Deck 14: Multiple Corporations and Their Reorganization

Question 1

The shareholders of Duo Co.and Tri Co.wish to combine the business activities of the two companies through a business combination.Both companies have assets that have appreciated in value above their capital cost.Duo Co.owns 85% of the shares of Tri Co.
Required:
Suggest a business combination (amalgamation or wind-up) that would defer the tax consequences associated with the increased value of the assets, and briefly explain why you did not choose the other option.

Answer 1

Duo Co.and Tri Co.can choose to amalgamate in accordance with section 87, which will allow them to transfer the assets at their tax values, thereby deferring any tax consequences.
Since Duo Co.owns less than 90% of Tri Co.a wind-up would not allow for a deferral of the tax gains.

Question 2

Leo Silver is the sole shareholder Ag Co., owning only common shares which have an ACB and PUC of $200.Leo has successfully operated the business for twenty-five years, and the shares now have a value of $900,000.Leo would like to transfer the business to Leo's oldest child, Ronan, using Section 86.Which of the following would not apply in this transaction?

A)Leo will receive preferred shares in Ag Co., redeemable for $900,000.
B)Leo's new shares will have an ACB of $900,000.
C)Ronan will acquire newly issued common shares of Ag Co.for $200.
D)Ronan's shares will have an ACB of $200.

Answer 2

B

Question 3

Jai Raines is the sole shareholder of Jai Ltd.Summer Kauffman is the sole shareholder of SK Co.Both of the companies are CCPCs.Jai and Summer will amalgamate their corporations as per Section 87(1) on July 21^st, 2020, forming RK Ltd.Jai's shares in Jai Ltd.have an ACB of $1,000 and a fair market value of $24,500.Summer's shares in SK Co.have an ACB of $1,500 and a fair market value of $45,500.Which of the following will apply with respect to the planned amalgamation?

A)RK Ltd.'s first taxation year will commence on July 22^nd.
B)All carry forward balances in Jai Ltd.and SK Co.are deemed to have expired prior to the amalgamation.
C)The ACB of Jai's and Summer's shares in SK Co.will be $24,500 and $45,500 respectively.
D)Summer will control SK Co.after the amalgamation.

Answer 3

D

Question 4

Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free/deferred combination?

A)At least one of the corporations must be Canadian.
B)Fifty percent of the assets and liabilities of the old corporation must become assets and liabilities of the new corporation.
C)The two corporations must be in a similar line of business.
D)All of the shareholders of the old corporations must become shareholders of the new corporation.

Question 5

The basic types of corporate reorganizations are listed below.
Required:
Match the types of reorganizations to the correct sections of the Income Tax Act.

Question 6

Kanaaq Sila began a group of companies in 2019 which are referred to as the 'Sila Group'.The companies only earn active business income.The parent company of the group is Sila Co.which had $300,000 of taxable income in 2020.Sila Co.'s wholly owned subsidiaries are Kan Co.which has taxable income of $50,000 for 2020, and Aaq Co.which has a loss of $20,000 for 2020 and unused losses from 2019 of $15,000.Sila Co.and Kan Co.have no loss carryovers.The corporate tax rate is 13%.What is the total tax liability for the Sila Group in 2020?

A)$39,000
B)$40,950
C)$42,900
D)$45,500

Question 7

An individual residing in Saskatoon has created a holding company to own the shares of their CCPC (which earns only active business income).The use of the holding company will permit which of the following?

A)The corporation's income will not be taxed.
B)The individual will receive dividends from the holding company, free of tax.
C)The holding company will receive dividends from the corporation, free of tax.
D)The individual will receive dividends from the corporation, free of tax.

Question 8

River Branley is the sole shareholder of Chinook Ltd.Chinook purchased all of the shares of Marble Inc.in 2017 for $500,000.Marble incurred a non-capital loss of $25,000 in the year ended December 31, 2018.River has decided to initiate a Section 88 wind-up of Marble into Chinook on June 23, 2020.Due to the seasonal nature of the sales, River would like to maintain the April 30^th year end that has been used since Chinook began.
River's accountant has prepared the following balance sheet for Marble Inc.as of June 22, 2020.The fair market value of the assets on both June 22, 2020 and the date of acquisition in 2017 are presented in the following table:
$\begin{array}{|l|c|c|c|}\hline&\text { June 22, 2020 } & \text { FMV June 22, } & \text { FMV } 2017\\&\text { (Cost) }&2020\\\hline \text { Shares in Brook Co. } & \$ 25,000.00 & \$ 80,000.00 & \$ 70,000.00 \\\hline \begin{array}{l}\text { Accounts Receivable (net of } \$ 2,000 \\\text { for doubtful accounts) } \end{array} & 18,000 & \$ 18,000.00 & \\\hline \text { Land } & 125,000 & \$ 500,000.00 & \$ 300,000.00 \\\hline \text { Building (UCC) } & 100,000 & \$ 300,000.00 & \$ 210,000.00 \\\hline \text { Total Assets } & \$ 268,000.00 \\\hline \text { Bank Loan } & \$ 70,000 \\\hline \text { Common shares } & 10,000 \\\hline \text { Retained earnings } & 188,000 \\\hline \begin{array}{l}\text { Total shareholder's equity and } \\\text { liabilities }\end{array} & \$ 268,000.00 \\\hline\end{array}$

A.Determine the deemed asset values for the below as a result of the wind-up of Marble into Chinook.
$\begin{array}{|l|r|}\hline \text { Shares in Brook Co. } & \$ \\\hline \text { Accounts receivable } & \$ \\\hline \text { Land } & \$ \\\hline \text { Building } & \$ \\\hline\end{array}$
B.Calculate the value of the section 88(1)(d) 'bump' available on the ACB for the non-depreciable capital property.
C.Identify the assets which may use the bump, and the amount of the bump available for each asset identified.Also identify any unusable bump amount.
D.When will Chinook be able to use the non-capital loss from Marble?

Question 9

Ilima Kahale is the sole shareholder of Kahale Foods Co.Ilima owns one class of common shares which have a value of $200,000.Ilima is approaching retirement age and would like two key employees to take over Kahale Foods.At this point in time, the employees do not have enough excess cash to buy Ilima's shares.Which of the following statements is true with regard to a corporate reorganization that would allow the employees to take over the ownership of the company?

A)A reorganization of share capital would allow Ilima to convert common shares to fixed value preferred shares, while also issuing nominal value common shares to the employees, resulting in an immediate tax consequence for Ilima.
B)A reorganization of share capital would allow Ilima to convert common shares to fixed value preferred shares, while also issuing nominal value common shares to the employees, resulting in an immediate tax consequence for the employees.
C)A reorganization of share capital would allow Ilima to convert common shares to fixed value preferred shares, while also issuing nominal value common shares to the employees, resulting in an immediate tax consequence for the corporation.
D)A reorganization of share capital would allow Ilima to convert common shares to fixed value preferred shares, while also issuing nominal value common shares to the employees, resulting in no immediate tax consequences.

Question 10

Zither Co.is a profitable CCPC which earns only active business income.The company is growing and dividend payouts are increasing for the two equal shareholders of the company, who have heard that 'holding corporations' might suit their needs.Which of the following would apply if they each created a holding corporation, and each holding corporation owned 50% of Zither?

A)Dividends received by the holding corporations from the operating company must be invested in the same ventures.
B)The holding corporations would receive the dividends from the operating company, free of tax, to be invested in the shareholders' separate choices.
C)The establishment of holding corporations would allow the shareholders to access the profits of the operating company for personal use without paying a second level of tax.
D)Dividends would flow from the operating company to the shareholders, and then to the holding corporations.

Question 11

Large Co.is a Canadian controlled private corporation that acquired 100% of the shares of Small Co.in 2020.Large Co.paid $50,000 for the shares.Big Co., an arm's length corporation, is now interested in purchasing Large Co.'s investment in Small Co.Small Co.'s shares are currently worth $500,000 and the retained earnings of the company are $200,000.In order to reduce the fair market value of the shares, Small Co.will pay a dividend of $450,000 to Large Co.Large Co.will then sell the shares to Big Co.for $50,000.Small Co.'s RDTOH balances are nil.
Required:
A.Applying the anti-avoidance rules of Subsection 55(2), what are the tax implications resulting from these transactions? Identify 1) the capital gain on the sale of the shares to Big Co., and 2) the tax effects of the $450,000 dividend to Large Co.
B.What is the value of Small Co.'s safe income?