Chap 17 - Section 85.1 & 86, Amalgamation & Wind Up

Question 1

When does section 85.1 apply?

Answer 1

• Vendor and purchaser dealing at arms length (not related)
• Vendor cannot control purchaser after transaction
• Cannot have filed section 85(1) for the same shares
• Vendor must not receive any consideration other than shares of the purchaser (THE EXCHANGE CONSISTS OF SHARES ONLY)

Question 2

What are the implications of section 85.1? Vendor side

Answer 2

• Deemed to have dispoed of their shares for proceeds = ACB of exchanged shares
• Acquired shares of purchaser at ACB = ACB of exchanged shares

Question 3

What are the implications of section 85.1? Purchaser side

Answer 3

Purchaser will have an ACB equal to the lesser of:

• FMV of exchanged shares
• PUC of exchanged shares

PUC of shares received by vendor = PUC of shares exchanged

Question 4

When does section 86 apply?

Answer 4

The exchange of shares must be within one corporation (ex: parent company and subsidiary):

• before the transaction, the parent company owns all of the common shares
• they create a new class of preferred shares
• they exchange all their common shares for preferred shares using sectino 86
• child company can receive common shares from the company
• result: child now controls the company (depending on voting rights of PS) and future growth will accrue in the hands of the child
• beware of TOSI*

Question 5

What are specific conditions to meet for section 86 to apply?

Answer 5

• shares must be capital property (not held for trading)
• all of the shares held by the transferor of that class must be exchanged
• there must be REORGANIZATION OF CAPITAL (articles of incorporation will be amended to create a new class of shares)
• transferor must receive shares of the corporation: they can also receive NSC but similar to 85(1) there will be tax consequences if NSC>PUC or ACB

Question 6

What are the steps for section 86? (No need to learn, given on formula sheet)

Answer 6

1- NSC: ACB = FMV

2- ACB of new shares: ACB of old shares - NSC

3- Proceeds of redemption of old shares: NSC + PUC of new shares

4- Proceeds of disposition of old shares: ACB of new shares + NSC

Question 7

How to calculate the PUC reduction for section 86? (No need to learn, formula given)

Answer 7

Increase in legal stated capital (FMV of acwuired shares) XXX
Less excess of:
PUC of old shares (XXX)
over NSC XXX (XXX)
————————————————————————————————————————————–
Reduction in PUC XXX

PUC = FMV - PUC reduction

Question 8

How to calculate a gift under section 86? (No need to learn, formula given)

Answer 8

Occurs when FMV of shares + NSC received > FMV of shares given up (you give more than what you get)

ACB of new shares: ACB of old shares - (NSC+amount of gift)

Proceeds of disposition of old shares - the lesser of:

• NSC + amount of gift
• FMV of old shares

again, a gift will result in double taxation

Question 9

What is an amalgamation? Horizontal vs Vertical?

Answer 9

Amalgamation: when two or more companies combine together to work under a new company

Horizontal: 2 corporations combine with each other

Vertical: 2 corporations (ex: parent & subsidiary) combine with each other

Question 10

Conditions for amalgamation to apply?

Answer 10

• All shareholders of predecessor corps must be taxable Canadian corps
• ” “ “ “ “ “ receive shares of new corp
• all assets/liabilities of “ “ “ be transferred to new corp
• a formal (legal) amglamation must take place

Question 11

What happens when an amalgamation occurs?

Answer 11

Both predecessor corps will have a deemed YE the day before the amalgamation (short YE)
- the new corp can then choose a new YE

The tax values of the new corp’s assets will be equal to the sum of prior corps’ assets

All types of loss carry forwards will flow through the amalgamated company (unless there is an acquisition of control)

GRIP, LRIP, CDA, RDTOH pools will also flow through the amalgamated company

Question 12

Amalgamation: consequences to shareholders

Answer 12

Deemed to have disposed old shares at ACB to acquire new shares at same ACB IF:

no other consideration is received

old shares must be capital property of shareholders

the amalgamation does not result in a gift

Question 13

What is a wind up?

Answer 13

Subsidiary company transfers all assets/liabilities to parent company and is then dissolved. For the transfer to be tax free, the parent company must own at least 90% of subsidiary

NO DEEMED YEAR END FOR THE PARENT COMPANY, but the subsidiary company will have a deemed YE the day before the wind up
subsidiary will not be able to take CCA deductions in deemed YE

Question 14

Wind up: transfer of assets

Answer 14

Assets are transfered at cost

GRIP/LRIP balances will flow through

Loss balances are flowed through the parent corp. HOWEVER: CANNOT BE USED UNTIL FIRST TAXATION YEAR OF THE PARENT CORP THAT BEGINS AFTER THE YEAR OF WIND UP

Question 15

Wind up: disposition of shares

Answer 15

Parent company is deemed to have disposed the shares at proceeds = ACB of shares -> no CG on disposition

Exception: if tax value of subsidiaries assets & PUC of subsidiary is greater than ACB, then deemed POD is lesser of:

• PUC of subsidiary shares
• Tax value of assets transferred

Question 16

What is an asset bump?

Answer 16

ONLY OCCURS WHEN CORPS ARE COMBINED VERTICALLY (WIND UP & VERTICAL AMALGAMATION)

You bump up the tax value of non-depreciable assets

Question 17

How to calculate the asset bump? (No need to learn, formula given)

Answer 17

1- Total bump available
ACB of subsidiary shares less:
- tax values of subsidiaries net assets at time of wind up
- dividends paid by subsidiary to parent since they acquired the company

2- Bump available for each non depreciable asset
FMV of asset at time of acquisition - tax value at time of acquisition

Question 18

Sale of assets: how to determine how much cash available to distribute?

Answer 18

1- determine tax consequences of assets disposal

2- determine taxable income/taxes payable

3- determine any RDTOH balance

4- determine CDA balance

then:

total proceeds from sale of assets
less: corporate tax payable
add: dividend refund (generally it's RDTOH balance since all cash will be distributed)
-----------------------
cash available to distribute