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.

Question

Quizplus · 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.

Mika Collin Has Operated a Proprietorship for Three Years, and Now