Femi and Fola are sisters who are partners in the Double F Partnership, each holding a 50 percent interest. They wish to bring their brother, Faraji into the partnership on January 1, 2020, with a 20% interest. Faraji will pay $15,000 to each of his sisters in order to purchase 20% of each of their 50% interests. On January 1, 2020, Femi and Fola each have capital accounts with a balance of $50,000, which is equal to their adjusted cost base. Which of the following statements describes the tax consequences to Femi and Fola of admitting their brother to the partnership?
A)Each sister will have a taxable capital gain of $2,500.
B)Each sister will have their capital account balance and adjusted cost base reduced to $35,000.
C)Each sister will have a taxable capital gain of $7,500.
D)There will be no tax consequences to the two sisters.

Question

Quizplus · Accepted Answer

Each sister is selling 20% of their interest for $15,000, which is 20% of their original capital account balance of $50,000. The sale price is equal to the adjusted cost base, so the difference between the sale price and the adjusted cost base is $0, resulting in no capital gain or loss. However, the correct tax consequence involves recognizing a capital gain, which suggests there was an error in the explanation provided. Given the information, the correct tax consequence should be calculated based on the difference between the sale price and the proportionate cost base of the interest sold. Without specific tax details or a mistake in the initial explanation, the correct answer should reflect a tax consequence based on typical capital gains calculation, which is not accurately captured in the provided explanation.

Femi and Fola Are Sisters Who Are Partners in the Double