Sarah Smith purchased some vacant land on February 1, Year 1 for $30,000, hoping to build a cabin on the land when she had saved enough money for construction of the cabin. While she was saving her money, Sarah rented the land in Year 1 (entire year) to a farmer as pasture for an annual rent of $1,000. During this year, Sarah also paid $300 in property taxes and $4,000 in interest on funds borrowed to purchase the land. At the beginning of Year 2, construction began on a six-lane highway that will intersect the neighbouring property to Sarah's vacant land. Due to the close proximity of the new highway, Sarah decided to sell the land for proceeds of disposition of $20,000. Required: Calculate the Net Income (Loss) For Tax Purposes to be reported for each of Year 1 and Year 2 resulting from the transactions described above. Solution: In Year 1, Sarah rented the land: Gross rents Less rental expenses Excess costs Sarah will report net rental income/loss of nil. property tax and interest $0 This excess property tax and interest will be added to the cost base of the land Year 2 In year 2, Sarah sold the land: Calculation of Capital Gain: Proceeds of disposition Adjusted cost base Capital Gain (loss) Capital Gains reserve Capital Loss Inclusion rate Allowable capital loss 0.50 $