Dr. Vain
Assess the situation
ESTABLISHING THE FACTS
Dr. Vain
– A cosmetic surgeon who was also involved with a friend’s fashion company Snap Corp.
– In 2020, Dr. Vain obtained 50,000 shares and another 50,000 six months later by private placement, with the motion to hold the shares as a long-term investment.
– Dr. Vain was never involved in any of the financial aspects of Snap’s business.
– Dr. Vain liquidated his shares over a two-year period (2021 and 2022).
– In 2021, the CRA assessed the share sales on account as income instead of capital as he reported on his return.
– The shares were liquidated to finance a settlement in a malpractice suit against him.
– In 2019, Dr. Vain purchased a vacation home for 275,000$ and has spent some time there ever since.
– Dr. Vain owns a house in Canada where he currently lives, purchased in 1998.
– In 2023, after a meeting with the Tax partner Dr. Vain mentioned to be in need cash flow and they explored three options:
– Rent out the Turks and Caicos property on a full-time basis to tenants
– Sell the Turks and Caicos property to Dr. Saver for 450,000$ with balance due of 112,500$ per year for two years.
-Sell his current home (ACB $180,000 and FMV $500,000), rent accommodations in Canada and continue to vacation at the Turks and Caicos property.
Understand the objectives
Dr. Vain needs to determine whether he should object to the CRA assessment.
Dr. Vain needs to generate cash flows and in doing so minimize taxes.
Dr. Vain needs to plan for his approaching retirement.
Timeline
– 1998: acquires house in Canada
– 2019: acquires vacation home
– 2020: acquires 100,000 shares of Snap Corp. in two transactions
– 2021: sold a portion of Snap Corp shares in 25 transactions
– 2022: sold remainder of Snap Corp. shares and receives 2021 CRA assessment
– 2023: wind-down to retirement and actions to improve cash flow
IDENTIFY THE TAX ISSUES:
A. Should Dr. Vain object to the 2021 CRA assessment? On what basis?
B. Is there a way Dr. Vain can guarantee capital gains treatment for the 2022 sale of shares?
C. What are the immediate and long-term tax implications of the three options available to Dr. Vain to improve cash flow and prepare for retirement?
DEVELOP A RESEARCH PLAN:
SOURCE
DESCRIPTION
Issue A and B
ITA Paragraph 38(a)
Mentions the 50% inclusion of capital gains in income.
ITA 39(1)
Definition of capital gain
ITA 39(4)
Allows taxpayer to elect to have the disposition of Canadian securities treated as capital gains/losses as long as you are not a trader or dealer in securities.
ITA 39(5)
Restrictions to 39(4).
ITA 39(6)
Definition of a Canadian security for the purpose of the election under 39(4).
Regulation 6200
Definition of prescribed security for the purposes of 39(6) and 39(4).
T4037 Capital Gains
Provides guidance on calculating capital grains and various other rules.
Sutton Lumber & Trading Co. V. MNR, 53 DTC 1158 (SCC)
Case outlining the guidelines for determining whether a transaction is on account of income or capital.
Snell Farms Ltd. V The Queen, 90 DTC 6693 (FCTD)
Case outlining that a secondary intention can be considered if the primary intention is no longer available.
Diamond Developments LTD. V. MNR, 84 DTC 1811 (TCC)
Case outlining that how long an individual holds an asset can help determine income or capital treatment.
Issue C
ITA 40(1)(a) Deduction of reserve.
ITA 40(2)(b)
Capital gain disposition deduction.
ITA 45(1)
Deems a disposition of a property at fair market value when there is a change of use of that property.
ITA 45(2)
Allows a taxpayer to make an election in their tax return to be deemed not to have begun to use a property for commercial or business purposes.
ITA 54
Definition of principal residence.
ITA 248(1)
Understanding capital property.
Regulation 2300 and 2301
Designation of a principal residence.
Folio S1-F3-C2
Principal residence.
Ennist v. R. 1985 CTC 2398, 85 DTC 669 TCC
A case dealing with the sale of a condominium and whether it qualifies as a principal residence given the definition of ‘Ordinarily inhabited’.
Analyze the Tax Issues
ISSUE A – Whether Dr. Vain should object to the 2021 CRA assessment and on what basis.
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