Canadian Tax Principles

Capital Gains Reserves Question:

Several years ago, Erin acquired two tracts of land located near Richmond, British Columbia. These tracts cost $325,000 and $430,000.

His original intention was to develop the tracts into two subdivisions of 40 lots each. However, because of the ongoing responsibilities associated with his position at the University of British Columbia, he has not found time to undertake this project. Even though he has made no effort to market the tracts, he receives two very attractive offers from a developer to purchase the tracts. The terms of the two offers are as follows:

Tract 1 The offer for the $325,000 tract was $879,000. The term requires a down payment on January 1, 2017 of $395,550 (45 percent of the sales price) with the balance due on December 31, 2020. Interest, calculated at an annual rate of 6 percent of the beginning of the year balance, is due on December 31 of 2018, 2019, and 2020.

Tract 2 The offer of the $430,000 tract was $1,000,000. The terms require a down payment on January 1, 2017 of $100,000. Further payments of $300,000 each will be required on December 31 of 2018, 2019, and 2020. Interest, calculated at an annual rate of 6 percent of the beginning of the year balance, is due on December 31 of 2018, 2019, and 2020.

Erin decides to accept both offers.

Determine the amounts that will be included in Erin's Net Income for Tax Purposes as a result of these transactions. Show the effect for each of the years 2017, 2018, 2019, and 2020 separately. Your answer should include taxable capital gains and interest receipts.