Midterm 2

Question 1

“The sale of a warehouse building used by a taxpayer to operate a business can result in a capital gain but not a capital loss.” Is this statement true? Explain.

Answer 1

Yes, the statement is true. A warehouse is depreciable property, so a capital gain occurs if the selling price is greater than the cost. However, no capital loss is allowed [ITA 39(1)(b)(i)]. If sold below cost, the loss affects the CCA class, potentially creating a terminal loss.

Question 2

If you hold investments both inside and outside an RRSP and usually invest in both corporate bonds and corporate shares, which type of investment would you prefer to hold within the RRSP? Explain.

Answer 2

It’s preferable to hold bonds in an RRSP and stocks personally. Dividends receive the dividend tax credit, and only 50% or 66.67% of capital gains are taxable. Holding stocks in an RRSP removes these benefits, as withdrawals are fully taxed as income. Bond interest is fully taxable, so keeping bonds in an RRSP provides a tax deferral.

Question 3

Briefly explain why an RRSP is an attractive investment.

Answer 3

-Contributions are tax-deductible
-Investment income grows tax-free
-Tax is deferred until withdrawal
-Spousal RRSPs enable income splitting