a double taxation because Mr. Frederick is trying to offset his mother capital gain with losses by selling shares at a higher price than arm’ length price (Hlaing, 2018).
Question 3:
Case A:
Gross total income of Mrs. Wanda Withers = $90000
less: Deduction
Medical expenses =$2700(5400-90000*3/100)
Total income =$87300
Tax
First $45282 15% =$6792.3
Balance $42018 20.5% =$8613.69
Total tax = $15605.99
Note1: income of daughter will not be clubbed because her age exceeds 16 years
Note2: medical expense will be deducted who have maximum income in its return of income.
Case 3 – Frederick Fence’s Share Sale to Create a Loss
Income of Mrs. Wanda Withers = $150000
First $45282 15% =$6792.3
Next $45281 20.5% =$9282.605
Next $49825 26% =$12954.5
Balance $9612 29% =$2787.48
Total tax on total income = $31816.89
Note1: Net income of son of year 20 will not clubbed because son is physical infirmity and not severe enough.
Note2: Tuition fees paid by Mrs. Wanda Withers for his son which is transferred back to her will not be deducted while calculating total income.
Interest income $2500
CPP benefit $11400
Old age security benefit $7000
RPP income $38000
Total of above $58900
Add: Clubbed income:
Interest income $1000
Old age security benefit $7000
RPP income $680
Total income after clubbing $67580
Salary income $75000
Total income $75000
Donation of: $4000
Therefore, tax credit:
First $200 = 200*15%=$430
Next $38000 = 3800*29%=$1102
Total federal tax credit=1102+430=$1532
Tax on total income
First $45282 15% =$6792.3
Balance 20.5% =$6092.19
Total tax =$12884.49
Federal tax credit =$1532
Net tax payable =$ 11352.49
Rental income $120000
Add: clubbing income of daughter $8000
Total income $128000
Tax:
First $45282 15% =$6792.3
Next $45281 20.5% =$9282.605
Balance $37437 26% =$2787.48
Total tax = $18862.39
Disability tax credit on $8000 will be carry forward.
As of 2017, the federal income tax rates and brackets are:
15 percent on your first $45,282 of taxable income;
20.5 percent on your next $45,281 of taxable income, that is, on the portion of your taxable income over $45,282 up to $90,563;
26 percent on the next $49,825 of taxable income, that is, on the portion of your taxable income over $90,563 up to $140,388;
29 percent on the next $59,612 of taxable income, that is, on the portion of your taxable income over $140,388 up to $200,000;
33 percent of taxable income over $200,000.
PARTICULARS AMOUNT
Ms. Bev’s salary compensation – 140000
Add: Year-end bonus – 20000
Add: Alice’s income (Note1) – 5500
Add: Compensation received (volunteer work) – 400
Add: Tuition fees for Ms. Bev paid by employer – 3000
Add: Income received from employer sponsored plan – 8000
Add: Financial counselling services cost paid by employer – 900
Add: Performance award – 8000
Less: Medical expense:
For self 5500
For dependent child 11000
For her dependant mother 6800
Less: Child care cost(note2): 11000
TOTAL 151500
Calculation of federal tax payable:
On first $45282 of taxable [email protected]% – $6792.3
On next $45281 of taxable [email protected]% – $9282.605
On next $49825 of taxable [email protected]% – $12954.5
Balance $10612 of taxable [email protected]% – $3077.48
As of 2017, the federal income tax rates and brackets are:
15 percent on your first $45,282 of taxable income;
20.5 percent on your next $45,281 of taxable income, that is, on the portion of your taxable income over $45,282 up to $90,563;
26 percent on the next $49,825 of taxable income, that is, on the portion of your taxable income over $90,563 up to $140,388;
29 percent on the next $59,612 of taxable income, that is, on the portion of your taxable income over $140,388 up to $200,000;
33 percent of taxable income over $200,000.
References
Baliamoune-Lutz, M., & Garello, P. (2014). Tax structure and entrepreneurship. Small Business Economics, 42(1), 165-190.
Byrd, C. (2016). Byrd and Chen’s Canadian Tax Principles, 2016-2017 Edition Plus MyAccountingLab with Pearson E-text–Access Card Package. Pearson Education Canada.
Faccio, M., & Xu, J. (2018). Taxes, Capital Structure Choices, and Equity Value. Journal of Financial and Quantitative Analysis, 53(3), 967-995.
Fleming, J. (2017). Corporate Taxation in Canada ADMS 4562.
Hlaing, K. P. (2018). The Effect of Canadian Tax Policy on Executive Equity Grants: Corporate Tax Planning and Managerial Power.
Hogg, P. W., Magee, J. E., & Li, J. (2013). Principles of Canadian income tax law. Carswell.
Mendly-Zambo, Z. (2017). Competing Approaches to Household Food Insecurity in Canada.
Palan, R., Murphy, R., & Chavagneux, C. (2013). Tax havens: How globalization really works. Cornell University Press.
Reyes-Mariano, M. A. (2015). Stress’ Impact of Supervisory Styles in US Navy Reservists in Central New York During the Military Fiscal Year 2013-2014.
Rugman, A. M. (2013). Multinationals in Canada: Theory, performance and economic impact. Springer Science & Business Media.
