Reference no: EM133228384
Dr. Sandra Bolt is 49 years of age and an extremely successful physician in Halifax, Nova Scotia. She is married to Tod Bolt and has two children. On December 31, 2018, her son, Dirk, is 20 years old and her daughter, Dolly, is 15 years old. Each of the children earns about $10,000 per year in income from part time acting jobs. While her husband Tod qualified as a professional accountant, he did not enjoy the work and, for the last 10 years, he has assumed the role of house parent. As a consequence, his only current source of income is the interest on $335,000 that he has in his personal savings account. This interest amounts to about $20,000 per year and all of the savings were accumulated from amounts that he earned while working as a professional accountant.
On December 28, 2018, Sandra Bolt is holding shares in a Canadian public company that have an adjusted cost base of $185,000 and a fair market value of $225,000. She is considering transferring these shares to either her husband or to one of her two children. She seeks your advice as to the tax consequences, both to herself and to the transferee, that would result from such a transfer.
During your discussions, Sandra Bolt has indicated the following:
- The transfer will take place on December 31, 2018.
- Any proceeds she receives from her family on the share transfer will not be invested in income producing assets.
- She wishes you to assume that the securities would pay eligible dividends during 2019 of $18,500 and that the transferee would sell the securities on January 1, 2020, for $260,000. The gross up on the eligible dividends would be $7,030 [(38%)($18,500)], resulting in a taxable amount of $25,530 ($18,500 + $7,030). The federal dividend tax credit would be $3,835 [(6/11)($7,030)].
Required: Each of the following independent Cases involves a transfer by Sandra Bolt to a member of her family. Indicate, for both Sandra Bolt and the transferee, the 2018, 2019, and 2020 tax effects of:
- the transfer on December 31, 2018, the assumed 2019 receipt of the dividends, and
- the assumed 2020 disposition by the transferee.
Note that some of the Cases have been included to illustrate specific provisions of the relevant legislation and do not necessarily represent a reasonable course of action on the part of Sandra Bolt.
Case A Sandra Bolt gives the securities to her husband and does not elect out of the provisions of ITA 73(1).
Case B Sandra Bolt's husband uses money from his savings account to purchase the securities for their fair market value of $225,000. Sandra Bolt does not elect out of the provisions of ITA 73(1).
Case C Sandra Bolt's husband uses money from his savings account to purchase the securities for their fair market value of $225,000. Sandra Bolt elects out of the provisions of ITA 73(1).
Case D Sandra Bolt's husband uses money from his savings account to purchase the securities for $140,000. Sandra Bolt does not elect out of the provisions of ITA 73(1).
Case E Sandra Bolt's husband uses money from his savings account to purchase the securities for $140,000. Sandra Bolt elects out of the provisions of ITA 73(1).
Case F Sandra Bolt gives the securities to her daughter, Dolly.
Case G Sandra Bolt gives her daughter, Dolly, a $225,000 loan. The loan requires interest to be paid at commercial rates, and Dolly uses the proceeds of the loan to purchase her mother's securities at fair market value. Sandra Bolt believes that the combination of dividends on the securities and Dolly's income from part time jobs will be sufficient to pay the interest on the loan.
Case H Sandra Bolt gives her son, Dirk, a $225,000 interest free loan. Dirk uses the proceeds to purchase his mother's securities at their fair market value of $225,000.