Reference no: EM13662852
Edith Cleaver earns income in excess of $200,000 each year. She is married to Paul Smith and has two children, Michael, age 20, and Judy, age 14. Edith has heard about income splitting and is thinking of transferring shares of RW Ltd., a public corporation, to her husband and children so that dividends may be paid to them in the future. She acquired 100 common shares of RW Ltd. in 2000 for $ 10,000. She wants to give 35 shares to her husband and 20 shares each to her two children. The FMV of the 100 shares is currently $ 2,000,000.
Edith inherited a parcel of land from her father in 1987. She sold the land in 2014 for $100,000. The value in 1987 was $20,000. The purchaser paid $20,000 cash, with the remaining $80,000 plus interest due in 2016. Edith has calculated her capital gain as $80,000.
Edith also owns a chalet she acquired in 2001 for $40,000. It was rented until December 2011, after which time it was used by Edith and her family for their pleasure. The FMV of the chalet was $65,000 in December 2011, and in January 2014 it was sold for $109,000. Edith paid $3,500 to the real estate broker who negotiated the sale. No CCA had ever been claimed, and an election under subsection 45(3) was included in Edith's 2011 income tax return. Edith and her husband also own a house that they lived in since they were married in 1988. They paid $70,000 for their house, which is now worth $300,000.
a. Explain to Edith the tax consequences for herself, her husband, and her children, of the gift of the shares to each member of her family. State the immediate tax consequences and what the tax consequences would be when dividends are paid on the shares, and when the shares are eventually sold by Judy, Michael, and Paul. Show all your calculations.
b. Determine if Edith's calculation of her capital gain is correct. Indicate whether she has any other alternatives for reporting the gain in 2014. Support your answer with appropriate references to the ITA.
c. Determine the tax consequences for Edith for 2014 for the disposition of the chalet, and identify any elections she can make.