Problem 16

RBL Proprietorship was heavily damaged during a recent street riot. The mobs broke in, set fire to

the store, and physically assaulted the owner, Larry. Fortunately the business was insured, and the

owner received the following amounts without delay:

Personal injury damage award $ 50,000

Insurance receiptsbusiness interruption 80,000

Insurance receipts for delivery truck destroyed 30,000

Insurance receipts for leaseholds destroyed by fire 15,000

Total $175,000

The undepreciated capital cost in Class 10 is $15,000 and in Class 13, $10,000. The original cost of

the truck was $35,000 and the original cost of the leaseholds was $20,000.

Larry does not understand why the damages are not treated as an expense for tax purposes. RBL

plans to replace the truck immediately. The damage to the leaseholds, however, presents a challenge

because the cost to repair the damage far exceeds the insurance compensation. RBL is considering

relocating its business to a safer location. The company will then be able to change its image to suit a

new clientele. The architect estimates that the leasehold improvements could be completed in

12 months. The total cost for the move would be as follows:

Moving costs $ 12,000

Business interruption 48,000

Leasehold improvements 60,000

Lease cancellation penalty 4,400

Total $124,400

Larry would like your advice on the tax implications of his plans.

Problem 17

Dundas Printing Inc. has been in business for the past 20 years. It has only been in the past three

years that Bill Peach has taken over the operations from his father (who founded the company and is

now retired). As a result of his new-found management freedom and changes in the marketplace, Bill

has decided to expand his operations.

One of the printing presses he needed to buy would have been too expensive if he had bought it

new, so he found a used press at half the price. The drawback is that it will take some time to get the

press into production, since it needs some repairs to put it into workable condition. However, Bill feels

that this is still a good buy since it will meet his needs for the next five years, by which time new

technology will probably make it obsolete and he will be forced to buy a new machine.