Tax - Midterm

Question 1

AII

Answer 1

Rental Income
Interest Income
Net Taxable Capital Gains (Including Business Assets)
Capital Loss Carryforwards
NO Dividends

Need to determine tax

Question 2

AAII

Answer 2

Net Taxable Capital Gains (Not for business assets)
Dividends from non-connected corporations
Rental Income
Interest Income
NO Loss Carryforwards

Used for determining SBD limit deduction

Question 3

SBD Deduction

Answer 3

SBD is as lesser of :
- Taxable Capital between 10M and 50M
- AAII between 50k and 150k

Question 4

CCPC with SBD
CCPC without SBD

Answer 4

13%
27%

Question 5

Components of CFA Account

Answer 5

Non-taxable portion of Capital Gains
Capital Dividends from Other Corps
Life insurance proceeds minus ACB of policyholder
Minus Capital Dividends Paid

Question 6

Advice to give for selling company

Answer 6

Clear out RDTOH, CDA

Question 7

NO CAPITAL LOSSES ON DEPRECIABLE PROPERTY

Question 8

Tax treatment of dividends received by a corp (connected vs non-connected)

Answer 8

Corps - Include in income
By canadian corp - div is deductible
Portfolio dividends - may be subject to pat IV tax

Individuals -
Gross Up and then tax credit

Question 9

Stock Dividend Treatment

Answer 9

Treated as cash dividend
amount of dividend deemed to be equal to increase in PUC due to stock dividend, regardless of FMV - also considered to be cost of shares

Question 10

Dividend in Kind Treatment

Answer 10

Corp deemed disposed of assets at FMV
Shareholders deemed to acquire assets at FMV
Dividend paid/received equal to FMV of assets
Loss to corp on transfer of assets to controlling SH is denied

Question 11

When do deemed dividends occur

Answer 11

When PUC increases with no corresponding increase in net assets
DD is added to ACB of shares (so they are not taxed again)

Question 12

When does DD not occur?

Answer 12

Increase in PUC is less than increase in FMV of net assets
Increase in PUC is bc of stock dividend
Increase in PUC bc of decrease in another PUC for a similar or larger amount
Increase in PUC due to conversation of Contributed Surplus

When FMV> increase in PUC - Contributed Surplus
When increase in PUC > increase in FMV - deemed dividend

Question 13

What is PUC Reduction/Treatment

Answer 13

Happens for entire class of shares
Reduction in PUC without redemption of any shares
If amount of PUC reduction is greayer than PUC - Deemed dividend
If lesser, PUC is simply reduced

If PUC reduction > ACB of shares - Capital Gain - ACB values change accrodginly

DD does not occur if shares are redeemed from open market -

Question 14

Winding Up Procedures

Answer 14

Determine ABI, AII, CDA on sale of assets
Subtract Liabilities including tax liabilities (consider AAII and reductions to SBD)
Add back RDTOH amounts
Determine amount of deemed dividends, elect for CDA and taxable dividends
Ensure taxable dividends are adequate for RDTOH refund
Determine Capital Gain or Capital Loss for shareholders
GIVE ADVICE!! - Pay out PUC, Pay out CDA, Pay out RDTOH, wait till in lower tax bracket

Question 15

AR Election - Sale of assets

Answer 15

Reserve must be added to income regardless of whether section 22 is used

With the election, any capital gains or losses on AR are treated as business income for the seller and purchaser

Without the election, they would be considered capital amounts for both - purchaser cannot deduct a reserve without the election

If Section 22 is elected, purchaser MUST include the gain in income
They can then deduct the reserve for doubtful debts and bad debts

ONLY allowed if purchaser has purchased substantially all the assets and intends to continue the business

Question 16

Treatment of inventory in sale of assets

Answer 16

Vendor - disposed inventory is considered sold and proceeds are in income

Purchaser - an inventory purchase is consdered inventory and recorded at cost

Question 17

What type of sale do vendors prefer

Answer 17

Vendor: Share sale offers tax advantage of use of CGE and low tax rates for CG, however if they want to retain entity asset sales make more sense

Question 18

What type of sale do purchasers like

Answer 18

Prefer Asset Sales

- Asset purchase offers tax advantage through higher future CCA deductions based on purchase price of assets  When shares are acquired, UCC balances are not impacted - internally generated goodwill is not recognized and CCA for acquisition of goodwill will not be availalble - instead goodwill is reflected in purchase price of shares (ACB)

Question 19

Capital Gains Deduction vs Capital Gain Exemption

Answer 19

Deduction is 1/2 of 971190

Question 20

QSBC Share

Answer 20

SBC Test
Holding Period Test
Basic Asset Test

Question 21

SBC Test

Answer 21

AT TIME OF DISPOSITION (A particular point in time)
Corp was?
- CCPC
- All or substantially all (90%) of FMV of assets were:
- Used principally in active business carried primarily in Canada (>50%)
- Shares or debt of a SBC that was connected
- Or combindation

Question 22

Cash - active or inactive?

Answer 22

Possible to plan to ensure that substantially all of the assets are active business assets prior to share sale to meet the test - purification
Achieved through removal of non-active assets
- If non-active assets are sold, cash is still non-active, and must either be used or removed
- Possible purification strategies:
○ Use non-active assets and after tax proceeds of disposition to pay off liabilities
○ Replace non-active assets that are not used in business with active business assets
○ Pay out non-active as taxable dividends or bonuses
○ Pay out as tax-free capital dividends or PUC distributions

Cash is not always a non-active asset
- Operating account used in ops on regular basis = active business asset
- Cash/marketable securities that are not needed or regularly drawn upon - non-active business assets
- Loans to shareholder (unless by cirtue of employment) - are non-active business assets
- If cash in down time of business is invested - it may stil be an active asset

TIP:
- ALWAYS SEE if we are looking at a past or future transaction
○ For future transactions (sale share) if SBC test is not met, we could advise to purify company prior to sale to ensure CGE can be used

Cash is a redundant asset when it is in excess of working capital
- Do we have enough receivables and inventory to pay our AP
- If you have redundant cash -
○ Pay off liabilities before sale
○ Pay out dividend befor sale

PROF EXPECTS US TO GIVE ADVICE ON EXAMS - WILL NOT BE EXPLICITYL ASKED

When we see share sales on an exam:
- Is it a CCPC?
- Is it a QSBC - tests
- Is the CGE available?

Question 23

Holding Period Test

Answer 23

For last 24 months, all assets must be held by person or related individual/corp

Question 24

Basic Asset Test

Answer 24

for 24 months preceeding, more than 50% of assets must be active business assets (without shares of subsidiary) - if this condition is not met, we use the modified test where

Parent and subsidiary (connected, does not have to be SBC) must meet 50% ad 90% test, and can include shares in subsidiary as part of calc

Question 25

How is ACB impacted in sale of assets vs sale of shares

Answer 25

Sale of assets - FMV becomes new ACB - there is more amount available for deduction for CCA

Sale of shares - assets transferred as they were pre-transfer, tax basis remains the same