It is early January 2012 and the president of BDC Distributing Limited, a client of your firm, called recently to discuss the tax implications regarding the construction of a new building. BDC has been growing rapidly and needs new warehouse space. They have been unable to locate any suitable space in the existing buildings in town and, therefore, have decided that their only option is to build their own building. They have identified the site and have estimated the costs of the project. These projected costs (and dates of completion) are as follows:
The land that has been identified will be purchased on February 15, 2012, for $405,000. There is no significant site preparation required so construction of the building can commence immediately. The cost of the building is estimated to be $1,348,000 plus the costs noted below. It is anticipated that BDC will be able to occupy the building on October 31, 2012.
BDC currently has an architect finalizing the drawings for the building. The architect fees, which will all be paid in 2012, will amount to $7,200. There will also be fees of $2,100 for an engineer to examine the drawings.
BDC has arranged for the financing required for the project. The project will be financed with a mortgage of $875,000 and $1,000,000 of preferred shares issued on January 15, 2012. Interest on the mortgage is payable semi-annually on July 15 and January 15 at a rate of 8% per annum. The preferred shares pay dividends of 5% per annum, payable semi-annually on July 15 and January 15. There will be a number of costs incurred in order to issue the debt and shares. These costs are legal and accounting fees of $18,450, commissions of $58,300 and registration fees of $1,800 for amending the articles of incorporation to allow the issuance of the preferred shares.
The balance of the costs related to the building are summarized below:
Building insurance from April 15, 2012 @ $450 per month...................$ 3,825
Property taxes from February 15, 2012 @ $770 per month...... 8,085
Soil testing to determine location of footings for building.......1,825
Relocation expenses......34,100
Utilities service connections estimated to be completed on May 20, 2012 . . . .3,800
Mortgage insurance premium from March 1, 2012 of $325 per month.......3,250
Maintenance from October 31, 2012 .......2,500
Utilities from October 31, 2012 .......6,300
Landscaping......15,500
REQUIRED
Advise the corporation of the impact of the proposed transactions on their December 31, 2012 income tax return. Ignore the effects of the leap year.