Estate Planning and Ethics Assignment 2

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Sheridan College *

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FINA38448

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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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The Taxable capital gain on the sale of the house is $85,387.83. Reasoning to use house as principal residence in year it wasn’t rented out: Note: As Maggie started renting out the property in 2009, it cannot be considered her principal residence starting 2010 but it will still be considered principal residence for 2009 because of the N1 rule (full or partial year of residence). However, from 2009 - 2020 the cottage will be her primary residence. In this case, we will consider the house as principal residence before Maggie started giving it out on rent in 2009 because the per year capital gain on the house is higher than the cottage. As we generally declare the property which provides the highest capital gain per year as principal residence. Which is why the house will be considered principal residence till the year it is not rented out. So, in the above case we have used the house as the partial year of principal residence. As such, if Maggie wouldn’t have given the property on rent, we will be considering the house as her principal residence. Calculate taxable capital gain on the sale of the Cottage? Shimran Cottage bought in 1999 for 45,000 and sold in 2020 the following table shows the future value of the cottage based on property prices increasing by 6% per year since 2009 till 2020. Property Mode P/Y C/Y PV I/Y N PMT FMV Cottage END 1 1 - 180,000 6 11 0 341,693.70 The below table is showing details of calculation to the final amount of the taxable net capital gain to be reported for the cottage: Cottage Calculations Final Value ACB = (Purchase Price + Major Improvements / Winterized) = 65,000 = 45,000 + 15,000 + 5000 $65,000

FMV = (sales price - any related fees) = 341,693.70 $341,693.70 Capital Gain = 276,693.70 =341,693.70 – 65,000 $276,693.70 N1 Number of years declaring as principal residence = 2009 - 2020 = 12 years 12 Years N2 Numbers of years of ownership = 1999 - 2020 = 22 years 22 Years Capital Gain per Year Capital gain/number of years of ownership = 276,693.70/22 = 12,577 $12,577 Capital Gain Exemption (N1 + 1)/N2 * Capital Gain value N1: number of full or part years designated as principal residence (after 1971) N2: number of full or partial years owned (since 1971) (12 + 1)/22 * Capital Gain value = 0.59091 * 276,693.70 = 163,500.82 $163,500.82 Net Capital Gain to Report Capital Gain - Exempted Capital Gain = 276,693.70 - 163,500.82 = 113,192.88 $113,192.88 Taxable Net Capital Gain to Report Net Capital Gain Reported * 50% Inclusion Rate = 113,192.88 * 0.50 = 56,596.44 $56,596.44 The Taxable capital gain on the sale of the cottage is $56,596.44 Reasoning for the cottage to become Maggie’s principal residence, note as mentioned above the general rules of declaring that property as principal residence which provides higher capital gain per year does not apply if one of the properties is considered a business, as in Maggie’s case when she immediately started renting out the house she decided to keep it to be her retirement fund. The house immediately stopped being her principal residence from July 2009 and the cottage was the property that was considered her principal residence until the time it was sold.

2) Taxation at Death (6 marks) Sonia and Kyle are married and own the following assets: Asset Title ACB FMV Home Joint $200,00 0 $450,000 QSBC Shares Sonia $50 $850,000 RRSP Kyle $225,000 RRSP Sonia $31,000 Mutual Funds – non-registered Kyle $490,00 0 $255,000 Sonia and Kyle have each written a will that leaves their entire estate to the other. Questions: Show all reasoning and calculations a) If Kyle dies first, what is the taxable income to include in his final tax return? Assume no other income. $0 - Spousal Rollover of all assets will take place on a tax - free basis as they have Mirror Will that leaves assets on each other in case one spouse dies. Therefore, the taxable income to include in his final tax return will be $0. b) If Sonia dies soon after, what is the taxable income to include in her final tax return? Assume no other income or change in asset values.

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Asset Gain Taxable Income Home $0 $0 RRSPs $256,000 MF Portfolio – Non-Regd. Capital Loss ($265,000) ($132,500) QSBC Shares $849,950 $424,975 TOTAL $813,475 Notes:  Principal Residence Exemption will take place, no taxes.  RRSP: [ $225000 + $31000] = $256000  Mutual Fund Portfolio: [ $225000 - $490000] = ($265000) Capital Loss, 50% of Capital Loss becomes Allowable Capital Loss. In the year of death, it becomes Net Capital Loss which can be offset with any source of income (not Taxable Capital Gain)  QSBC shares: [$850,000 - $50] = $849,950 ... [$849,950 * 50%] = $424,975  Total Taxable amount: $256,000 + 132,500 + 424,975 = $813,475

c) What will the probate fees be on Sonia’s estate? Assume she lives in Ontario. $50,000 = No Tax $50,000+ = 1.5% Sonia’s estate $450,000 + 850,000 + 255,000 = $1,555,000 Probate fees $1,555,000 - 50,000 = $1,505,000 $1,505,000 * 1.5% = $22,575