Reference no: EM132462756
Problem - Three years ago, Rachel Kwan acquired a commercial property consisting of land and a building at a total cost of $1,580,000. At the acquisition date, an appraisal concluded that the respective values for the two components of the property were $420,000 for the land and $1,160,000 for the building. The acquisition was facilitated by a $550,000 mortgage on the property.
During 2016 and 2017, she operated the property as a proprietorship with good success, realizing a substantial profit in each year. Given this, she would like to transfer the property to a corporation as of January 1, 2018. On that date, the relevant facts about the property are as follows:
Land Building
Fair Market Value $580,000 $1,300,000
Adjusted Cost Base / Capital Cost $420,000 $1,160,000
UCC N/A $1,071,000
Mortgage Balance N/A $ 520,000
Rachel will elect a transfer value for the land of $580,000. The corresponding figure for the building will be $1,100,000.
The corporation will assume the $520,000 mortgage on the building and, in addition, will issue a note to Rachel for $1,160,000. The corporation will also issue common shares to Rachel with a fair market value of $200,000 and legal stated capital of $200,000.
The new corporation does not have a balance in its General Rate Income Pool (GRIP) account in any of the years under consideration.
Required -
A. What are the tax consequences of making this transfer at the elected value of $1,680,000 ($580,000 + $1,100,000)? Your answer should include amounts to be included in Rachel's income as a result of the transfer, as well as the corporation's tax values for the assets.
B. Compute the adjusted cost base of each component of the consideration that Rachel has received from the corporation.
C. Compute the PUC of the corporation's newly issued common shares.
D. What amounts would be included in Rachel's Net Income for Tax Purposes if, during 2018, she sells her common shares for $200,000?
E. What amounts would be included in Rachel's Net Income for Tax Purposes if, during 2018, the corporation redeems her common shares for $400,000?