Estate Planning and Ethics Assignment 2

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Sheridan College *

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FINA38448

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Finance

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Jan 9, 2024

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Estate Planning and Ethics Assignment 2 - Capital Gain and Taxation at Death Prepared by Cheena Gulati – 991521616 Davinder Kaur - 991533077 Shimran Oraham - 991434573 Adnan Ahmed Zahoor - 991521993 Prepared for: Professor Uday Mohaya Sheridan College

Assignment 2 FINA38448 Due Date: October 24th, 2021 by 11:59 p.m. Submission: To Assignment Dropbox Submission rules: Microsoft Word (no pdf) Individually or in groups of up to 4 Student name(s) and i.d.#(s) shown on page 1 1) Capital Gain – Cottage (6 marks) Maggie bought a house which was quite a dump in 1990 for $85,000. She fixed it up with paint and wallpaper but in 1993 she did a major renovation which cost her $50,000. In 1999, she bought a dump of a cottage for $45,000 because it was both on a lake and near some good cross- country ski trails. She winterized it immediately for $15,000. Over time, the dumpy cottage has become quite attractive with the addition of a new roof, siding, windows and doors all of which cost $5,000 in 2001. In addition, she is fond of landscaping and has created quite a beautiful garden. I might add that Maggie has only $40,000 in RRSPs since she prefers to sink her money into her living space. In July 2009, Maggie lost her job and received $70,000 in severance pay. She put as much as she could into her RRSP (included in the $40,000 above) and put the rest in GICs to help finance her plan. Maggie had been taking courses for several years to become a Master Gardener. When she lost her job, she decided to live out her dream of having a gardening business where she would design gardens for others with cottages near her and maintain them if they needed it because they mostly come to their cottages on the weekend to relax. In the winter, she will keep the lanes clear (with her snow blower) and check up on the cottages now and again. She gave her corporate clothes to her friend Kate with the provision that she could stay with her when she comes to the City (which won’t be often because she is very fed up). When she lost her job, she immediately started renting out the house for $1,700 a month plus utilities. She still has to pay the $2,300 a year taxes and maintenance but figures the house will be her retirement fund. When she started renting out the house, it immediately ceased to be her principal residence – her cottage is now her principal residence. In July 2009, her house was worth $350,000 and the cottage was worth $180,000. Real Estate Prices have been increasing by 6% from 2009 onwards till date. She has sold both the properties in 2020. Question: Note: You must show all the work including formula, reasoning and calculations in order to get full marks.

Calculate taxable capital gain on the sale of the House? Davinder To calculate the taxable capital gain on the house, first we need to find the FMV of the house, when it was sold in 2020 as property prices increased by 6% per year since 2009 till 2020. We can calculate FMV using the BAII plus financial calculator. Property Mode P/Y C/Y PV I/Y N PM T FMV House END 1 1 - 350,000 6 11 0 $664,404.50 In order to find the taxable capital gain on the property we need to further perform following Calculation: House: Calculations Final Value ACB ACB = (Purchase Price + Major improvements/renovations) $135,000 = $85,000 + $50,000 $135,000 FMV FMV = Sale Price - Any related fee $664,404.50 $664,404.50 Residence years 1990 - 2009 = 20 years 20 years Ownership years 1990 - 2020 = 31 years 31 years Capital gain per year Capital gain = (Sale Price - ACB) / Ownership years $17,077.56 = (664,404.50 - 135,000) / 31 $17,077.56 Capital gain exemption Capital gain exemption = [(NI + l) / N2] * Realized Capital Gain $358,628.85 = [(20 + 1) / 31] * $529,404.50 (Selling Price - ACB) Where: NI is number of full or partial years designated as principal residence after 1971 N2 is number of full or partial years owned after 1971 Realized Capital Gain = Selling Price - ACB $358,628.85 Net capital gain to report Net capital gain to report = Capital gain - exempted capital gain $170,775.65 = $529,404.50 - $358,628.85 $170,775.65 Net Taxable capital gain to report Taxable CG = Net CG * inclusion rate $85,387.83 = $170,775.65 * 50% $85,387.83

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