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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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Property Transferred ITA S.85 Conside Asset NOTE Tax Value FMV Elected Amount Assumed Debt Office Equipment 1 10,000 12,000 10,000 9,000 - 20,000 1 10,000 32,000 10,001 9,000 85(1.1) Defines Other property Transferred outside S.85 Asset FMV Consideration Received Cash 5,000 5,000 note payable to Elijah *A/R 15,000 15,000 note payable to Elijah 20,000 20,000 Tax Values of Assets Owned by the Corporation Cash 5,000 A/R 15,000 Office Equipment 10,000 Good will 1 30,001 CH 17 AP 2 - Basic s.85 Rollover from Pr *File an election under s.22 onthe transfer of the receivables so that the purchaser can write off any bad d rather than it being treated as a capital loss
85(1.1) Defines Eligible Property eration Received NS Consideration cannot exceed elected amount New Debt Pref Shares Income/CG 1,000 2,000 1 19,999 1,001 21,999 - s Eligible Property roprietorship to Corporation Main debts against income
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CH 17 AP 3 - Transfer of Assets Part A: Assess the situation 1. Draw a diagram identifying all stakeholders and their relationship (Corporate Org chart) 2. Identify the relationships amoung the stakeholders Peter owns Handyman Inc and is related and affiliated with the company Handyman lnc wic awn shares in Toolman which will make the corporations associated, connected, and 3. Identify the profile of each stakeholder Peter handy: Canadian resident Currently owns Handyman Inc Handyman Inc: CCPC Carrying on active business Toolman Inc. CCPC Starts as a shell company to receive the business assets of Handyman Inc. 4. Understand the decision maker and their objectives Protect his real estate in Handyman Inc from potential lawsuits
Transfer the business assets and liabilities to a new corporation without any tax liability Leave land and building / mortgage in Handyman Inc. accumulate assets in Handyman Inc away from the business 5. ldentify the relevant past transaction/events or planned future transactions/events and create a tim 10 years ago Operations started PART B : ldentify the lssues (Tax and non-tax issues) 1. Eligibility for a s.85 election 2. Determine which assets should be transferred using s.85 3. Determine which assets should be transferred without using s.85 4. Determine which assets should not be transferred at all 5. Determine Elected Amounts 6. Determine allocation between non-share consideration (boot) and shares and the tax attributes PART C: Analyze the issues 1. dentify and perform the qualitative analysis of the transactions and plans including an analysis of the Eligibility: Toolman is a taxable canadian corporation Joint election must be filed between the two corporations Property has to be eligible: Cash (not eligible) Inventory (no gain, transfer outside of s.85) Furniture & Fixtures (is a gain, transfer using s.85) Goodwill (is a gain, transfer using s.85) Accounts Pavable and Bank Loan should be assumed by Toolman Inc. 2. ldentify and perform the quantitative analysis of the transactions and plans using appropriate analy Property Transferred outside S.85 Consideration Received Asset Tax Value FMV Assumed Debt (A/P) Assumed Debt (BankLoan) Cash (ineligible) 220,000 220,000 220,000 Inventory (no gain) 395,000 395,000 30,000 300,000 615,000 615,000 250,000 300,000 MAX AP MAX Bank Loan Property Transferred ITA S.85 Asset NOTE Tax Value FMV Elected Amount Furniture & Fixtures (gain) 60,000 80,000 60,000 Goodwill (gain) - 800,000 1 60,000 880,000 60,001 ACB of shares received as consideration
Elected transfer price 60,001 Less: non-share consideration - 60,000 1 PUC of shares received as consideration Legal stated capital (LSC) before reduction 820,000 s.85(2.1) reduction of PUC: (a) LSC increase 820,000 (b) elected amount 60,001 Less: non-share consideration - 60,000 excess, if any 1 PUC reduction: 819,999 Tax PUC of the shares 1 From the corporation perspective (Toolman Inc.) FMV COST UCC Cash (ineligible) 220,000 220,000 Inventory (no gain) 395,000 395,000 Furniture & Fixtures (gain) 80,000 120000 60,000 Goodwill (gain) 800,000 1 AP - 250,000 Bank Loan - 300,000 Due to Handyman Inc(new debt) - 125,000 Shares 820,000 3. ldentify risks including missing information, assumptions, and uncertain research positions Does the FMV reflect the actual value supported by appraisals Price Adjustment Clause 4. Reach a conclusion based on your analysis of each major issue Peter is able to transfer the assets and liabilities from Handyman inc to Toolman lnc without creating a t Peter can receive S125K for assets transferred without using s.85 There will be shares with an ACB/PUC of S1 since we allocated the maximum non-share consideration The shares will have a FMV of S820K The land/building and mortgage will remain in Handyman Inc Handyman lnc could charge rent to Toolman lnc as long as it is reasonable and based on FMY Handyman lnc, the rent would be considered ABl since the two corporations are associated The rental income inside Handyman Inc will be offset by mortgage interest, property taxes, and insuranc 5. Evaluate strengths/weaknesses/risks of vour conclusior N/A
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s & Liabilities between Corporations using s.85 d related. Bus
meline Operations started Incorporate the sub and transfer assets/liabilities e applicable provisions of the Act ysis format. d New Debt Income 65,000 65,000 - Consideration Received Assumed Debt New Debt Pref Shares Income/CG 60,000 20,000 - 800,000 0.50 - 60,000 820,000 0.50
tax liability ce (possibly R&M)
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Main siness Asset
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CH 17 AP 4 - Transfer of Part A: assess the situation 1. Draw a diagram identifying all stakeholders and their relationship (Corporate Org chart The facts of the problem have been revised as follows; 2. Identify the relationships amoung the stakeholders Ms. Hart is related and affiliated with her husband 3. Identify the profile of each stakeholder Mrs. Hart: Canadian Resident operating a proprietorship retailing business Mr. Hart Canadian resident no connection to the retailing business he will own the common shares of Hart Ltd. Hart Ltd. CCPC it will carry on active business once the assets and liabilities are transferred in 4. Understand the decision maker and their objectives Objectives: she wants to incorporate her business and have her husband receive the benefit of future growth of the bus she wants to transfer in the assets in a tax efficient manner she wants to know the consequences if she sells or redeems the shares 5. ldentify the relevant past transaction/events or planned future transactions/events and create a timelin On Nov 10th she will transfer all of her business assets and liabilities into Hart Ltd. Inventory : The tax value has increased from 8,000 to 38,000 and the fair market value from S9,000 to S59.00 Land Invenotry : The tax value has increased from 100,000 to $400,000 and the fair market value has increas Building : The tax value has increased from 70,000 to 670,000, the far market value has ncreased from 5150, Land (capitall) : The tax value has increased from 140,000 to $340,000 and the fair market value has increase Goodwill : The fair market value has increased from 80,000 to 180,000 Liabilities : Increased from 60,000 to 360,000.
PART B : Identify the lssues (Tax and non-tax issues) 1. Eligibility of a s.85 election 2. Determine which assets can be transferred by using s.85 3. Determine which assets will be transferred outside of s.85 4. Determine which assets should not be transferred at all 5. Determine the elected walue 6. Determine non-share consideration/ boot and the share consideration 7. Determine the tax consequences is she sells the shares or they are redeemed PART C: Analyze the issues 1. Identify and perform the cualitative analvsis of the transactions and plans incuding an analysis of the appl Hart Ltd. Is a taxable canadian corporation Joint election filed between Mrs. Hart and Hart Ltd. Property needs to be eligible - Land held as inventory and prepaid property insurance are not eligible proper Pubic shares have no atcrued aln therefore wil not transter using s.85, howeverif they are transtered in and which will prevent the use of the lCGE on sale. The shares will also be earning passive income which may red She should retain the shares personally 2. ldentify and perform the quantitative analysis of the transactions and plans using appropriate analysis f Property Transferred outside S.85 Consideration Asset Tax Value FMV Assumed Debt (A/P) Assumed Debt (BankLoan) A/R 14,000 10,000 Prepaid 600 600 14,600 10,600 - - MAX AP MAX Bank Loan Property Transferred ITA S.85 Asset NOTE Tax Value FMV Elected Amount Inventory 38,000 59,000 38,000 Building 670,000 1,150,000 670,000 Land 340,000 660,000 340,000 Good will - 180,000 1 1,048,000 2,049,000 1,048,001 ACB of shares received as consideration Elected transfer price 1,048,001 Allocated to: Assumed Debt 360,000 New Debt 688,000 1,048,000 ABC Shares 1
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Tax consequences if share consideration is sold or redeemed SALE: POD 1,001,000 Less: ACB - 1 CG 1,000,999 TCG 500,500 Personal tax on sale of share 250,250 3. Identify risks including missing information, assumptions, and uncertain research positions There may be a benefit designated to her hustand f her purpose of suing him the c/s was to ower her tax rat FMV assessment needs to be accurate and substantiated PART D : Advise/Recommend 4. Reach a conclusion based on your analysis of each major issue She should not transfer the land inventory or the pulic shares Prepaids and A/R are transferred outside of s.85 (file a s22 election on A/R) Transfer the remainine assets at tax value to avoid CG/recapture HART Ltd will assume all liabilities Present tax consequences above of either a sale or redemption 5. Evaluate strengths/weaknesses/risks of your conclusion No Weakness Identified
f Assets using s.85 and Tax consequences of Sale or Redemption siness (c/s) ne 00. sed from 5220,000 to 5520,000 ,000 to S1 150.00 and the ost has incresed from 590,000 to 5690.0 ed from 160,000 to 660,000
licable provisions of the Act rty they significanty growin value it may dlisqualfy the shares are 0S8c shares duce the SBD format. n Received New Debt Income 10,000 - 3,000 600 10,600 - 3,000 Consideration Received Assumed Debt New Debt Pref Shares Income/CG 38,000 21,000 - liabilities of S360 322,000 348,000 480,000 - 340,000 320,000 180,000 0.50 360,000 688,000 1,001,000 0.50 Max Liabilities PUC of shares received as consideration Legal stated capital (LSC) before reduction s.85(2.1) reduction of PUC: (a) LSC increase 1,001,000 (b) elected amount 1,048,001 Less: non-share consideration 1,048,000 excess, if any 1
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PUC reduction: Tax PUC of the shares (PUC after Reduction) REDEEMED: Redemption Proceeds 1,001,000 Less: PUC - 1 Deemed Dividend 1,000,999 POD 1,001,000 Less: Deemed Dividend - 1,000,999 Personal tax on redemption (42.5%) 425,425 Adjusted Proceeds 1 Less: ACB - 1 CG/CL - te, because she received ful y for the assets tis likely not a beneft to him
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Main
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0 to be asume dby Hart Ltd. 1,001,000
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1,000,999 1
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CH 17 AP 6 - Tran PART A: Assess the situation 2. Identify the relationships amoung the stakeholders Joe controls TEL so he is related and affiliated Joe is related to each of the common shareholders of TSE TEL & TSE are related After the transfer of assets and liabilities the corporations will be associated (SBD) 3. Identify the profile of each stakeholder Joe: Canadian resident Runs retail business through TEL Children: Canadian residents, adults Three of children are active in the business of TSE and will own common shares One child is not active and will not own shares of TSE 4. Understand the decision maker and their objectives Obiectives: Decision maker = Joe He needs income in retirement
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he wants to maintain control of TSE through voting, retractable preferred shares wants to share the growth of business with the kids wants to keep the land and building in TEL to earn rental income wants to earn income from TSE even if the business doesn't prosper he wants to use up a S3K ACL on transfer of assets (create TCG) wants maximum non-share consideration wants advice on: which assets to transfer what consideration he should receive for the assets tax values of assets in TSE 5. ldentify the relevant past transaction/events or planned future transactions/events and create a timelin On Nov 30 th transfer assets and liabilities to TSE PART B : Identify the lssues (Tax and non-tax issues) 1. Eligibility for a s.85 election 2. Determine which assets can be transferred using s.85 3. Determine which assets should be transferred outside of s.85 4. Determine which assets should not be transferred at all 5. Determine the elected amounts 6. Determine non-share (boot) consideration & the share consideration 7. Elect to create a TCG to utilize losses that he has S3K ACL 8. How will income be earned in retirement 9. Joe wants to maintain control 10. Will TOSI apply to the children (dividends)? 11. Will TOSI apply to Joe's dividends? PART C: Analyze the issues 1.ldentify and perform the qualitative analysis of the transactions and plans including an analysis of the a TSE is a taxable canadian corporation Joint election filed between TSE and TEL Ineligible property: Cash (we can still transfer outside of s.85) *A/R - cannot use s.22 election because all or substantially all of the business assets are not being transferre A/R will remain in TEL to be collected and the company can loan the cash to TSE if it requires cashflow Eligible Property: (all of these assets have an accrued gain) Inventory Equipment Goodwill Property that should NOT be transferred: Shares of Supplyco should not be transferred as they may grow in value and cause the shares to not qualify Dividends to Joe from TEL
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Over 24+ years old dividends that are derived directly or indirectly are a related business exception and the Shares would be excluded from TOSI The common shares owned by oe in El wl not be excluded shares even though they represent more than 10 of the income will be derived from a related business through rents and management fees - not business se However,it could be argued that divs on the common shares in TEl could be an excluded business exeption-b If he is paid from TSE the dis wil not be subiect to Tosl because he was activeiy engaped on a regular and con Dividends to the Children from TSE TOSl will not apply to the kids that are actively working in the business (>20hrs/week or more) they also invested in the company by paying for their common shares. if child #4 was to receive shares and be paid dividends they would likely be subject to TOSl 2. ldentify and perform the quantitative analysis of the transactions and plans using appropriate analysis f Property Transferred outside S.85 Consideration Received Asset Tax Value FMV Assumed Debt (A/P) New Debt Income Cash 12,000 12,000 12,000 12,000 12,000 12,000 - - MAX AP MAX Bank Loan Property Transferred ITA S.85 Conside Asset NOTE Tax Value FMV Elected Amount Assumed Debt Inventory 90,000 100,000 90,000 55,000 Equipment 57,000 60,000 57,000 Goodwill - 90,000 6,000 147,000 250,000 153,000 55,000 ACB of shares received as consideration Elected transfer price 153,000 Less: non-share consideration - 153,000 - PUC of shares received as consideration Legal stated capital (LSC) before reduction 97,000 s.85(2.1) reduction of PUC: (a) LSC increase 97,000 (b) elected amount 153,000 Less: non-share considerat - 153,000 excess, if any -
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PUC reduction: 97,000 Tax PUC of the shares - Tax cost to the corporation of assets transferred: Tax cost Inventory 90,000 Equipment 57,000 Orginal cost 110,000 Goodwill 6,000 Consideration Received: Notes Payable - can be set up as demand notes (assumed and new debt) Pref shares - voting, redeemable and retractable 3. ldentify risks including missing information, assumptions, and uncertain research positions FMV's - obtain appraisals risk of problems arising regarding the estate plan and Joes assets - his shares may be left to all 4 children (the 4th child would end up having voting rights - that could be problematic) 4. Reach a conclusion based on your analysis of each major issue Joe has frozen the value of the business and his 3 children will benefit from the growth going forward Joe controls TSE and TEL Joe can receive dividends from TEL supported by rental income and dividends from TSE 5. Evaluate strengths/weaknesses/risks of your conclusion none. PART D : Advise/Recommend Joe can transfer assets from TEL to TSE and freeze the value, kids have growth of TSE He is earning retirement income Utilized the ACL All of joe's objectives have been met.
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nsfer using s.85 Problem solving case framework is on page xxv in the Main
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ne applicable provisions of the Act ed as 0SBC shares which wl preventhe use of the .Ce
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0% votes and valuel. t is likeiv that 90% or more of ervices by way of dividends being paid from TSE to TE ntinuous basis within the past five vears format Before you A) Assess t B) Identify (C) Analyze D) Advise/r eration Received New Debt Pref Shares Income/CG 35,000 10,000 - 57,000 3,000 - 6,000 84,000 3,000 Wanted to create TCG to use up losses 98,000 97,000 3,000
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e study guide
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u meet with Joe you want to: the situation. the issues. e the issues recommend
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CH 18 AP 3 - Reorganiz 1. Draw a diagram identifying all stakeholders and their relationship (Corporate Org chart) 2. Identify the relationships amoung the stakeholders Matt & Beam Inc are related and affiliated Son is related to Matt, and will part of a related group that controls Beam lnc. after the reorganization of 3. Identify the profile of each stakeholder Matt: canadian resident owns c/s of Beam Inc Son: canadian resident will subscribe to the common shares after re-organization for a nominal amount he has worked FT for the business for the past 5 years, and is 30 yrs old - TOSl will not apply on dividends Beam Inc. CCPC 4. Understand the decision maker and their objectives Matt is the decision maker Matt needs to decide which package out of ONE or TWO he should accept in exchange for his common sh 5. ldentify the relevant past transaction/events or planned future transactions/events and create a time none
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PART B : ldentify the lssues (Tax and non-tax issues) 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 TOSl apply? PART C: Analyze the issues 1. ldentify and perform the qualitative analysis of the transactions and plans including an analysis of the a 1. Are the conditions of s.86 met for the proposed transaction to qualify ? i) Reorganization of Capital is taking place ii) a taxpayer, Matt, is disposing of ALL of his common shares MUST BE A ili) The consideration received has to include shares, this is met via Pref shares Conclusion: s.86 does apply 2. ldentify and perform the quantitative analysis of the transactions and plans using appropriate analys (Analyze the results of the two consideration packages under s.86) 2. What impact does the consideration have on a tax free rollover? PACKAGE ONE lssuance of new shares - STEP 1 (1) PUC of the new shares LSC increase for all new shares 810,000 A Less: PUC of the old shares 300,000 Less: NS Consideration 90,000 210,000 B PUC Reduction (A-B) 600,000 Reduced PUC of the shares 210,000 (2) Cost of new shares (ACB) ACB of old Shares 300,000 Less: NS Consideration - 90,000 ACB of new shares 210,000 ACB of new shares Cost of NS considerarion 90,000 Redemption of old shares - STEP 2 (1) Proceeds of redemption of old shares Reduced PUC 210,000 FMV of NS consideration 90,000 Redemption Proceeds 300,000 Deemed Dividend 84(3)
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Redemption Proceeds 300,000 PUC of old shares - 300,000 Deemed Dividend 84(3) - 2) Proceeds of Disposition of old shares Cost of all new Shares 210,000 NS Consideration 90,000 300,000 Less: Deemed Dividend - Adjusted Proceeds 300,000 Less: ACB - 300,000 CG/CL - Net Economic Effect: Deemed Dividend - CG/CL - Accrued Gain on the New Shares FMV 810,000 ACB - 210,000 Net Economic Effect 600,000 **The accrued gain on th enew shares reflects the same accrued gain on the old shares before the reorganization (900k fmv - 300k ACB = 600K) 3. Does Tax on Split Income (TOSl) have an application? TOSl will not apply as Matt and his son are actively engaged in the business His son is over 25, he is 30 years old subscribe for common shares after the re-organization 3. ldentify risks including missing information, assumptions, and uncertain research positions NONE 4. Reach a conclusion based on your analysis of each major issue Package ONE does not result in any income at the time of the exchange Package TWO results in a deemed dividend of S200K since the NS consideration exceeds the pUC 5. Evaluate strengths/weaknesses/risks of your conclusion NONE PART D : Advise/Recommend Matt should propose package ONE, however he could improve the result: Package ONE TWO Optimal Cash 10,000 500,000 300,000 Bond 80,000 Class A pref 810,000 400,000 600,000
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PUC of new shares 210,000 ACB of new shares 210,000 ACB of NSC 90,000 500,000 300,000 Deemed Dividend - 200,000 Capital Gain/Loss - Accrued Gain 600,000 400,000 600,000 Total 600,000 600,000 600,000
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zation using s.86 capita hares eline Main
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applicable provisions of the Act ALL OF THE SHARE sis format PACKAGE TWO 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 300,000 Less: NS Consideration 500,000 - B PUC Reduction (A-B) 400,000 Reduced PUC of the shares - (2) Cost of new shares (ACB) ACB of old Shares 300,000 Less: NS Consideration 500,000 ACB of new shares - ACB new shares Cost of NS considerarion 300,000 Redemption of old shares - STEP 2 (1) Proceeds of redemption of old shares Reduced PUC - FMV of NS consideration 500,000 Redemption Proceeds 500,000 Deemed Dividend 84(3)
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Redemption Proceeds 500,000 PUC of old shares - 300,000 Deemed Dividend 84(3) 200,000 2) Proceeds of Disposition of old shares Cost of all new Shares - NS Consideration 500,000 500,000 Less: Deemed Dividend - 200,000 Adjusted Proceeds 300,000 Less: ACB - 300,000 CG/CL - Net Economic Effect: Deemed Dividend 200,000 CG/CL - Accrued Gain on the New Shares FMV 400,000 ACB - 400,000 Net Economic Effect 600,000 ** The net economic effect is equal to the inherent gain on the old shares **Paying tax on 200K now as opposed to deferring the entire gain
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d MV of
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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
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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
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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
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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
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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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