Deck 7: Income From Property

Question 1

Indicate two differences between the tax treatment of business income and the tax treatment of property income.

Answer 1

The required two differences can be selected from the following differences which were described in the text:
• When some types of property income are being earned, the deduction of capital cost allowance (CCA)cannot be used to create or increase a net loss for the period.
• When property income is being earned by individuals, there is no requirement for a pro rata CCA reduction to reflect a short fiscal period.
• When property income is being earned, the income attribution rules (see Chapter 9)are applicable. This is not the case when business income is being earned.
• Certain expenses can be deducted against business income, but not property income.
These include write-offs of cumulative eligible capital and convention expenses. In contrast, for individuals, there is a deduction for foreign taxes on property income in excess of 15 percent that is not available against foreign business income.

Question 2

Briefly explain the tax treatment of corporate bonds that are issued at a discount.

Answer 2

Over the life of the bond, no recognition is given to the fact that the bond sold at a discount. The amount of interest that will be deducted will be based entirely on the coupon or stated rate. When the bonds are paid off at maturity, the difference between the discounted value and the maturity amount will be deductible as a loss. Provided the bonds are sold for not less than 97 percent of their face value and have an effective yield that does not exceed 4/3 of the stated yield, the loss will be a fully deductible business loss. Otherwise, it must be treated as a capital loss, only one-half of which is deductible against taxable capital gains.

Question 3

GAAP requires that any premium that is received on the issuance of debt securities be amortized as an adjustment of interest expense over the life of the debt. Explain briefly the tax treatment of premium that is received on the issuance of debt securities.

Answer 3

If the debt issuer is in the money lending business, the premium will have to be taken into income when the bonds are issued. For most other issuers, the premium will be treated as a tax free capital receipt, with no further tax consequences at the maturity of the bond. If, however, it appears that the bonds were deliberately priced to create a premium, the premium will have to be amortized as a reduction in interest expense over the life of the bonds.

Question 4

For tax purposes, neither premium nor discount on long-term debt is ever amortized by the issuer as an adjustment of interest expense.

Question 5

When an investor receives a payment from a corporation, what characteristics determine whether it is an interest payment or a dividend payment?

Question 6

In considering whether interest will be deductible, the direct use of the borrowed money is the relevant consideration.

Question 7

Briefly describe the application of the federal gross up and tax credit procedures for (1)eligible dividends and (2)non-eligible dividends.

Question 8

Mutual funds can be organized as either corporations or trusts. How will the choice of organizational structure affect the taxation of income distributions from the fund?

Question 9

Briefly explain the concept of integration.

Question 10

Interest on debt incurred to acquire equity securities is only deductible if the securities have a history of paying regular dividends.

Question 11

How is the adjusted cost base of units in an income trust determined?

Question 12

Corporations must use the full accrual approach to recognize interest inclusions.

Question 13

The tax rules for recognizing interest inclusions for individuals are different than they are for corporations. Briefly describe these differences.

Question 14

One conceptual approach to determining whether interest should be deductible is to limit deductibility to situations where this interest paid is related to the production of income that is fully taxable in the taxation year in which it is earned. List two situations in which interest would not be deductible under this conceptual approach.

Question 15

Describe the tax treatment of foreign non-business income when the foreign jurisdiction has withheld some portion of the income.

Question 16

What is a stock dividend? How will such dividends be taxed? Describe the manner in which the adjusted cost base of an investor's holding will be changed by a stock dividend.

Question 17

Why are capital dividends received on a tax free basis?

Question 18

Briefly describe the "disappearing source" rules.

Question 19

When publicly traded debt securities are purchased between interest payment dates, the purchaser pays for any accrued interest to the date of acquisition. Describe the tax treatment of interest received by the purchaser on the next interest payment date.

Question 20

Each rental property that is owned by an individual that has a cost in excess of $50,000 must be placed in a separate CCA class. What is the objective of this requirement?

Question 21

A corporation issues debt with a maturity value of $1,000,000 for proceeds of $1,100,000. The debt matures in 10 years and pays annual interest at a rate of 10 percent. The issuer is not a money lender and there is no evidence that there was a deliberate creation of a premium. Which of the following statements is correct?

A)The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10.
B)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully taxable gain of $100,000 in year 10.
C)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a capital gain in year 10 of $100,000, only one-half of which will be taxable.
D)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and there will be no tax consequences at maturity.

Question 22

An individual purchased a warehouse as an investment property two years ago. During the current year, he received rents of $8,000 and paid the following expenses; interest of $6,000, property taxes of $2,000, heat, light and power of $500, and maintenance of $300. The UCC of this Class 1 asset was $60,000 on January 1 of the current year. He cannot claim a rental loss in the current year.

Question 23

On January 1, 2020 Bernard borrowed $5,000 by signing a 1-year note payable at 6% interest and used the money to purchase 2,000 common shares of Import Ltd., a Canadian public corporation for $2.50 per share. During 2020 Import Ltd. paid eligible dividends of $0.35 per share. On January 1, 2021 Bernard repaid the $5,000 he borrowed plus $300 in interest. On his 2020 tax return, Bernard will report:

A)Net Property Income of $400.
B)Net Property Income of $666.
C)Net Property Income of $700.
D)Net Property Income of $966.

Question 24

For tax purposes, stock dividends must be treated in exactly the same manner as cash dividends.

Question 25

Louis received a "hot tip" from a friend about Fine Mine Ltd. He borrowed $10,000 from a bank April 1, 2020 and used the funds to purchase 1,000 common shares in the company for $10 each. Louis sold the shares June 30, 2020 for $15 a share and repaid the loan which included $148 of interest. As a result of these transactions Louis's net income for 2020 would have increased by:

A)$2,352.
B)$2,426.
C)$2,500.
D)$4,852.

Question 26

The federal dividend tax credit for eligible dividends can be expressed as 6/11 of the gross up, 20.73 percent of dividends received, or 15.02 percent of grossed up dividends.

Question 27

While of the following statements related to interest deductibility is correct?

A)Interest paid on a mortgage secured by a principal residence is never deductible in Canada.
B)If a business borrows to pay interest free loans to its employees, the interest on the borrowing will not be deductible.
C)If an individual borrows $100,000 to invest in securities and the securities are later sold for $60,000, interest on the $100,000 will continue to be fully deductible provided the $60,000 is immediately invested in other securities.
D)If an individual borrows in order to buy common stocks, the interest on the borrowing will only be deductible if the stocks have a long-term history of paying dividends.

Question 28

On July 1, 2019, Janett Koenen acquired 1,000 shares of Techhab Inc. for $10 per share. The purchase was financed with a $10,000 bank loan, requiring annual interest payments of 5 percent. These shares were sold on December 1, 2019 for $6 per share, with the proceeds immediately invested in 500 Flexhub Ltd. shares at $12 per share. During 2020, the Flexhub shares pay eligible dividends of $0.50 per share. The bank loan was not repaid in 2019 and remains outstanding on December 31, 2020. On her 2020 tax return, Janett will report:

A)Net Property Income Of $45.
B)Net Property Loss Of $155.
C)Net Property Income Of $345.
D)Net Property Loss Of $50.

Question 29

When foreign tax authorities withhold taxes on the foreign source income of a Canadian resident, only the net amount received will be included in the Net Income For Tax Purposes of the Canadian resident.

Question 30

Mutual funds can be organized as either corporations or trusts.

Question 31

Jorge purchased a newly issued $20,000 corporate bond for $19,500 on November 1, 2020. The maturity date of the bond is October 31, 2025 and the annual interest rate is 5%, paid on October 31 of each year. How much interest income should Jorge report on his 2020 and 2021 tax returns if he wants to minimize the interest recognized for tax purposes?

A)$0 in 2020 and $975 in 2021.
B)$0 in 2020 and $1,000 in 2021.
C)$167 in 2020 and $833 in 2021.
D)$167 in 2020 and $1,000 in 2021.

Question 32

On July 1, 2020 Esther borrowed $8,000 from the bank and purchased 400 shares in No Hope Ltd. for $20 per share. Esther felt that this was a safe investment because she read online in a blog that No Hope would be paying dividends of $1.50 per share during the last half of 2020. Unfortunately, this didn't happen and she only received eligible dividends totalling $100 during 2020. On December 31 she paid the bank loan interest of $240. On her 2020 tax return, Esther will report:

A)Net Property Income of $100.
B)Net Property Income of $138.
C)Net Property Income of $0.
D)Net Property Loss of $102.

Question 33

Income for 2018 is nil, 2019 income is $1,200, and 2020 income is nil.

A)Accrual Method
B)Cash Method
C)Compound Interest Method
D)Receivable Method
E)Not Allowed Method

Question 34

Income for 2018 is $300, 2019 income is $900, and 2020 income is nil.

A)Accrual Method
B)Cash Method
C)Compound Interest Method
D)Receivable Method
E)Not Allowed Method

Question 35

Income for 2018 is nil, 2019 income is nil, and 2020 income is $1,200.

A)Accrual Method
B)Cash Method
C)Compound Interest Method
D)Receivable Method
E)Not Allowed Method

Question 36

When the holder of income trust units receives a distribution that contains a return of capital, the amount of the return of capital must be added to the adjusted cost base of the units.

Question 37

Which of the following statements is NOT correct?

A)Income from rental properties can be either business income or property income.
B)When property income is earned, the income attribution rules are applicable.
C)Interest paid on a mortgage on a principal residence can be deductible.
D)Interest paid on funds borrowed to make interest-free loans to employees is not deductible.

Question 38

A corporation issues debt with a maturity value of $1,000,000 for proceeds of $900,000. The debt matures in 10 years and pays annual interest at a rate of 10 percent. Which of the following statements is correct?

A)The corporation will be able to deduct interest of $110,000 in each of the years 1 through 10.
B)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully deductible loss of $100,000 in year 10.
C)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a capital loss in year 10 of $100,000, only one-half of which will be deductible.
D)The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10.

Question 39

Which of the following is NOT a characteristic of interest?

A)It must represent compensation for use of a principal amount.
B)It must accrue continuously over time.
C)It must be paid on a regular, periodic basis.
D)It must be calculated with reference to a principal amount.

Question 40

Income for 2018 is nil, 2019 income is $900, and 2020 income is $300.

A)Accrual Method
B)Cash Method
C)Compound Interest Method
D)Receivable Method
E)Not Allowed Method

Question 41

Aziz purchased a residential rental property on April 15, 2020. He paid $300,000 cash for the building and paid an additional $540 for eligible rental expenses during 2020. He rented the property on May 1 to long term tenants for $2,500 per month. On his 2020 tax return he should report net rental income of:

A)$1,460.
B)$7,918.
C)$7,378.
D)$19,460.

Question 42

On July 1, 2020, Jon Laxtor acquires a newly issued investment contract with a maturity value of $100,000. It matures on June 30, 2025, with interest accruing at 8 percent per annum. Interest is paid for the first one and one-half years on December 31, 2021. The remaining interest will be paid at maturity. With respect to the minimum amount of interest that Jon must recognize for tax purposes, which of the following statements is correct?

A)Jon will have to recognize $4,000 in 2020 and $8,000 in 2021.
B)Jon will have to recognize nil in 2020 and $8,000 in 2021.
C)Jon will have to recognize nil in 2020 and nil in 2021.
D)Jon will have to recognize nil in 2020 and $12,000 in 2021.

Question 43

Which of the following statements with respect to dividends is NOT correct?

A)Capital dividends can be received by individuals without tax consequences.
B)All taxable dividends paid by Canadian controlled private corporations are non-eligible dividends.
C)Stock dividends are subject to the same gross up and tax credit procedures as cash dividends.
D)Dividend tax credits are based on a percentage of the gross up on dividends received.

Question 44

Rosa owns a duplex and rents both units to tenants. Which one of the following expenditures is not a deduction for tax purposes?

A)Cost of a new refrigerator.
B)Cost of repairing the front stairs.
C)Cost of painting the interior of unit #2.
D)Interest paid on the mortgage on the duplex.

Question 45

Saul has two residential rental properties that are mortgaged. Both properties are in Class 1 with a CCA rate of 4 percent. At the beginning of the year, Property A has a UCC of $500,000 and Property B has a UCC of $1,100,000. Before consideration of CCA, Property A earned net rental income of $43,000, and Property B had a net rental loss of $27,000. What is the maximum amount of CCA Saul will be able to claim this year?

A)Nil.
B)$16,000.
C)$20,000.
D)$44,000.

Question 46

During 2020 Erin received eligible dividends of $800, non-eligible dividends of $600 and foreign dividends of $900 (10% foreign tax was withheld at source). Her 2020 net property income for tax purposes is:

A)$2,648.
B)$2,694.
C)$2,748.
D)$2,794.

Question 47

Martin held 2 percent of the outstanding shares of a Canadian public corporation. The corporation issued an eligible stock dividend in 2020 and capitalized $800,000 of its retained earnings. By how much will Martin's Taxable Income increase as a result of the dividend?

A)$ 8,000.
B)$16,000.
C)$18,400.
D)$22,080.

Question 48

Which of the following statements is correct?

A)The federal dividend tax credit is equal to 38 percent of the eligible dividends received.
B)The federal dividend tax credit is equal to 6/11 of the gross up on eligible dividends received.
C)The federal dividend tax credit is equal to 15 percent of the non-eligible dividends received.
D)The federal dividend tax credit is equal to 6/11 of the gross up on non-eligible dividends received.

Question 49

Which of the following statements is correct?

A)Net Property Income = Dividends received plus the gross-up minus the dividend tax credit.
B)Net Property Income = Dividends received minus the gross-up minus the dividend tax credit.
C)Federal Tax Payable = Federal tax on grossed-up dividends minus the dividend tax credit.
D)Federal Tax Payable = The gross up on dividends received minus the dividend tax credit.

Question 50

With regard to debt securities, which of the following statements is correct?

A)Provided the issuer is not in the business of lending money, issuing debt securities at a premium will normally reduce the after-tax cost of financing for the issuer.
B)Provided the issuer is not in the business of lending money, issuing debt securities at a premium will normally increase the after-tax cost of financing for the issuer.
C)Issuing debt securities at a discount results in the borrowing corporation receiving funds above the stated price.
D)Issuing debt securities at a premium results in the borrowing corporation receiving funds below the stated price.

Question 51

During 2020 Thelma Evatt receives eligible dividends of $23,000. She has no other source of income in that year. What would be the amount of federal Tax Payable or refund on these dividends?

A)$4,761
B)$3,450
C)Nil
D)A $6.00 Refund

Question 52

Fergus owns a rental property. Instead of hiring contractors he does all of the property maintenance and repairs himself, keeping careful records. Which one of the following amounts is not a deduction for tax purposes?

A)$700 for shrubs and flowers.
B)$250 for bookkeeping services.
C)$400 for lumber, paint and hardware.
D)$500 for his labour (50 hours @ minimum wage of $10 per hour).

Question 53

Which of the following statements with respect to rental properties is NOT correct?

A)Every rental property with a cost in excess of $50,000 must be allocated to a separate CCA Class.
B)The short fiscal period rules do not apply to the calculation of CCA on a rental property owned by an individual.
C)The deduction of CCA cannot be used to create or increase a rental loss.
D)If a new rental property is acquired, put into a separate CCA class, and is used more than 90 percent for non-residential purposes, it is eligible for an enhanced CCA rate of 10 percent.

Question 54

Sherry's marginal federal tax rate is 29 percent. She lives in a province where her provincial marginal tax rate is 17.5 percent and the provincial dividend tax credit is 31 percent of the dividend gross up. If Sherry receives an eligible dividend of $16,000 from a Canadian public corporation in 2020, how much will she pay in income tax?

A)$6,150.
B)$2,827.
C)$5,066.
D)$8,382.

Question 55

Shahrukh owns a residential rental building which he purchased for $200,000 in 2020. In that year, his rental income before CCA was $5,000. In 2021, his rental income before CCA was $8,000. Sharukh always minimizes his tax liability. Which of the following statements is correct?

A)Shahrukh has a net rental loss of $3,000 in 2020.
B)Shahrukh has net rental income of $480 in 2021.
C)Shahrukh has net rental income of nil in 2021.
D)Shahrukh has net rental loss of $7,000 in 2020.

Question 56

When calculating taxable property income for a rental property owned by an individual, which of the following should never be included in the calculation?

A)AccII provisions.
B)Short fiscal period rule.
C)Recapture.
D)Terminal loss.

Question 57

Which of the following statements concerning the tax treatment of interest income is NOT correct?

A)Individuals must accrue interest using the cash basis.
B)Corporations must accrue interest on a daily basis.
C)Accrued interest from the date of the last interest payment date will be added to the purchase price of a security.
D)If there is accrued interest on a security, the seller includes the accrued interest in income and the purchaser deducts a corresponding amount from the interest received on the bonds.

Question 58

Which of the following statements with respect to income trusts and mutual funds is NOT correct?

A)Mutual funds can be organized as either trusts or corporations.
B)When an income trust makes a capital distribution, the amount received by a unit holder will be deducted from the adjusted cost base of the units held.
C)Business income received by an income trust will be distributed to investors as business income.
D)Eligible dividends received by a mutual fund will be distributed to investors as eligible dividends.

Question 59

During 2020 Rolf received eligible dividends of $900 and non-eligible dividends of $600. His 2020 federal dividend tax credit is:

A)$231
B)$249
C)$286
D)You can't calculate the dividend tax credit if you don't know his effective tax rate.

Question 60

The federal dividend tax credit cannot be claimed if you receive:

A)Eligible dividends.
B)Non-eligible dividends.
C)Stock dividends.
D)Capital dividends.

Question 61

Ms. Marilyn Lox invests in a newly issued debt instrument on April 1, 2020. It has a maturity value of $50,000, matures on March 31, 2024, and pays interest at an annual rate of 5 percent. The terms of the instrument call for payment of interest for the first two and one-half years on September 30, 2022. The remaining interest is paid at the maturity date of the instrument. What amount of interest will Ms. Lox have to include in her tax returns for each of the years 2020 through 2024?

Question 62

Maria owns 500 units in a mutual fund that invests exclusively in bonds issued by Canadian public corporations. During 2020 the mutual fund received bond interest and paid income distributions of $1.12 per unit. Maria reinvested all of her distributions. The effect on Maria's 2020 Taxable Income is:

A)Increase of $280.
B)Increase of $560.
C)Increase of $773.
D)$0 because the distributions were reinvested.

Question 63

Which of the following statements is correct for both income trusts that are not specified investment flow-through trusts (i.e., not SIFTs)and mutual fund trusts?

A)Dividend income is grossed up before it is distributed to the unit holders.
B)All after tax distributions are treated as deemed eligible dividends.
C)Income earned by the trust is not subject to income tax within the trust if it is distributed to the unit holders.
D)If the distributions are a return of capital, the inclusion rate is 50 percent.

Question 64

During 2020, Mr. Franz Schlitz receives $23,500 in eligible dividends from Canadian public corporations. His income is such that this additional amount will be taxed at a 29 percent federal rate and a 14 percent provincial rate. On eligible dividends, the province has a dividend tax credit equal to 25 percent of the gross up. Determine the total federal and provincial tax that will be payable on these dividends and his after tax retention.

Question 65

During the current year, Pearlene Monroig earns business income in the U.K. of €10,000 from which the British government withholds €2,000. Assume that the relevant exchange rate was €1.00 = $1.70 for the year. Which of the following statements is correct?

A)Pearlene will have foreign source net business income of $13,600 and a credit against Tax Payable of $3,400.
B)Pearlene will have foreign source net business income of $17,000 and no credit against Tax Payable.
C)Pearlene will have foreign source net business income of $16,150 and a credit against Tax Payable of $2,550.
D)Pearlene will have foreign source net business income of $17,000 and a credit against Tax Payable of $3,400.

Question 66

On May 1, 2020, Mrs. Anna White purchases bonds with a maturity value of $40,000 at par. These bonds pay semi-annual interest of $2,000 on June 30 and December 31 of each year. She purchases the bonds for $41,326, including interest accrued to the purchase date. She holds the bonds for the remainder of the year, receiving both the June 30 and December 31 interest payments. What amount of interest will be included in Mrs. White's 2020 tax return?

Question 67

Alice Baxter acquires a residential property on May 1, 2020. The total cost of the property is $385,000, with $95,000 of this total being allocated to the land. She spends $3,500 to paint the interior and exterior of the building. During 2020, rents total $29,000 and expenses other than CCA and the cost of painting total $20,100. Determine the maximum CCA that is available for 2020. In addition, determine Ms. Baxter's minimum net rental income for the year.

Question 68

Which of the following will provide the lowest amount of after-tax income for an individual in the top federal tax bracket?

A)$100 of interest income from Canadian bonds
B)$100 of capital gains from Canadian stocks
C)$100 of non-eligible dividends from Canadian corporations
D)$100 of eligible dividends from Canadian corporations

Question 69

Yang owns 800 units in a mutual fund that invests exclusively in the shares of Canadian public corporations. During 2020, the fund paid a distribution of $1.50 per unit. One-half of the distribution was eligible dividend income and the remaining half was capital gains. By how much will Yang's Taxable Income increase as a result of the distribution?

A)$600.
B)$1,128.
C)$1,200.
D)$1,428.

Question 70

Alex Bodvin acquires a residential rental property on June 1, 2020 at a total cost of $423,000. Of this total, $132,000 can be allocated to the value of the land. He immediately spends $42,000 to make major improvements to the property. Rents for the year total $32,000, while rental expenses other than CCA total $27,500. This is the only rental property owned by Mr. Bodvin. Determine the maximum CCA that is available for 2020. In addition, determine Mr. Bodvin's minimum net rental income for the year.

Question 71

On January 1, 2020, Desay Inc. issues 5 year bonds payable with a maturity value of $900,000. They have a coupon rate of 12 percent, pay interest on January 1 of each year, and are sold for $1,200,000. The Company has a December 31 year end. Determine the current year tax consequences under each of the following assumptions:
• Desay is in the business of lending money.
• Desay is not in the business of lending money and the CRA does not believe that they made a deliberate effort to create a premium on the issuance of the bonds.
• Desay is not in the business of lending money and the CRA believes that they made a deliberate effort to create a premium on the issuance of the bonds.

Question 72

Julio has a savings account in a foreign country. The account earned $5,000 interest during 2020 but he only received $4,500 since $500 for foreign taxes was withheld by the bank. All amounts are stated in Canadian dollars. The effect on Julio's 2020 tax return is:

A)An increase in taxable income of $4,500 and a foreign tax credit of $0.
B)An increase in taxable income of $5,000 and a foreign tax credit of $500.
C)An increase in taxable income of $5,000 and a foreign tax credit of $75.
D)Nothing since the interest was earned outside of Canada.

Question 73

On January 1, 2020, Leno Ltd. issues bonds for $770,000. The bonds have a maturity value of $800,000 and mature on December 31, 2022. The coupon rate on the bonds is 3 percent, with the interest paid annually on December of each year. The maturity amount is paid on December 31, 2022. What are the tax consequences related to this bond issue for Leno Ltd. in each of the years 2020 through 2022? How would these tax consequences differ from the information included in Leno's GAAP based financial statements? Leno Ltd. uses the straight-line method to amortize the discount on the bonds for accounting purposes.

Question 74

Lexor Inc. has bonds outstanding with a maturity date of December 31, 2028. The bonds pay semi-annual interest at an annual rate of 5 percent. Payments of $2,500 are made on June 30 and December 31 of each year. The bonds are currently trading at their maturity value. On April 1, 2020, Arnold Wexler acquires some of these bonds. He pays $101,243, including an amount for accrued interest, for bonds with a maturity value of $100,000. He holds the bonds for the remainder of the year, receiving both the June 30 and December 31 interest payments. What amount of interest will be included in Mr. Wexler's 2020 tax return?

Question 75

Ravinder's marginal federal tax rate is 29 percent. He has a foreign investment that earns $50,000 (Canadian)of non-business income. The government of the foreign country withholds $10,000 of this amount, with the remaining $40,000 being remitted to Ravinder during 2020. By what amount will Ravinder's 2020 federal Tax Payable increase as a result of this transaction?

A)$ 4,500.
B)$ 6,275.
C)$11,600.
D)$14,500.

Question 76

On January 1, 2020, John Traverse acquires 12,000 units of the RV Income Trust at a cost of $720,000. During 2020, the trust makes a distribution of $5.00 per unit. Of this total $1.50 is a return of capital while the remaining $3.50 is property income. John reinvests the total distribution in RV units at a cost of $55 per unit. What is the adjusted cost base of John's units on December 31, 2020?

A)$58.21 per unit.
B)$53.62 per unit.
C)$59.58 per unit.
D)$60.00 per unit.

Question 77

On January 1, 2020, Latkin Inc. issues bonds with a maturity value of $1,250,000 and a maturity date of December 31, 2025. The bonds pay interest on December 31 of each year at an annual coupon rate of 2 percent. They are sold for proceeds of $1,150,000 for an effective yield of 3.5 percent. The maturity amount is paid on December 31, 2025. What are the tax consequences related to this bond issue for Latkin Inc. in each of the years 2020 through 2025? How would these tax consequences differ from the information included in Latkin's GAAP based financial statements? Latkin Inc. uses the straight-line method to amortize the discount on the bonds for accounting purposes.

Question 78

Bernadette owns 1,000 shares of a German public corporation. The corporation paid dividends of $1.50 per share during 2020 but Bernadette only received $1,275 since 15% tax was withheld in Germany. All amounts are stated in Canadian dollars. Bernadette's 2020 net property income from this investment is:

A)$1,275.
B)$1,500.
C)$1,760.
D)$2,070.

Question 79

On January 1 of the current year, Dryer Inc. issues 8 year bonds payable with a maturity value of $1,500,000. The bonds have a coupon rate of 14 percent, pay interest on January 1 of each year, and are sold for $1,750,000. The Company has a December 31 year end. Determine the current year tax consequences under each of the following assumptions:
• Dryer is in the business of lending money.
• Dryer is not in the business of lending money and the CRA does not believe that they made a deliberate effort to create a premium on the issuance of the bonds.
• Dryer is not in the business of lending money and the CRA believes that they made a deliberate effort to create a premium on the issuance of the bonds.

Question 80

On June 1, 2020, Mr. Michael Leiner acquires a newly issued debt instrument with a maturity value of $80,000. It matures on May 31, 2026 and pays interest at an annual rate of 7 percent. Payment for the first three and one-quarter years of interest is due on August 31, 2023, with interest for the remaining two and three-quarters years payable on the maturity date. What amount of interest will Mr. Leiner have to include in his tax returns for each of the years 2020 through 2026?