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Chapter 7

Chap7 Non-Arms lengthTransactions-Solutions.doc

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Solutions- Chapter 12 Exam Exercise Solution Twelve - 1 As the transfer is for \$130,000, a value that is less than the fair market value of \$175,000, ITA 69 deems the proceeds of disposition to be the fair market value. This means that Ms. Lox has a taxable capital gain of \$12,500 [(1/2)(\$175,000 - \$150,000)]. When her father sells the securities for \$175,000, his adjusted cost base will be the \$130,000 that he paid. This will result in a taxable capital gain of \$22,500 [(1/2)(\$175,000 - \$130,000). Exam Exercise Solution Twelve - 2 Ms. Lox will have a taxable capital gain of \$30,000 [(1/2)(\$210,000 - \$150,000)]. This is based on the actual proceeds of disposition. As the transfer is for \$210,000, a value that is more than fair market value of \$175,000, ITA 69 limits the father’s adjusted cost base to the fair market value. This means that when he sells the securities for \$175,000, he would have no gain or loss. Exam Exercise Solution Twelve - 3 As the transfer was to a related party for an amount less than the fair market value of the asset, Mr. Low will be deemed to have received the fair market value of \$132,000. This will result in a taxable capital gain of \$3,500 [(1/2)(\$132,000 - \$125,000)] and recapture of CCA of \$61,500 (\$125,000 - \$63,500). This is a non-arm’s length transfer in which the transferee’s cost is less than the transferor’s capital cost. In these circumstances, ITA 13(7)(e)(iii) deems the capital cost to the transferee to be that of the transferor. Given this, the sale at \$132,000 will result in a taxable capital gain of \$3,500 [(1/2)(\$132,000 - \$125,000)], plus recapture of \$61,500 (\$125,000 - \$63,500). In effect, the difference between \$132,000 and \$63,500 has been taxed twice. Exam Exercise Solution Twelve - 5 If Mr. Lionel does not elect out of ITA 73(1), the property will be transferred at the
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