Question 1

Which of the following statements is TRUE regarding the disposal of shares by a shareholder?&#10;A)When a shareholder sells shares to other shareholders, the corporation's capital base increases.&#10;B)The sale of shares to other shareholders is known as a 'buy-back'.&#10;C)The sale of shares back to the corporate treasury is not an allowable transaction.&#10;D)The sale of shares to the corporate treasury may result in a deemed dividend and a capital gain or loss to the shareholder.

Accepted Answer

When a shareholder sells shares to the corporate treasury, it is known as a 'buy-back'. This transaction may result in a deemed dividend and a capital gain or loss to the shareholder. Option A is incorrect as the capital base decreases when shares are sold. Option B is not true as a buy-back refers to a shareholder selling shares to the corporation. Option C is also incorrect as selling shares back to the corporate treasury is a permissible transaction.

Question 2

Calamari Inc.has transferred the following three assets to Squid Co., a Canadian controlled private corporation, under section 85 of the Income Tax Act.
$\begin{array}{|l|c|c|c|}\hline&\text { Building } & \text { Land } & \text { Goodwill }\\\hline \text { Adjusted cost base (ACB) } & \$ 230,000 & \$ 70,000 & \text { NI } \\\hline \text { Fair market value } & \$ 220,000 & \$ 150,000 & \$ 50,000 \\\hline \begin{array}{l}\text { Undepreciated capital cost } \\\text { (UCC) }\end{array} & \$ 120,000 & \text { N/A } & \text { NIL } \\\hline \text { Sale price } & \$ 220,000 & \$ 150,000 & \$ 50,000 \\\hline \text { Cash received } & \$ 100,000 & \$ 100,000 & \text { NIL } \\\hline \text { Shares received } & \$ 120,000 & \$ 50,000 & \$ 50,000 \\\hline\end{array}$
Required:
Determine the following amounts:

A) The minimum amount that Calamari may elect to transfer each asset in the rollover based on the information provided
B) Calamari's income or loss for tax purposes as a result of the rollover
C) The ACB of the shares received by Calamari following the rollover
D) The PUC of the shares received by Calamari following the rollover

\begin{array}{|l|r|r|r|r|}\hline& \text { A. } & \text { B. } & \text { C. } & \text { D. } \\\hline&\text { Minimum } &\text { Calamari's } &\text { ACB of }&\text { PUC of } \\&\text { elected value }&\text { income or loss }&\text { Calamari's shares }&\text { Calamari's shares }\\\hline \text { Building } & \$ 120,000 & \mathrm{NIL} & \$ 20,000 & \$ 20,000 \\\hline \text { Land } & \$ 100,000 & \$ 15,000 & \mathrm{NIL} & \mathrm{NIL} \\\hline \text { Goodwill } & \$ 1 & \$ 0.50 & \$ 1 & \$ 1 \\\hline\end{array}

Accepted Answer

&#10; $\begin{array}{|l|r|r|r|r|}&#10;\hline& \text { A. } & \text { B. } & \text { C. } & \text { D. } \&#10;\hline&\text { Minimum } &\text { Calamari's } &\text { ACB of }&\text { PUC of } \&#10;&\text { elected value }&\text { income or loss }&\text { Calamari's shares }&\text { Calamari's shares }\&#10;\hline \text { Building } & \$ 120,000 & \mathrm{NIL} & \$ 20,000 & \$ 20,000 \&#10;\hline \text { Land } & \$ 100,000 & \$ 15,000 & \mathrm{NIL} & \mathrm{NIL} \&#10;\hline \text { Goodwill } & \$ 1 & \$ 0.50 & \$ 1 & \$ 1 \&#10;\hline&#10;\end{array}$&#10;

Question 3

There are significant attributes in the tax treatment of shareholder debt and shareholder equity from the perspective of both the CCPC and the shareholders.
Required:
List one tax consequences for each of the following:
1) Return on investment - shareholder debt
2) Loss on investment - shareholder debt
3) Return of capital - shareholder debt
4) Return on investment - shareholder equity
5) Loss on investment - shareholder equity
6) Return of capital - shareholder equity

Some of the answers students might include are listed below.

Accepted Answer

Some of the answers students might include are listed below.&#10;

Question 4

Little Co.is a Canadian controlled private corporation and Large Co.is a public Canadian corporation.Both corporations have a paid-up capital balance of $25,000.Which of these statements is TRUE, provided the proper legal steps are followed?

A)If Little Co.makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence for the shareholders.
B)If Little Co.makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.
C)If Large Co.makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence for the shareholders.
D)If Large Co.makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.

Accepted Answer

When a Canadian controlled private corporation like Little Co. returns capital to its shareholders by reducing its paid-up capital, there is generally no immediate tax consequence for the shareholders, provided the return does not exceed the adjusted cost base of the shares.

Question 5

The following shares were issued in Barney Co.between 2018 and 2020:
January 1, 2018: Kelsey Weber incorporated Barney Co.and received 2,000 common shares for $2,000 from the corporate treasury.
January 1, 2019: István Horvath received 500 common shares in Barney Co.for $1,000 (fair market value) from the corporate treasury.
December 31, 2020: Addison Walker received 1000 preferred shares of Barney Co.for $5,000 (fair market value) from the corporate treasury.
Required:
A.Calculate the paid-up capital (PUC) of the common shares and the preferred shares of Barney Co.at the end of 2020.
B.Calculate the PUC and adjusted cost base (ACB) of the shares held by Kelsey, István, and Addison.
(Work must be shown for marks to be awarded.)

Accepted Answer

The answer of The following shares were issued in Barney...

Question 6

Mika Collin has operated a proprietorship for three years, and now plans to incorporate the company.All of the assets and liabilities of the company will be transferred to the corporation. Amongst the list of assets being transferred are accounts receivable with a fair market value of $5,000 and a cost of $7,000.If Mika chooses to transfer the receivables using a joint Section 22 election, which of the follow will apply?

A)The cost of the receivables to the corporation for tax purposes will be $5,000.
B)The corporation will not be allowed to claim a reserve for doubtful accounts against its business income.
C)Mika will treat the loss as a capital loss.
D)Mika will treat the loss as a business loss.

Accepted Answer

When transferring assets to a corporation under a joint Section 22 election in Canada, the tax consequences are designed to be neutral for both the transferor and the transferee. In this case, the loss on the transfer of accounts receivable (the difference between the cost of $7,000 and the fair market value of $5,000) would be treated as a business loss for Mika. This is because the loss is incurred in the course of operating a business, rather than a capital loss, which typically arises from the disposition of capital property.

Question 7

A shareholder of a Canadian corporation is planning to transfer a building to the corporation and wishes to avoid tax on the transaction.The building originally cost $150,000.It has a UCC of $85,000 and a fair market value of $225,000.Which of the following will meet the taxpayer's wish?

A)The shareholder can receive non-share consideration of $150,000 and preferred shares of $85,000.
B)The shareholder can receive non-share consideration of $140,000 and preferred shares of $10,000.
C)The shareholder can receive non-share consideration of $85,000 and preferred shares of $140,000.
D)The shareholder can receive non-share consideration of $225,000 and preferred shares of $0.

Accepted Answer

The shareholder can receive non-share consideration of the UCC amount ($85,000) and preferred shares for the remaining value of the building ($140,000). This will avoid tax on the transfer while allowing the shareholder to hold preferred shares in the corporation. Option A is not appropriate as it would require the shareholder to receive consideration for the original cost of the building, which is not reflective of the current fair market value. Option B is not appropriate as it does not reflect the full fair market value of the building. Option D is not appropriate as it would require the shareholder to pay tax on the full fair market value of the building.

Question 8

Salamander Co.transferred a small piece of land to one of its shareholders as a dividend in kind.The land originally cost $50,000 and had a fair market value of $175,000 at the time of the transfer.The corporation will realize ________, and the shareholder will realize ________.

A)no tax effect; a dividend of $125,000.
B)a dividend of $125,000; no tax effect.
C)a capital gain of $125,000; a dividend of $175,000.
D)a capital gain of $50,000; a dividend of $125,000.

Accepted Answer

The corporation will realize a capital gain of $125,000, which is the difference between the fair market value ($175,000) and the original cost ($50,000). The shareholder will realize a dividend of $175,000, which is the fair market value of the land at the time of the transfer.

Question 9

Makeda Kemal has operated a proprietorship for five years and has decided to incorporate the company this year.The following assets will be transferred to the corporation:

\begin{array} { | l | r | r | } \hline & \text { UCC/ACB } &{ \text { FMV } } \\\hline \text { Land } & \$ 50,000 & \$ 200,000 \\\hline \text { Building (capital cost } \$ 120,000 ) & 100,000 & 140,000 \\\hline \text { Equipment (capital cost } \$ 100,000 ) & 75,000 & 75,000 \\\hline \text { Goodwill } & \text { NIL } & 20,000 \\\hline\end{array}

The transfer will also include the company's inventory and accounts receivables.The inventory originally cost $25,000 and has a fair market value of $30,000.The accounts receivable have a fair market value of $10,000 and a cost of $12,000.
Makeda wishes to minimize the tax effect of this business decision using a Section 85 rollover where beneficial.Makeda will receive the maximum non-share consideration possible and the remainder of the transfer in preferred shares for assets transferred using Section 85.Any other assets will be transferred for non-share consideration.
Required:
A.What is the elected value for each of the assets transferred under Section 85?
B.What is the value of the non-share consideration that Makeda will receive for those assets benefitting from Section 85? (Show the amounts for each asset, and the total for all.)
C.What is the value of the preferred shares that Makeda must receive in order to defer any income inclusions from the assets that will benefit from Section 85? (Show the amounts for each asset, and the total for all.)
D.Identify any asset(s) not included in your previous answers, and briefly explain why they were excluded.(< 20 words per asset)
E.If Makeda elects to transfer the accounts receivable using a Section 22 election, what is the amount of Makeda's business loss that will be included in the corporation's income?
(Work must be shown for marks to be awarded.)

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Accepted Answer

The answer of Makeda Kemal has operated a proprietorship for...

Question 10

Which of the following scenarios would be appropriate for a section 85 rollover?&#10;A)A shareholder of a corporation wishes to transfer their vehicle to his corporation.The vehicle originally cost $20,000 and has a market value of $12,000.&#10;B)A corporation wishes to convert land owned by the company into a parking lot.&#10;C)A taxpayer wishes to transfer property worth $200,000, with an ACB of $90,000, to their corporation.&#10;D)A corporation is selling its equipment to another corporation and does not wish to own shares in the other corporation.

Accepted Answer

A section 85 rollover is used for the tax-deferred transfer of property to a corporation, where the transferor receives shares in exchange. Option C fits this scenario as the taxpayer wishes to transfer property to their corporation, and the property has an ACB of $90,000, meaning it was not acquired solely for the purpose of transferring it to the corporation. Options A, B, and D do not involve the transfer of property to a corporation for the purpose of receiving shares in exchange, and therefore are not appropriate for a section 85 rollover.

Question 11

Jules Mart'nez sold 5000 shares back to ABC Co.for $25,000 during the current fiscal year.Jules purchased these shares from Evrim Malas three years ago for $15,000.Evrim had originally purchased the shares from the corporate treasury for $10,000.Which of the following tax consequences will Jules recognize?

A)A deemed dividend of $10,000 and no capital gain or loss.
B)A deemed dividend of $15,000 and a capital loss of $5,000.
C)A deemed dividend of $15,000 and a capital gain of $10,000.
D)A deemed dividend of $10,000 and a capital gain of $10,000.

Accepted Answer

The answer of Jules Mart'nez sold 5000 shares back to...

Deck 12: Organization, Capital Structures, and Income Distributions of Corporations