Question 1

Which of the following is not a common feature of closely held corporations?&#10;A)The corporations have only one, or relatively few, shareholders.&#10;B)The business of these corporations is often sold due to the owner's wish to retire.&#10;C)The sale of these corporations may be structured in a way that allows family members or employees with minimal funds to buy the business.&#10;D)These corporations pay regular dividends to their public shareholders.

Accepted Answer

Closely held corporations are typically owned by a small number of shareholders and may be structured in a way that allows for the sale of the business to family members or employees with minimal funds. However, these corporations do not typically pay regular dividends to public shareholders since they are closely held and not publicly traded.

Question 2

Hayden owns 100% of the shares of ABC Co.Hayden's spouse owns 100% of the shares of XYZ Co.The shares of ABC Co.are valued at $50,000 with an ACB and PUC of $1000.The couple is planning for XYZ Co.to pay Hayden $50,000 in cash for the shares in ABC Co.Which of the following will result from this sale?

A)Hayden will recognize a capital gain of $50,000.
B)Hayden will recognize a capital gain of $49,000.
C)Hayden will recognize a deemed dividend of $50,000 and a capital gain of $0.
D)Hayden will recognize a deemed dividend of $49,000 and a capital gain of $0.

D

Accepted Answer

D

Question 3

Which of the following statements most accurately describes an aspect of a tax-deferred sale of a business to a group of employees, through share reorganization?&#10;A)The employees will purchase the corporation's original common shares from the vendor.&#10;B)There is a risk to the original shareholder, as the value of their preferred shares following the reorganization depends on the future success of the corporation.&#10;C)This method of sale is appropriate when the vendor is unsure of the purchaser's ability to manage the business.&#10;D)The vendor generally does not participate in the financing of the sale of the business.

Accepted Answer

In a tax-deferred sale of a business to a group of employees, through share reorganization, the original shareholder typically exchanges their common shares for preferred shares. The value of these preferred shares following the reorganization can be dependent on the future success of the corporation, which creates a risk for the original shareholder. Options A, C, and D are not accurate descriptions of this type of sale.

Question 4

Pie Co.is transferring a depreciable asset to Berry Co.The asset has a fair market value of $200,000.The original cost of the asset was $175,000 and the undepreciated capital cost is $160,000.The two corporations wish to structure the transfer in a manner that will defer all taxes at this time.Pie Co.has no unused losses.Which of the following statements is incorrect?

A)For legal purposes, the asset will be sold for $200,000.
B)The elected value in the transfer for tax purposes will be $175,000.
C)The transfer can include cash or a note receivable to a maximum value of $160,000.
D)Pie Co.will receive shares from Berry Co.in the transaction.

Accepted Answer

The elected value for tax purposes should be the undepreciated capital cost ($160,000) to defer all taxes, not the original cost ($175,000). This allows the transfer to occur without immediate tax implications, aligning with the goal of deferring all taxes at this time.

Question 5

Kit and Skye Berzina would like to transfer their family business to their child, Winter.Winter does not have the required funds to purchase the company at this time.Which of the following might Kit and Skye consider in order to make the transfer possible without any immediate tax consequences?

A)Sell their shares to Winter.
B)Sell their shares to a third party who will then hire Winter.
C)Reorganize their shares, exchanging their common shares for preferred shares of equal value, and then issue a new class of common shares to Winter for a nominal value.
D)Sell the assets in the corporation that have appreciated in value.

Accepted Answer

Reorganizing their shares by exchanging common shares for preferred shares and issuing a new class of common shares to Winter for a nominal value would allow the transfer of the business to their child without any immediate tax consequences. Selling shares to Winter or a third party would result in a taxable capital gain for Kit and Skye, while selling appreciated assets would trigger a taxable capital gain for the corporation.

Question 6

Tobi Schmidt and Nik Rowe are unrelated acquaintances.Tobi owns 100% of the shares of Sun Co., and Nik owns 100% of the shares of Moon Co.Nik would like to sell all of the shares of Moon Co.to Sun Co.The shares have a cost base of $50,000 and a market value of $250,000.Nik and Tobi are meeting with an advisor to structure the sale in a manner that will defer any taxes at this time.Nik would like to take as large a note receivable as possible in the sale.Which of the following statements is correct pertaining to the sale of Moon Co.to Sun Co.?

A)Nik will receive a note receivable from Sun Co.for $250,000.
B)Nik will receive a note receivable from Moon Co.for $250,000.
C)Nik will receive shares in Sun Co.valued at $200,000 and a note receivable for $50,000.
D)Nik will receive shares in Sun Co.valued at $50,000 and a note receivable for $200,000.

Accepted Answer

Since Nik is selling all of the shares of Moon Co. to Sun Co., it is likely that the sale will be structured as a share purchase agreement. If the purchase price is $250,000 (the market value) and Nik would like to take as large a note receivable as possible, then it is likely that the agreed-upon price will be split between cash and a note receivable. Sun Co. would pay for the cash portion of the purchase price with its own funds, and would give Nik a note receivable for the remaining balance. Since Nik owns all of the shares of Moon Co., he would receive the cash and the note receivable directly, not through Moon Co. Therefore, answer choice C is the best choice. Nik would receive shares in Sun Co. valued at $200,000 (the cash portion of the purchase price) and a note receivable for $50,000 (the remaining balance).

Question 7

Brynn Costello owns all of the common shares of Fresh Horizons Inc., a Canadian-controlled private corporation.The shares have a fair market value of $150,000, an ACB of $30,000, and a PUC of $5,000.Brynn would like to retire soon, and Brynn's only child Emory has expressed interest in taking over the business.Emory does not have a lot of disposable income at this time, and as such, a Section 86 reorganization of share capital has been recommended to Brynn.Brynn's common shares will be converted to preferred shares, redeemable for $150,000.Emory will then purchase a new class of common shares at a nominal value.
Required:
Discuss the immediate tax consequences of the reorganization of share capital for Brynn, indicating the ACB and the PUC of the new preferred shares.

Accepted Answer

The answer of Brynn Costello owns all of the common...

Question 8

Shareholder A owns 100% of the shares of Sun Co., and shareholder B owns 100% of the shares of Moon Co.Sun Co.is buying an asset from Moon Co.with a fair market value of $150,000.The tax cost of the asset is $80,000.Neither corporation has loss-carryovers.The arm's-length companies have elected to structure the transfer of the asset in a manner which will defer any taxes at this time.Moon Co.would like to take the maximum note receivable on the transfer.Which of the following is correct?

A)Sale of asset = $80,000, Non-share consideration = $70,000, Share consideration = $10,000
B)Sale of asset = $150,000, Non-share consideration = $80,000, Share consideration = $70,000
C)Sale of asset = $80,000, Non-share consideration = $10,000, Share consideration = $70,000
D)Sale of asset = $150,000, Non-share consideration = $70,000 Share consideration = $80,000

Accepted Answer

Since Moon Co. wants to take the maximum note receivable, it means that they want to receive the highest amount of money possible. In order to achieve this, the sale of the asset should be equal to the fair market value of $150,000. However, since the tax cost of the asset is $80,000, this means that Sun Co. can only pay $70,000 in non-share consideration (cash or a note payable) to Moon Co. The remaining $80,000 can be paid in share consideration (shares of Sun Co.). Therefore, the correct option is B, with a sale of the asset at $150,000, non-share consideration of $80,000 (note receivable), and share consideration of $70,000.

Question 9

The following are characteristics of various tax planning tools, (each dependent on specific conditions being met).
1.A corporation purchases the shares of another corporation in exchange for shares issued by the purchaser, and the vendors may report the sale at their tax costs.This is a useful method for public corporations with many shareholders.
2.Shares of two or more corporations are exchanged for shares of a new entity, and all of the assets of the corporations are transferred to the new entity.
3.In a tax-deferred sale of a business, a shareholder's common shares are converted to fixed-value preferred shares, and new common shares are then issued to the purchaser, often at a nominal value.
4.Assets are sold from a vendor corporation to a buyer corporation at an elected value ranging from the tax cost (i.e.UCC or ACB) to FMV, in exchange for shares and a non-share payment not exceeding the elected value.
Required:
Match each of the four scenarios with the appropriate tax-planning tool from the list below.Use each answer only once.

Accepted Answer

The answer of The following are characteristics of various tax...

Deck 19: Business Acquisitions and Divestiturestax-Deferred Sales