Herbert Nash has owned a 200-acre parcel of land for several years
1. Herbert Nash has owned a 200-acre parcel of land for several years. He had purchased the land for $250,000 with the intention of eventually building a home on the property. However, he received an offer of $425,000 for 75 acres of the property. Because these 75 acres had waterfront and better road access, he believed that the FMV of the remaining 125 acres was only $175,000. He accepted the offer and planned to use an ACB of $177,083
[$250,000 X $425,000/($425,000 + $175,000)] in calculating his gain or loss.
2. Gregory Hayes sold a capital property with an ACB of $85,000 for $135,000. The $135,000 price included a charge for a warranty on the property which he anticipates will cost him $5,000 to service. He did not anticipate any of the warranty expenses would be incurred in the year of the sale. He planned to recognize a capital gain on the transaction of $45,000 after the consideration of the estimated warranty costs.
3. During the current year Ms. Kristy Stone sold her sailboat to an arm’s length person for $71,000. She had purchased the boat several years ago for $51,000. Also, during the year, she sold securities with an ACB of $22,000 for $12,000. She intends to deduct the loss on the securities against the gain on the sailboat.
4. Nellie Ward had a cottage which she had owned for a number of years. Nellie Ward purchased the cottage for $125,000. It is currently worth more than $500,000. While she has rarely used it, preferring to stay in her penthouse in the city, she believed that it would continue to increase in value. Given this, she decided to convert it to a rental property. While she planned to report her future rental income to the CRA, she did not plan to recognize a capital gain on the conversion of the property, since there was no actual disposition.
5. During the current year, Ignacio Rogers sold a non-depreciable capital property for $216,000. The ACB of the property was $184,000, resulting in a capital gain of $32,000. Under the terms of the sale, he would receive 10% ($21,600) of the sale price in the year of the sale, with the remainder due in the following year. As a result, he would recognize only $3,200 of the capital gain in the year of the sale.
Required: In each of the preceding Cases, indicate whether you believe that the income tax treatment proposed is the correct one. Explain your conclusion.
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