Question 1

When there is a winding up of a Canadian corporation, the shareholders will receive some amount of proceeds from the disposition of their shares. What are the tax consequences of receiving these proceeds?

Accepted Answer

To the extent of the PUC of the shares, the distribution will be received tax free. However, the excess of the distribution over the PUC of the shares will be treated as a deemed dividend. This deemed dividend is further subdivided as follows:
• To the extent that the corporation has a balance in its capital dividend account, part of the distribution will be considered a separate capital dividend, which will be received on a tax free basis under ITA 83(2). This treatment will only apply if an appropriate election is made.
• To the extent that the company has a pre-1972 capital surplus on hand account, the balance will be deemed not to be a dividend.
• Any remaining amount of the deemed dividend will be treated as a taxable dividend under ITA 84(2), subject to either the eligible or non-eligible dividend gross up and tax credit procedures.

Question 2

How is "group" defined by the associated corporations legislation?

Accepted Answer

ITA 256(1.2)(a)defines a group as simply two or more persons, each of whom owns shares in the corporation in question. This would include corporations, individuals, and trusts. There is no requirement that they be related.

Question 3

For purposes of applying the associated company rules, how is control defined?

Accepted Answer

For purposes of applying the associated company rules, control is defined as follows:
Control - A corporation is deemed to be controlled by another corporation, a person, or a group of persons, if the corporation, person, or group of persons owns either:
• shares (common and/or preferred)of capital stock with a fair market value of more than 50 percent of all issued and outstanding shares of capital stock; or
• common shares with a fair market value of more than 50 percent of all issued and outstanding common shares.

Question 4

For purposes of applying the associated company rules, there is a deeming rule with respect to the holding of rights. Briefly describe this rule.

Accepted Answer

The answer of For purposes of applying the associated company...

Question 5

In general, investment tax credits require a taxpayer to exchange a given amount of tax deductions for the same amount of tax credits. Explain why this is favourable to the taxpayer.

Accepted Answer

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Question 6

How is an acquisition of control defined? Describe a common event that would result in an acquisition of control.

Accepted Answer

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Question 7

A redemption of shares may result in an ITA 84(3)deemed dividend. As the redemption is also a disposition, there may also be a capital gain. Explain how tax legislation avoids some part of the proceeds received for the shares from being double counted as both a deemed dividend and a capital gain.

Accepted Answer

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Question 8

Indicate the types of taxpayers that are eligible for refundable investment tax credits.

Accepted Answer

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Question 9

ITA 249(4)requires that, when there is an acquisition of control, the acquired corporation will have deemed year end on the day preceding the acquisition of control. What is the objective of this requirement?

Accepted Answer

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Question 10

When control of a corporation is acquired, ITA 111(4)(e)permits the acquired corporation to elect to have a deemed disposition of any of its capital properties on which there is either unrealized recapture of CCA or unrealized capital gains. Under what circumstances would you advise a client to make this election? Briefly explain your conclusion.

Accepted Answer

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Question 11

The per share value for Paid Up Capital (PUC)will often be different than the per share value for Adjusted Cost Base (ACB). Briefly explain how such differences arise.

Accepted Answer

The answer of The per share value for Paid Up...

Question 12

What is the basic purpose of the capital dividend account?

Accepted Answer

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Question 13

Why does the government believe that it is necessary to have rules related to the acquisition of control of a corporation that has accumulated losses.

Accepted Answer

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Question 14

Corporations sometimes issue new shares in order to retire existing debt. In some cases, the value of the shares issued will exceed the value of the debt retired. Describe the tax consequences that result from such a transaction.

Accepted Answer

The answer of Corporations sometimes issue new shares in order...

Question 15

What characteristics define "shares of a specified class" under the provisions governing associated companies? What is a common designation for such shares?

Accepted Answer

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Question 16

Why is it necessary to have the associated company rules?

Accepted Answer

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Question 17

If the government wanted to provide additional tax benefits, how would they choose between using a general rate reduction and, alternatively, one or more investment tax credits?

Accepted Answer

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Question 18

When a business receives an investment tax credit as the result of the acquisition of a depreciable asset, how does this affect the amount of CCA taken in the current and subsequent years?

Accepted Answer

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Question 19

Briefly describe the basic tax consequences that result from an acquisition of control.

Accepted Answer

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Question 20

What is a stock dividend? What are the tax consequences for an individual receiving such dividends, as well as for the corporation issuing the dividend?

Accepted Answer

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Quiz 14: Other Issues in Corporate Taxation