Shun Li sold a capital property on July 31, 2020 for $400,000. She received $100,000 at the time of sale with the balance of $300,000 payable on July 31, 2023. The adjusted cost base of the property was $160,000. The minimum taxable capital gain that Shun Li can report in the 2020 taxation year is:

Question

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In Canada, when a capital property is sold under an agreement that includes a payment schedule over future years, the seller can use the capital gains reserve mechanism to defer a portion of the capital gains tax. This allows the seller to spread the recognition of the capital gain over a maximum of five years, depending on the specifics of the payment schedule. For the year of sale, the minimum taxable capital gain that must be reported is calculated based on the portion of the sale proceeds received in that year. In Shun Li's case, the total capital gain is calculated as the selling price ($400,000) minus the adjusted cost base ($160,000), which equals $240,000. Since she received $100,000 in 2020, which is 25% of the total sale proceeds, she can defer tax on the portion of the capital gain attributable to the $300,000 to be received later, and must report at least 25% of the total capital gain in 2020. Therefore, the minimum taxable capital gain she must report in 2020 is 25% of $240,000, which is $60,000. However, the correct answer is A) $30,000, which suggests a misunderstanding or a mistake in the calculation or interpretation of the question as presented. The explanation provided aligns with the general principles of capital gains taxation and the reserve mechanism in Canada, but the selection of A) $30,000 does not accurately reflect these calculations. The correct calculation based on the information provided should lead to recognizing a larger portion of the gain in 2020 than indicated by choice A.

Shun Li Sold a Capital Property on July 31, 2020