Question

During  2018,  Jack  Harris sells a  capital asset with an adjusted cost base of  $87,200  for proceeds of $105,300. He receives a down payment of $5,300 in 2018, the second payment of $50,000 in 2019, and a final payment of $50,000 in 2020. What is the minimum amount that Jack will have to include in Net Income For Tax Purposes in 2018, 2019, and 2020 as a result of this sale?

Answer 1

The capital gain on the property would be $18,100 ($105,300 - $87,200).

 

2018:

At the end of 2018, the balance owing would be $100,000 ($105,300 - $5,300). Based on this, the 2018 reserve is the lesser of:

• [($18,100)($100,000 ÷ $105,300) = $17,189
• [($18,100)(20%)(4 - 0)] = $14,480

This means that the Net Income For Tax Purposes inclusion for 2018 would be $1,810 [(1/2)($18,100 - $14,480)].

 

2019:

At the end of 2019, the balance owing would be $50,000 ($100,000 - $50,000). Based on this, the 2019 reserve is the lesser of:

• [($18,100)($50,000 ÷ $105,300) = $ 8,594
• [($18,100)(20%)(4 - 1)] = $10,860

The capital gain for 2019 would be calculated as follows:

          2018 Reserve               $14,480

          2019 Reserve               (  8,594)

          2019 Capital Gain        $ 5,886

The Net Income For Tax Purposes inclusion for 2019 would be $2,943 [(1/2)($5,886)].

 

2020:

At the end of 2020, all of the proceeds have been collected. Given this, no reserve can be deducted. However, the 2019 reserve will have to be added back to income, resulting in a Net Income For Tax Purposes inclusion of $4,297 [(1/2)($8,594)].

The Net Income For Tax Purposes inclusion for 2018 would be $1,810,  for 2019 would be $2,943, and for 2020 would be $4,297.