Class Notes (811,481)
Canada (494,754)
AFM 362 (14)
Lecture 9

AFM 362 Lecture 9: Non-arms length

4 Pages
Unlock Document

Accounting & Financial Management
AFM 362
Ken Klassen

Problem 1 1) Transfers to spouse have an automatic rollover. $3000 bond interest is attributed to Donna. If they elect out of the rollover, interest on the loan is not at the prescribed rate, $3000 bond interest is attributed to Donna. (automatic rollover) Attribution Automatic rollover Always Elect out of rollover If you choose to, does an exception apply? FMV consideration? If debt, is it at prescribed rate? Are they divorced/separated? 2) Transfers to spouse have automatic rollover - $3000 bond interest attributed to Donna. If elect out, because Donna does not receive FMV consideration of $100000, $3000 bond interest is attributed to Donna. 3) Because her daughter is under 18 at the end of the calendar year, $3000 bond interest is attributed to Donna. 4) Same answer as (3) What if daughter paid prescribed interest on the loan? Then no attribution. 5) Because daughter is over 18, but an exception applies. Interest on the loan is not at the prescribed rate, so $3000 interest is attributed to Donna. 6) Because daughter is over 18, attribution will not apply. Problem 4 A Taxable income for each mutual fund 200000 x 4% = 8000 interest income Marginal tax rate of 50% = 4000 $200000 x 3% = 6000 dividend 6000 + Gross up of 38% = 8280 taxable dividend Marginal tax rate of 50% = 4140 (larger after-tax cash than other one) DTC = -2280 Actual tax paid = 4140 – 2280 = 1860 After-tax income (6000 – 1860) = 4140 B If he purchases the mutual fund in the name of his 8 year old daughter, this is transfer of property. Under 18, so property income from mutual fund will be attributed to Mr. Wiser. No advantage. If daughter sells mutual fund? CG attribution only applies to first generation income, not second generation, CG will not be attributed to Mr. Wiser and he may have an advantage here. C No election out of spousal rollover The loan to his wife is at the prescribed rate – Mr. Wiser can avoid income attribution if she pays him interest. Mr. Wiser will include property income from the original loan to his wife (200000 x 1% = $2000) on his tax return, but the rental income (property income) of $16000 will not be attributed to Mr. Wiser. What are the consequences to Mr. Wiser’s wife? His wife’s property income will include the rental income of $16000 less $2000 less any other expenses. If wife sells property, what happens to Mr. Wiser? Capital Gain attribution will not apply to Mr. Wiser because FMV consideration given or because it’s second generation income. Problem 10 A Transfer to spouse with automatic rollover. If they elect out, there is no FMV consideration given. In either case, attribution will apply. Tony reports 5000 x 1.38 = $6900 under 3a property income (also DTC). How can Tony avoid attribution of this income? B Daughter is 18 at the end of the year, attribution will not apply. Daughter will report BOTH $2500 and $7500 of interest income earned on investments under 3a property income. Who paid the tax on the $7500 last year? Her mother. Problem 6 FMV = 100000 ACB = 70000 Higher of proceeds, lower of cost = Max CG Donna cons Don cons Attribution Automatic rollover POD becomes ACB Deemed cost of acq = Dividend income of Deemed POD = 70000 70000 5000 x 1.38 = 6900 ACB = 70000 attributed to Donna. CG = 0 Elect out of rollover When transferring Deemed cost of acq No FMV consideration. shares: (FMV) = 100000 6900 dividend income Deemed POD = 100000 attributed to Donna. ACB = 70000 CG = 30000 What if Don sells the shares? FMV = 100000 ACB = 70000 Donna cons Daughter cons Attribution Give to 15 yo daughter POD = 100000 Cost of acq = 100000 Yes attribution, ACB = 70000 (gift) daughter under 18 CG = 30000 and no exceptions Give to 25 yo daughter POD = 100000 Cost of acq = 100000 No attribution ACB = 70000 because daughter CG = 30000 over 18. Daughter will report 6900. What if either daughter sells the shares? Pro
More Less

Related notes for AFM 362

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.