Premium Essay

Tax Prep

In: Other Topics

Submitted By aminul2
Words 15408
Pages 62
Taxation Self Assessment Tool

1.

In 1987, Richard purchased a home in Hamilton for $135,000. After paying down the mortgage and accumulating some savings, he purchased a cottage in the Muskoka area in
1998 for $200,000. It is now early 2013 and Richard is looking to sell his home in Hamilton and move to Vancouver later this year. The Hamilton home and the Muskoka area cottage were recently appraised at $470,000 and $450,000, respectively. Richard has never been married and he spends a few weeks each year at the cottage (and will continue to do so after he moves to Vancouver). In making the optimal use of his principal residence exemption, which of the following amounts is closest to the taxable capital gain he will recognize in
2013?
a.
b.
c.
d.

$0
$93,000
$97,000
$99,000

Solution:
The correct response is b.
Hamilton home has been owned for 27 taxation years (including both 1987 and 2013).
Muskoka area cottage has been owned for 16 taxation years (including both 1998 and
2013).
Average annual gain for Hamilton home = ($470,000 - $135,000) / 27 years = $12,407
Average annual gain for Muskoka area cottage = ($450,000 - $200,000) / 16 years =
$15,625
The optimal solution would be to allocate as much of the principal residence exemption as possible to the property with the highest average annual gain. Therefore, allocate the principal residence exemption to the Hamilton home for all the years from 1987 to 1997, inclusive (11 years) and to the Muskoka area cottage from 1998 to 2013, inclusive (16 years). The allocation limit is 16 years for the Muskoka area cottage since it was not owned by Richard prior to 1998.
The amount of the capital gain that is shielded as a result of the principal residence exemption is determined by the following formula:
Gain x (1 + the number of years as principal residence)/number of years owned
=…...

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