Lecture 3 Associated, connected, SBC examples September 17, 2023
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Associated corporations – September 17, 2023
s. 256(1)(a) One corporation controls the other
Taxpayer owns A Ltd. and A Ltd. owns 75% of B Ltd. 75%
A
B
2
s. 256(1)(b) Two corporations controlled by the same person or group of persons
Example 1
Mr. A owns 75% of A Ltd. and 75% of B Ltd.
Mr. A
75% 75%
Example 2
M Ltd. is owned 10% by Mike and 45% by Ken. K Ltd. is owned 20% by Mike and 35% by Ken. Mike and Ken
55% 55%
A
B
M
K
3
Example 3
Mr. and Mrs. X are married.
H Ltd. is owned 51% by Mr. X and 2% by Mrs. X = 53%
W Ltd. is owned 51% by Mrs. X and 5% by Mr. X = 56%
Mr. and Mrs. X
53% 56%
H
W
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4
s. 256(1)(c): Two related persons control two different corporations. One person owns 25% or more of each corporation.
An example with Mr. and Mrs. X:
H Ltd. is owned 51% by Mr. X and 25% by Mrs. X W Ltd. is owned 51% by Mrs. X
Mr. X Mrs. X
51% 25% 51%
W
H
5
Connected corporations
s. 186
Two corporations are connected when:
1. one owns > 10% of the shares.
2. one is controlled by the other or a non-arm’s length person(s) individually or as a group.
Part IV Tax Example 1
D Co. is a Canadian-controlled private corporation. During the year, D Co received dividends from three corporations:
Payor
% of shares
owned by D
Dividends
Received
by D
Dividend
Refund
received by
Payor
A Co 5% $10,000
$
–
B Co
10% 20,000
66,000
C Co
25% 30,000
–
D Co
5% 10% 25%
C
A
B
6
Part IV Tax Example 2
A owns 50% of the issued shares of B and 10% of the issued shares of C.
During
the current taxation year, A received taxable dividends of $30,000 from each of B
and C.
B and C received dividend refunds of $4,000 each for the same year. Which one of the following is A’s Part IV tax payable for the current year?
A Ltd
50% 10% not connected
connected
B Ltd.
C Ltd
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Small business Corporation (SBC) 😊
= a CCPC which meets an “all or substantially all” FMV gross asset test = the CCPC must have >
90% of its assets (including goodwill) on FMV basis either
= used primarily in active business
carried on principally in Canada by itself or related corporation
= shares or debt of a connected SBC
= or a combination of the two
SBC Example 1:
Robert and Wendy Mandrake (husband and wife) own 2 companies. Robert owns 75% of each and Wendy owns 25% of each. The companies are
- RHL, which owns 2 types of assets: some blue-chip stocks (<10% FMV assets) and a rental property rented by Mandrake Construction (>90% FMV assets) and
- Mandrake Construction, which owns 2 types of assets: 1. business assets used primarily in an active business in Canada and 2. a large amount of debt owed by RHL (perhaps >10% FMV assets).
Analysis
RHL and Mandrake Construction are related, associated two ways and connected (both controlled by Robert, both controlled by the same group of Robert and Wendy).
RHL’s rental income is deemed to be ABI because it is deducted by an associated corporation (Mandrake) in computing its ABI.
RHL is a SBC because its rental building is used primarily in active business
c
arried on principally in Canada by Mandrake (related corporation). Mandrake Construction is also a SBC because the RHL’s debt is debt of a connected SBC.
Mr. and Mrs. Mandrake -Robert (75% each) & Wendy (25% each)
100% 100%
active business assets <90%
building rented to Mandrake – OK if 90% or more of FMV assets
RHL debt
>10%
blue chip stocks – Ok if 10% or less of FMV assets
Mandrake
RHL
8
SBC Example 2:
Which of the following Canadian controlled private corporations will not qualify as a small business corporation?
A. A company which owns one asset: 10% of shares of a small business corporation. The remaining 90% is owned by unrelated persons.
10%
?
SBC
9
Which of the following Canadian controlled private corporations will not qualify as a small business corporation?
B. A company which has two assets with the following fair market values: $80,000 of term deposits and $920,000 of shares of a connected small business corporation. The shares of the connected small business corporation cost the company $70,000.
$80K FMV connected - $920K FMV
term deposits
?
SBC
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C. A company which owns one asset (a rental building used primarily in an active business in Canada by a company controlled by the sister of the controlling shareholder) and no employees.
D. A company which carries on a consulting practice in Canada with all its assets.
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SBC Example 3:
Which of the following Canadian controlled private corporations will not qualify as a small business corporation?
A. A company which owns one asset: 50% of shares of a small business corporation.
B. A company which has two assets with the following fair market values: $100,000
of term deposits and $900,000 of shares of a connected small business corporation. The shares of the connected small business corporation cost the company $100,000.
C. A company which owns one asset: a rental building used primarily in an active business in Canada by a company controlled by the sister of the controlling shareholder.
D. A company which carries on an active business primarily in the U.S. with all its assets.