Question 1

Each of the following independent cases describes a situation with a proposed tax treatment. For each case, indicate whether the treatment is correct, and justify your conclusion.

Case A:

Several years ago, Ms. Barb Barn transferred four sports cars, with a $245,000 total fair market value, to a corporation, in return for all of the shares of the company. The cars were used for display purposes only and were not expensed/written off by the company. During the current year, all of the cars were destroyed in a fire on Ms. Barb Barn's estate. Unfortunately, the company did not insure the sports cars and, as a consequence, no compensation was available for the loss. The corporation had no assets other than the cars; therefore, there was no reason for Ms. Barb Barn to continue to hold the shares. Consequently, she sold the shares for $500 to a friend who needed a corporate shell for some business operations. Ms. Barb Barn used the $122,250 allowable capital loss [1/2 ($245,000 - $500)] to offset her taxable capital gains arising from real estate transactions.

Case B:

In 2019, Samuel Fort sold his son two items: a sofa for $1,500 and a painting for $900. These selling prices equaled their estimated fair market value. Several years ago, Samuel Fort purchased the sofa for $1,900 and the painting for $600. He did not report any capital gain or loss on his 2019 individual income tax return.

Case C:

John Johnston has owned a triplex for a number of years and, throughout this period, all three of the units were rented. In determining his income from this property, he deducted maximum CCA in each year. During the current year, John Johnston's son moved into one of the three units and, as a result, John Johnston will be reporting reduced rental revenue on his income tax return. Since John Johnston has not sold any property, he will not report any capital gains or losses for the current year.

Case D:

Dora Dern sold a property with an adjusted cost base of $250,000 for $465,000. She provided a warranty on the property that she estimates would cost her about $15,000 to service. As a result, she calculated her capital gain to be $200,000.

Case E:

Mandy Mind purchased recreational property in 2016 for $425,000, with the cottage being worth $325,000 and the land being worth $100,000. She rarely used the cottage, since she preferred to live in her Kamloops condo. In 2019, the cottage was worth $655,000 and the land remained unchanged in its fair market value. In 2019, she decided to convert the cottage into a rental property. Mandy Mind has told everyone that, in 2019, she will report all of her rental income, but she does not intend to recognize a gain or loss on the conversion of the property, since no disposition has occurred.