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.

Accepted Answer

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?

Accepted Answer

In a Section 86 reorganization, the ACB of the new shares received by the transferor (Leo) is typically equal to the ACB of the old shares, not the fair market value. Therefore, Leo's new shares would not have an ACB of $900,000.

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?

Accepted Answer

D

Question 4

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

Accepted Answer

For an amalgamation to result in a tax-free or deferred combination under Canadian tax law, one of the key conditions is that all of the shareholders of the old corporations must become shareholders of the new corporation. This ensures continuity of ownership, which is a fundamental requirement for such tax treatment.

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.
 $\begin{array}{|l|r|}
\hline{\text { Reorganization types: }} &{\text { Section: }} \
\hline \text { Amalgamations } & 85 \
\hline \text { Wind-up } & 86 \
\hline \text { Asset transfers } & 87 \
\hline \text { Share reorganization } & 88(1) \
\hline
\end{array}$

Accepted Answer

The answer of The basic types of corporate reorganizations are...

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?

Accepted Answer

The answer of Kanaaq Sila began a group of companies...

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?

Accepted Answer

The use of a holding company allows for the receipt of dividends from an operating corporation taxed at a lower rate. Therefore, the holding company will receive dividends from the operating corporation, free of tax. However, when the holding company pays dividends to the individual, there will be tax implications.

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?

Accepted Answer

The answer of River Branley is the sole shareholder of...

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?

Accepted Answer

A reorganization of share capital that involves converting common shares to fixed value preferred shares and issuing nominal value common shares to the employees can be structured in a way that does not result in immediate tax consequences for Ilima, the employees, or the corporation. This is because the reorganization can be done in a tax-deferred manner under certain tax jurisdictions, assuming it meets specific criteria set by the tax authorities.

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?

Accepted Answer

Dividends received by holding corporations from an operating company are typically tax-free due to the inter-corporate dividend deduction, allowing the holding corporations to invest the funds as they choose.

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?

Accepted Answer

The answer of Large Co.is a Canadian controlled private corporation...

Quiz 14: Multiple Corporations and Their Reorganization

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

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?