For the year ended August 31, 20X0, Zefer Ltd., a Canadian-controlled private corporation, reported a net income before income taxes of $485,000.The statement of income is summarized as follows:
Income from operations ……………………………………….. $380,000
Other income:
Interest ……………………………………………………… 5,000
Net gain on sale of assets…………………………………… 100,000
……………………………………………………… $485,000
The net gain on the sale of assets consists of the following amounts:
Gain on sale of franchise—$40,000
The franchise to operate a retail store was acquired seven years previously at a cost of $110,000. It was sold in 20X0 for $140,000. The sale proceeds included a cash down payment of $20,000, with the balance payable in seven annual instalments of $20,000 plus interest beginning in 20X1.The franchise, which qualified as a class 14 asset, had an undepreciated capital cost of $92,000 at the time of the sale and was the only asset in its class.
Gain on sale of warehouse property—$80,000
In July 20X0, a warehouse property was sold for cash proceeds of $430,000 (land $180,000, building $250,000).The property had an original cost of $370,000 (land $60,000, building $310,000).The building, which was the only asset in class 1, had an undepreciated capital cost of $290,000. After the sale of the warehouse, temporary premises were leased until a new, larger warehouse was constructed. New land was purchased in January 20X1 for $200,000. Construction of the new warehouse would be completed by July 20X1.
Loss on sale of shares of subsidiary—$20,000
Zefer sold shares of a subsidiary corporation for cash proceeds of $450,000.The shares were acquired five years ago for $470,000. Legal fees of $2,000 were paid to draw up the sale agreement and were charged to the legal expense account.
Required:
1. Calculate Zefer’s net income for tax purposes for the 20X0 taxation year.
2. What are the tax implications relating to the construction of the new warehouse in 20X1?