Mary Battle transfers a depreciable capital property with a fair market value of $100,000, a capital cost of $85,000, and a UCC of $47,500 to Battle Ltd. In consideration she receives cash of $60,000 and shares with a fair market value of $40,000, for a total value of $100,000. Using the provisions of Section 85 for the transfer, she elects a value of $90,000. Which of the following statements is correct?
A)Mary will have to report a capital gain of $5,000 and no recapture of CCA.
B)Because she is using Section 85, she does not have to report any income.
C)Mary will have to report recapture of CCA of $47,500.
D)Mary will have to report a capital gain of $5,000 and recapture of CCA of $37,500.

Question

Quizplus · Accepted Answer

When transferring capital property using Section 85, the elected amount of consideration is deemed to be the proceeds of disposition. In this case, Mary elected $90,000, which is less than the fair market value of $100,000, resulting in a capital gain of $5,000 ($90,000 - $85,000). Additionally, as the UCC is higher than the capital cost, she will have to report recapture of CCA in the amount of the excess UCC over the elected amount of consideration, which is $37,500 ($47,500 - $90,000). Therefore, option D is correct.

Mary Battle Transfers a Depreciable Capital Property with a Fair