Question 20

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School

York University *

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4562

Subject

Economics

Date

Feb 20, 2024

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docx

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1

Uploaded by DeanLoris1429

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Question: ABC Corp, a Canadian corporation, sold goods to its subsidiary, XYZ Inc, located in a foreign country, at a price significantly lower than the fair market value. The fair market value of the goods sold was determined to be $200,000, but ABC Corp sold them to XYZ Inc for only $150,000. Calculate the deemed benefit and its tax implications for ABC Corp. Answer: When transactions occur between non-arm's length parties, such as a parent company and its subsidiary, tax authorities often require that transactions be conducted at arm's length, meaning at fair market value. In this scenario, ABC Corp sold goods to its foreign subsidiary, XYZ Inc, for $150,000, which is less than the fair market value of $200,000. The difference between the fair market value and the actual selling price represents a deemed benefit to ABC Corp. The deemed benefit would be calculated as follows: Deemed Benefit = Fair Market Value − Selling Price Deemed Benefit=Fair Market Value−Selling Price \text{Deemed Benefit} = $200,000 - $150,000 = $50,000 ABC Corp would need to report a deemed benefit of $50,000 for tax purposes. This amount is considered additional income for ABC Corp and is subject to taxation accordingly. It's essential for companies to ensure that transactions with related parties are conducted at arm's length to comply with tax regulations and avoid potential tax implications.
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