final 8

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Fanshawe College *

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3043

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Finance

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Jan 9, 2024

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xlsx

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CH 17 AP 2 - Basic s.85 Rollover from Proprietorship to Corporation CH 17 AP 3 - Transfer of Assets & Liabilities between Corporations using s.85 CH 17 AP 4 - Transfer of Assets using s.85 and Tax consequences of Sale or Redemption CH 17 AP 6 - Transfer using s.85 CH 18 AP 4 - Capital Reorganization using s.86 with Benefit Conferred CH 19 AP 1 - Partnership Income, Tax Payable by partner, tracking ACB & CG on disposition of partners CH 19 AP 3 - Partnership Income, Taxable Income of Partner and CG on disposition (tracking ACB) CH 19 AP 4 - Partnership Income Partner Tax Liability and Impact of Negative ACB CH 19 AP 5 - Various Types of Trusts and Tax Consequences CH 19 AP 6 Inter-vivos Trusts and tax consequences CH 19 AP 10 Calculation and Comparison of Tax for an Estate Chapter 17 – Tax Deferred Transactions: Section 85 Rollover on a Transfer to a Corporation 17-2 17-3 17-4 17-6 Chapter 18 – Tax Deferred Transactions: Section 51, 86, 85.1 Amalgamations, Wind-Ups, and Estate Freeze CH 18 AP 3 - Reorganization using s.86 18-3 18-4 Chapter 19 – Partnerships, Trusts, and Death of a Taxpayer

Fo 84.1-84.2 NAL sale of shares 85 Transfer of property to a corporation 2022 FED Taxable Income $50,197 or less In excess of $50,197 In excess of $100,392 ship interest In excess of $155,625 In excess of $221,708 2022 PROV Taxable Income $50,197 or less In excess of $50,197 In excess of $100,392 In excess of $155,625 In excess of $221,709 e Transactions 19-1 19-3 19-4 19-5 19-6 19-10

or Chapter 19 Tax Rate DERAL TAX RATES: Tax 15% $7,530 + 20.5% on next $50,195 $17,820 + 26% on next $55,233 $32,181 + 29% on next $66,083 $51,345 + 33% on remainder VINCIAL TAX RATES: Tax 10% $5,020 + 12% on next $50,195 $11,043 + 15% on next $55,233 $19,328 + 17% on next $66,083 $30,562 + 17% on remainder

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CH 18 AP 4 - Capital Reorganization using s.86 Assess the Situation 1. Draw a Diagram re: Corporate Org Chart Summary of Information provided: Current c/s ACB PUC FMV Mr. Fresser 80% 50,000 50,000 500,000 Elana 20% 12,500 12,500 125,000 100% 62,500 62,500 625,000 Proposed Alternative 1: Alternative 2: Cash 100,000 Cash 100,000 Pref Shares 400,000 Pref Shares 320,000 500,000 420,000 $80k bene will result i 2. Identify the relationships amoung the stakeholders Mr. Fresser controls Fresser Ltd and is related and affiliated Elana is related to both Mr. F and the corporation 3. Identify the profile of each stakeholder Mr. F and Elana are Canadian Resident Fresser Ltd is a CCPC 4. Understand the decision maker and the objectives Objectives: Exchange is common shares for Preferred Shares wants to use up his TFSA room and purchase a new vehicle wants to transfer the value of the corporation to his daughter wants to maintain control of the Corporation with pref shares wants to redeem the pref shares during retirement minimize tax on the transfer determine the optimal package of consideration wants to know if it would be better to take back 320K of preferred shares

Timeline: Future capital reorganization PART B: Identify the lssues (Tax and non-tax) 1. Are the conditions of s.86 met for the proposed transaction to qualify? 2. What impact does the consideration have on the tax-free rollover under s.86? 3. Does TOSI have an application on future dividends? PART C: Analzye the Issues 1. ldentify and perform the qualitative analysis of the transactions and plans including an analysis of t 1. Are the conditions of a s.86 met for the proposed transaction to qualify? i) Reorganization of capital is taking place ii) a taxpaver, Mr. fresser is exchanging ALL of his common shares iil the consideration received has to include shares (preferred shares) What impact does the consideration have on the tax-free rollover under s.86? Note: to fuly defer the unrelized gain on the old shares, non-share consideration exchanged for the old Note: to avoid the benefit rule, balance the fair market value of the old shares with the total fair market ALTERNATIVE 1 lssuance of new shares - STEP 1 (1) PUC of the new shares LSC increase for all new shares 400,000 A Less: PUC of the old shares 50,000 Less: NS Consideration 100,000 - B PUC Reduction (A-B) 400,000 Reduced PUC of the shares - (2) Cost of new shares (ACB) ACB of old Shares 50,000 Less: NS Consideration 100,000 ACB of new shares - ACB of new shares Cost of NS considerarion 100,000 Redemption of old shares - STEP 2 (1) Proceeds of redemption of old shares Reduced PUC - FMV of NS consideration 100,000 Redemption Proceeds 100,000 Deemed Dividend 84(3): Redemption Proceeds 100,000 PUC of old shares - 50,000

Deemed Dividend 84(3) 50,000 2) Proceeds of Disposition of old shares Cost of all new Shares - NS Consideration 100,000 100,000 Less: Deemed Dividend 50,000 Adjusted Proceeds 50,000 Less: ACB - 50,000 CG/CL - Net Economic Effect: Deemed Dividend 50,000 CG/CL - Accrued Gain on the New Shares FMV 400,000 ACB - 400,000 Net Economic Effect 450,000 3. Does Tax on Split Income (TOSl) have an application? **As Mr.Fresser and his daughter are actively engaged in the business TOSl will not apply to dividends PART D : Advise/Recommend He should reduce the cash consideration in alternative 1 to $50K and increase the preferred shares to $

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6 with Benefit Conferred efit conferred as the FMV is less than the $500K FMV of the shares in a CG to Mr.F 86(2)@ states that the POD will be adjusted by S80K Main

the applicable provisions of the Act shares should not excced their PUC? t value of the package of consideration received. ALTERNATIVE 2 lssuance of new shares - STEP 1 (1) PUC of the new shares LSC increase for all new shares 320,000 A Less: PUC of the old shares 50,000 Less: NS Consideration 100,000 - B PUC Reduction (A-B) 320,000 Reduced PUC of the shares - (2) Cost of new shares (ACB) ACB of old Shares 50,000 Less: NS Consideration 100,000 Benefit Conferred 80,000 ACB of new shares - ACB new shares Cost of NS considerarion 100,000 Redemption of old shares - STEP 2 (1) Proceeds of redemption of old shares Reduced PUC - FMV of NS consideration 100,000 Redemption Proceeds 100,000 Deemed Dividend 84(3) Redemption Proceeds 100,000 PUC of old shares - 50,000

Deemed Dividend 84(3) 50,000 2) Proceeds of Disposition of old shares Cost of all new Shares - NS Consideration 180,000 Adjusted by benefit Total 180,000 Less: Deemed Dividend - 50,000 Adjusted Proceeds 130,000 Less: ACB - 50,000 CG/CL 80,000 Benefit conferred Net Economic Effect: Deemed Dividend 50,000 CG/CL 80,000 Accrued Gain on the New Shares FMV 320,000 ACB - 320,000 Net Economic Effect 450,000 $450k

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CH 19 AP 4 - Partnership Income Partner Tax Liability and Impac (1) partnership income Dec 31 22: Net Income per FS 65,000 Add: charitable donations 2,000 Partnership income to be allocated: 67,000 lsabelle @ 40% 40% 26,800 Samara @ 20% 20% 13,400 (2) Adjusted Cost base of lsabelle's Partnership Interest (2) Adjuste Capital Contribution 90,000 Capital Con Additions: Additions: Share of Income up to end of 2021 300,000 Share of In Share of income for 2022 26,800 Share of in Share of capital gains to end of 2021 4,000 Share of ca Deductions: Deduction Shares of losses - 32,000 Shares of l Share of Donations 2021&2022 (15000 + 2000) x 40% - 6,800 Share of D Drawings 2021 & 2022(170000+10000) - 180,000 Drawings 2 ACB of the partnership Dec 31, 2022 202,000 ACB of the Capital Gain in Dispostion of Partnership Interest 2023: Capital Ga POD Jan 1,2023 (given) 250,000 POD Jan 1, ACB - 202,000 ACB (adde CG 48,000 CG TCG 24,000 TCG 3) Calculate Taxable Income 3) Calculat Partnership Income (above) 26,800 Partnership Interest Income (given) 2,500 Interest Inc Taxable Income 29,300 Total Incom RRSP Cont Isabelle's Tax Liability: Taxable Inc Federal & Provincial Tax 7,325 Less: NRTC - 3,600 Basic Personal amoun Samara's T Less: Donation tx credite Note 1 - 326 Federal & P Total Tax Liability 3,400 Less: NRTC Less: Dona Note 1 Note 1 Total Donations of partnership 2,000 Total Dona

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Isabelles Shares 800 Samara Sh 1St $200 x 15% 25% 50 1St $200 x Balance x 46% 46% 276 Balance x 4 326

ct of Negative ACB ed Cost base of Samara's Partnership Interest ntribution 50,000 : ncome up to end of 2021 150,000 ncome for 2022 13,400 apital gains to end of 2021 2,000 ns: losses - 16,000 Isabelle $1 Donations 2021&2022 (15000 + 2000) x 20% - 3,400 Pinancial r 2021 & 2022 (250000+5000) - 255,000 Net incom e partnership Dec 31, 2022 - 59,000 Chantale d ain in Dispostion of Partnership Interest 2023: ,2023 (given) 125,000 ed to the POD because it is negative) 59,000 184,000 92,000 te Taxable Income p Income (above) 13,400 come (given) 6,600 me 20,000 tribution (given) - 2,700 come 17,300 Tax Liability: Provincial Tax 4,325 C - 3,600 ation tx credite Note 1 - 142 584 ations of partnership 2,000 Main

hares 400 x 15% 25% 50 46% 46% 92 142

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170,000 Eden, 150,000 Samara, 250,000, and Joy, $160,000. results for the year ended December 31, 2021, are as follows! me per financlal statements 65,000 donations (deducted from aceounting ineome) . 2,000

CH 19 AP 5 - Various Types of Trusts and Tax PART A a) Settlor: Mrs. A Trustees: D Settled June 1, 2022 Beneficiari Painting ACB $ 500 (LPP - S1,000) FMV $ 7,000 Intervivos Trust a) the trust is an intervivos trust because it was established during her lifetime b) the federal rate of 33% and prov rate of 17% will be payable by the trust, and have a calendar year en C) Since this is not a spousal trust, the painting gifted to the trust is deemed to be disposed of by rs, A as of the gilft of $7,000. She willthen report the capital gain of S6,00 (LPP 7,000-1,000). The ACB to the trus d) If the painting is transfered from the trust to the grandchildren, then the trust wil be deemed to have The grandchildren will receive it with a cost of $7,000. PART A b) Settlor: Mrs. A the will indicates that her shares are to be held in trust for her grandkids ABC shares ACB $ 10,000 FMV $ 35,000 Testamentary Trust a) because the trust is created as a consequence of her death it is testatmentary b) The rate of tax payable by the trust will be 50% because it is not a GRE. A testamentarv trust created therefore it cannot be designated as a GRE (Rules changed Jan 1, 2016) c) The trust will have a calendar year end d) Since this is not a spousaltrust the shares gifted to the trust are deemed to be disposed of on her fina at their FMv at the time of death of $35K. She will report the gain on her final return. The trust ACB will it would need to be determined if the shares were QSBC and if she could utilize her LCGE

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e) if the shares are transferred from the trust to the grandchildren then the trust will have diposed of th at their cost of $35K. The grandchildren will receive them with an ACB of $35K also. f) lf dividends are paid on the ABC shares and distributed to the grandchildren,TOSI should be considere Dividends on private company shares are split income unless they meet the definition of an excluded am If the shares have been received on the death of a parent or on the death of any person if the individua was enrolled as a ful-time student during the year in a post-secondary institution, the dividends would b Otherwise, TOSI will apply particularly where the grandchildren are minors. PART B DOD: march 15,2021 Trustees: executors? Settlor: Mr. B Beneficiaries: ACB 1,000 Shares XYZ Inc. ACB $ 1,000 FMV $ 100,000 (A) The trust created under Mr.B's will is a testamentary spouse trust per ITA 70(6) a. Mrs. B is a resident of Canada; b. Mrs. B is entitled to receive all of the income of the trust before her death; and c. no person, except Mrs. B, may receive or obtain the use of any of the income or the capital of the trus b) Because the trust is a spouse trust, Mr. B will be deemed to have disposed of the shares of ABC nc. on equal to the adiusted cost base of those shares to him (that is, $1,000), So no CG oon transter to trust d B) Any dividends eared by the trust wil be eligible for the gross-up and tax credit if they are kept in the t then she will receive them and be eligible for the gross-up and tax credit. The trust will get a deduction The trust is not a graduated rate estate so it will have a tax rate of 33%+17% C) If the shares are distributed to Mrs. B then they wil be disposed of by the trust at its cost of $1,000 an (D) lf the shares are stillin the trust when Mrs. B dies then they wil be deemed to be disposed of the sha Then, when they are distributed to the children, they will receive them at a cost equal to the FMV at the (E) Because the trustees have the power to encroach on capital for the benefit of the B's children, it is n As such, Mr. B will be deemed to have disposed of the shares of ABC inc. for proceeds eaual to fair mark Mr. B would be deemed to realize a gain of $99,000 (i.e., $100,000- $1,000). Part C ESTATE

Settlor: Ms.C Trustee: Ms. J DOD: June 1,2022 Beneficiaries: Adult children Public shares RRSPS House/Cottage Art Partnership Interest A)At the time of Ms. C's death, she wil have a deemed disposition of all of her properties at fair market v Her terminal tax return will include any taxable capital gains and allowable capital losses related to her i the fair market value of her RRSPs, taxable capital gains on personal use property and taxable capital gai The executor would be able to claim the principal residence exemption on the house or cotage whichev The executor may be able to include stub period Income form the partnership on a separate return. (B) The estate is a testamentary trust for tax purposes. The executor can designate the estate as a gradu A graduated rate estate can benefit from graduated tax rates on any income earned in the estate for th Only one graduated rate estate is allowed per deceased individual. The estate can choose a non-calenda In this case, the year end could be chosen to be May 31, 2023. After 36 months, if the estate is still in ex (ie, the properties have not been distributed to the beneficiaries),the estate wil no longer be treated as and be subject to 50% tax rate going forward. (C)The estate wlexist until al tax liabiities are paid and a clearance certificate is received trom CRA. At th they wil be disposed of bythe trust at tax cost to the beneficiaries Ms. C's daughters, resulting in no tax The tax cost of the properties in the trust will be the fair market value of those properties at the time of

x Consequences Daughters B&C ies: Grandchildren ACB $ 7,000 nd s its fair market value at the time st is therefore $7,000 (her proceeds e disposed of it at its cost of $7,000 Trustees: Daughters B&C Beneficiaries: Grandchildren ACB $ 35,000 by a will is not an estate al tax return l be $35k equal to her poD. Main Part A b) Part B PartC

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hem ed if the shares are private company shares. mount. al recelving the dividend be considered an excluded amount His spouse (while alive) then their adult kids st. n his death for proceeds of disposition due to spousal rollover trust. If the dividends are paid out to Mrs. B for dividends paid out to Mrs. B. nd Mrs. B will receive them at a cost of $1,000 ares at FMY at the time of her death. e time of her death. no longer a spouse trust. ket value. Accordingly, on his death

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value investments, in on her partnership interest. ver is most eneficial in terms of minimizing tax ordinarlyinhabits; uated rate estate on the first year's tax return filed for the estate RULES post date he first 36 months after the individual's death, January 1, 2016 GRE ar year end. Better to choose Dec 31 y/e date xistence June 1, 2022 - Dec 31, 2022 a graduated rate estate and wil adopt a calendar year end Jan 1, 2023-Dec 31,2023 Jan 1, 2024-Dec 31,2024 Jan 1, 2025-May 31,2025 he time, the propertes of the estate are distributed implications on the disposition to the beneficiaries. f Ms. C's death.

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e: just created 4 year ends to pay lower tax still within the 36 months of death Dividends can be received by the estate at low rate tax for 4 periods

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final 8

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