Reference no: EM132623476

Question - Hagrid Inc. is subject to an acquisition of control on January 1, 2020. The company has an operating loss of $65,000 in the year prior to the acquisition of control, which cannot be carried back. On December 31, 2019, the company had two assets, a piece of land with an ACB of $150,000 and fair market value of $65,000; and a depreciable asset with a capital cost of $100,000, a UCC of $75,000 and a fair market value of $200,000. Assuming Hagrid will continue in business and will return to profitability in 2020, what write downs and elections are available to Hagrid Inc. in order to optimize the amount of losses carried forward to the 2020 year?

Hagrid Inc. will be required to write the land down to its fair market value and recognize the allowable capital loss of $42,500 at the end of 2019. No elections are available to the company.

Hagrid Inc. should elect to recognize the allowable capital loss of $42,500 on the land at the end of 2019. A deemed disposition of the depreciable asset should be elected at a value of $100,000, resulting in recapture of $25,000.

Hagrid Inc. will be required to write the land down to its fair market value and recognize the allowable capital loss of $42,500 at the end of 2019. A deemed disposition of the depreciable asset should be elected at a value of $185,000, resulting in recapture of $25,000 and a taxable capital gain of $42,500.

Hagrid Inc. should elect to recognize the allowable capital loss of $42,500 on the land at the end of 2019. A gain on the depreciable asset must be recorded, and this would be comprised of recapture of $25,000 and a taxable capital gain of $50,000.