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Femi and Fola are sisters who are partners in the Double F Partnership, each holding a 50 percent interest. They wish to bring their brother,

Femi and Fola are sisters who are partners in the Double F Partnership, each holding a 50 percent interest. They wish to bring their brother, Faraji into the partnership on January 1, 2015, with a 20% interest. Faraji will pay $15,000 to each of his sisters in order to purchase 20% of each of their 50% interests. On January 1, 2015, Femi and Fola each have capital accounts with a balance of $50,000, which is equal to their adjusted cost base. Which of the following statements describes the tax consequences to Femi and Fola of admitting their brother to the partnership?

Each sister will have a taxable capital gain of $2,500.

Each sister will have their capital account balance and adjusted cost base reduced to $35,000.

Each sister will have a taxable capital gain of $7,500.

There will be no tax consequences to the two sisters.

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