Ch.30 legal forms and structure

Question 1

Incorporation

Answer 1

rules for a Section 85 rollover, the advantages and disadvantages of incorporation should be considered.

Question 2

Advantages

Answer 2

• limited liability for shareholders (except with respect to personal guarantees)
• tax deferral on earnings, as earnings are retained in the corporation and dividend payments to shareholders are delayed
• potential tax reduction on earnings subject to the small business deduction, depending on a combination of corporate and personal tax rates
• greater potential for income splitting among family members
• greater flexibility for owner-manager compensation (for example, salary versus dividends)
• flexibility regarding fiscal year-end selection
• access to the lifetime capital gains exemption on future disposition of shares of the corporation that are qualified small business corporation shares

Question 3

Disadvantages

Answer 3

• cost of initial incorporation and ongoing compliance, including preparation of the financial statements, corporate tax returns and annual filing fees
• inability to claim corporate losses against other sources of personal income

Question 4

Section 85 rollover

Answer 4

used when transferring assets of a proprietorship to a corporation or transferring shares of an operating company to a newly created holding company.

Question 5

AR

Answer 5

A Section 22 election is a joint election between the purchaser and the seller of the receivables. When a Section 22 election is made, the receivables are no longer considered capital property. As a result, any losses realized by the seller are fully deductible business losses. If the purchaser collects more than the amount paid to acquire the receivables, the additional amount collected is fully taxed as business income.

Question 6

limits

Answer 6

The ceiling, or maximum amount that may be elected, is the FMV of the asset being transferred.

The floor, or minimum amount that may be elected, will equal the greater of:

• the FMV of any NSC (boot)
• the tax value of the asset being transferred

Question 7

Goodwill

Answer 7

The tax value of internally generated goodwill is nil. To make the election valid, an elected amount of nil cannot be chosen. Normally, an elected amount of $1 is chosen in order to minimize taxes.

Question 8

Non-share consideration (boot)

Answer 8

NSC should equal the tax basis (plus $1 for goodwill) because the maximum amount of NSC that may be taken without tax consequences is the tax value of the asset being transferred.

Question 9

Terminal losses

Answer 9

does not allow the transfer of property with an unrealized terminal loss to a corporation. The property may be sold to the corporation at its FMV. The transferor will be denied the terminal loss on sale but is permitted to hold the terminal loss in a separate CCA class of the same classification as the one from which the property originated, and will be allowed to claim CCA on that separate pool.