Hugo owns a farm. Both Hugo and his son work on the farm raising sheep. On February 16, 2020 Hugo sold a shearing machine to his son for $5,000. The original cost of the machine was $10,000, the UCC is $8,000 and the fair market value is $5,000. The machine was the last asset in its CCA class. On September 1, 2020, his son took the machine to an auction in another province where an enthusiast bidder paid $6,000 for it. The tax consequences are:

Question

Quizplus · Accepted Answer

The sale of the shearing machine from Hugo to his son is a non-arm's length transaction, meaning that the son will have to use the $8,000 UCC as his class balance going forward (instead of the $10,000 original cost). When the son sells the machine at the auction for $6,000, he will have to recapture CCA on the amount of the UCC ($8,000) minus the sale price ($6,000), which gives a recapture of $2,000. However, since the original cost of the machine was lower than the UCC, Hugo will also have a terminal loss of the difference between the UCC and the fair market value (i.e. $8,000 - $5,000 = $3,000). Therefore, the correct answer is B.

Hugo Owns a Farm