Mod 2 - Corporate Reorgs Flashcards
Section 85 - Transfer of Property to a Corporation
Purpose is to:
1) facilitate the transfer of assets of an unincorporated business to a Canadian Corporation. This may allow the business to take advantage of small business tax rates and for the Shareholders to access cap gains excemption.
2) Consolidate operations for loss utilization and tax planning.
3) establish hold co.s to achieve income splitting and estatem planning for families.
4) to spin off assets of one corp to another (redundant assets) for tax purposes.
5) to minimize or defer taxes payable by a vendor for both arms length acquisitions and divestitures of businesses or shares.
Section 86 - Share Capital Reorganization
provides for the tax-free exchange of shares under specific circumstances, and is commonly used to effect an estate freeze. A parent who owns the common shares of an operating company, for example, would exchange the common shares for preferred shares of the operating company, the redemption/retraction price being equal to the fair market value of the common shares at the time of the transaction. The children then subscribe for new common shares of the operating company and the future equity growth accrues to the new common shareholders, i.e., the children.
Section 87 - Statutory Amalgamation
Generally, an amalgamation of Canadian corporations can be accomplished on a tax-free basis. The two major requirements in order for this to occur are that:
• The assets and liabilities of each company entering into the amalgamation must flow through to the amalgamated company (subject to the cancellation of the intercompany debt).
All shareholders of each predecessor corporation must receive shares of the amalgamated corporation, except inter-company shareholdings, which cancel out.
Section 88(1) - Winding-up of a Subsidiary
Provision is made in subsection 88(1) for the winding-up of a Canadian corporation’s subsidiary company provided that the parent company owns at least 90% of the shares of each class of capital stock immediately before the winding-up. Also, the shares that the parent does not own must be owned by people at arms length from the parent.
Wind up an acquired corporation by transferring its assets to the acquiring corporation.
• Minority squeeze-out.
• Loss/CCA utilizations.]
• Eliminate inactive corporations or simply “clean up” a multi-corporation group’s organizational chart.
Section 88 (2) - Winding-up a Subsidiary
Subsection 88(2) deals with any winding-up situation other than subsection 88(1) wind-ups. Accordingly, the valuator will be concerned with subsection 88(2) any time a liquidation value is calculated. In such cases, tax at both the corporate and shareholder levels must be considered. At the corporate level, the corporation is deemed to have disposed of all its properties immediately before the winding-up and a tax year is deemed to have ended at that time for purposes of calculating the capital dividend account and pre-1972 capital surplus on hand (CSOH). As a result of the deemed disposition, taxes will be payable on any gains realized on all the corporation’s assets. The gains are determined by valuing the properties at their fair market value.
Section 22 - Allowable Elections
applicable where all or substantially all of the proerty used in a busienss, including outstanding AR, is sold to a purchaser who agrees to continue the business. If this is the case, it provides the following:
The vendor can deduct any loss sustained on the sale of the accounts receivable;
• The purchaser is required to include an equal amount in income.
• The purchaser is then able to deduct a reserve for the accounts receivable acquired which are or become doubtful, and to write off those debts which become bad.
• The effect is to essentially allow the purchaser to deal with the accounts receivable for tax purposes as though they had arisen while the purchaser was the owner of the business.
