Chapter 8 Notes Flashcards
What is the formula for calculating a reasonable reserve on a capital gain when the proceeds are payable over a number of years.
The lesser of:
(a) (proceeds not yet due ÷ total proceeds ) x gain
(b) (1/5 x gain) x (4 minus no. of preceding tax years ending after disposition)
What is the difference with regard to the capital loss resulting from an election to dispose of a bad debt betwen income-use property and personal-use property?
Income-use property:
- the loss can be carried back under Division C to be applied against the previous capital gain.
personal-use property:
- the debt would have been “personal-use property” and a capital loss is allowed only to the extent of the capital gain on the original disposition.
What are the two basic types of disposition which qualify for the capital gain rollover?
- an involuntary disposition of property (not limited to land and buildings) which has been lost, stolen, destroyed or taken by order of statutory authority (e.g., expropriation, bankruptcy); and
- a voluntary disposition of real property referred to as “former business property” that usually occur on the relocation of a business. “Former business property” means “land and buildings
What are the limitations on the capital gain deferral for a voluntary disposition?
- “former business property” meaning “land and buildings”
- limited period franchises, concessions, or licences on which an election has been made jointly by the transferer and the transferee
Are separate elections required to defer capital gains and recapture on replacement of property?
No. An election to defer either recapture or a capital gain is, also, deemed to be an election to defer the other.
Where a property is being replaced,
what are the taxpayer’s choices regarding the recognition of capital gain?
In the year of disposition, a taxpayer may choose to either:
- recognize the usual capital gain (i.e., POD minus ACB and selling costs), or
- elect to report the capital gain as the lesser of:
- the actual capital gain in (1) above, and
- the excess, if any, of proceeds for the old property over the cost of replacement (i.e., the amount of the proceeds not spent on the new property
What are the deadlines for replacing the old property in order to qualify for the capital gain rollover election when replacing property?
Voluntary disposition - by the later of
- end of the first taxation year after the year of disposition and
- 12 months after the end of the year of disposition
Involuntary disposition - by the later of:
- end of second taxation year after year of disposition and
- 24 months after the end of the year of disposition
When is the disposition of old property deemed to have occurred?
Only when proceeds are “receivable”. For involuntary dispositions (excluding death of taxpayer or winding-up of a corporation):, the earliest of
- the day the taxpayer has agreed to the full amount of the compensation;
- the day the compensation is finally determined by court or tribunal; and
- the day that is two years from the day of loss, destruction or taking where a claim or suit has not been taken before the courts.
What is the definition of replacement property?
Replacement property is defined as property acquired
- for the same or a similar use as the original property, and
- for gaining or producing income from the same or a similar business
As asset has been destroyed. What should the company do while waiting for the claim to be settled,
(A) Claim a terminal loss on the UCC because there is no longer an asset in the class.
(B) Continue to deduct CCA until the claim is settled
(B) Continue to deduct CCA until the claim is settle.
During the years prior to the settling of a claim, the company is deemed to own the destroyed asset. Hence the company can continue to take capital cost allowance.
How to you recalculate the capital gain in the year of disposal in order to transfer all or a part of the actual capital gain to the year in which the asset is replaced?
The amended gain will be the lesser of:
(A) Actual capital gain
P of D minus ACB
(B) Excess of replacement cost over P of D
replacement cost minus P of D
The deferred gain will be:
actual capital gain minus the amended gain (lesser of A and B above)
What is the election under section 22?
Where a person has sold all or substantially all of the property used in the business to a purchaser who will continue the business, the Act provides for joint election by the vendor and purchaser which permits the purchaser to take the reserve or right off in respect of Accounts Receivable.
The seller would take the reserve or wright-off back into income and the difference between the face value of the accounts receivable and the FMV received would be deducted by the seller as a business loss.
If the election were not made, the loss would be a capital loss, only 1/2 allowable as a deduction and only deductible against taxable capital gains.
The buyer could then set up an appropriate reserve for doubtful debts and could write off any of these debts should they prove bad.
If, after a disposition of a property, the balance of the UCC of the class is positive, will this always result in a terminal loss?
Only if there are no longer any properties in the class otherwise CCA continues to be claimed.
When the POD is greater than the capital cost of a depreciable property plus disposal costs there is a capital gain. Is there a capital loss when the POD is less than the capital cost?
No. A capital loss can never arise on the disposition of depreciable property. After deducting the LOCP from the UCC there will either be a recapture of CCA which is brought back into income or a terminal loss which is deducted from income.
How do you determine whether to allocate proceeds of disposition between land and buildings on their sale
Key Question: Was there a capital gain on the land and a terminal loss on the building?
If so, an amount equal to the terminal loss (but not greater than the capital gain) will reduce the proceeds on the land and increase the proceeds on the building. This will reduce the capital gain and the terminal loss will be eliminated.
