Unit 6 Flashcards

1
Q

Acquisition of Control

A

-Occurs when an individual acquires more than 50% of voting shares necessary to elect the BOD of the corp

-Change in control happens when an acquires control of corp and or when an individual who prev controlled the corp loses control

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2
Q

Deemed yr end

A

-when a AOC happens the corp is deemed to have a tax yr ending the day before the AOC

-Deemed yr end does not coincide with the fiscal yr end of the acquired corp, there will be 2 taxation yrs in 1 fiscal period:
a) Yr 1: from the beg of the normal fiscal period to the day before the AOC
b) Yr 2: from the day of the AOC to the normal fiscal yr end

Following would apply:
1) Tax return filed for the taxation yr ending at the deemed yr end
2) Upaid amounts (management bonuses and SH) should be reviewed.
3) Review charitable dono with respect to 75% limit
4) CCA claims must be prorated for the # of days in the short taxation yr

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3
Q

Losses and AOC

A

-Amount of loss that can be used * by the tax rate in effect in the period the loss is expected to be used
-Profitable corps may use loss from acquired corps within certain restrictions

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4
Q

Loss utilization strats on AOC

A

2 options:
1) Restructure: Section 85 of the ITA may be used to do a tax-free rollover of income-producing assets from the profitable corp to the loss corp–> the assets would generate income in the corp after the AOC
a) acc loss in the loss corp may only be deducted against income from the same or similar busi generated after the AOC

2) Intercompany transactions: produce exp deductions in the profitable corp while generating TI in the loss corp

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5
Q

Accrued losses triggered at deemed yr end by AOC rules

A

-Upon OAC accrued losses on assets are deemed realized:
a) accrued losses are determined by comparing the FV of the assets to the tax base
b) for dep prop terminal losses are realized non-dep prop capital losses are realized

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6
Q

Elective capital gains and recapture

A

-Result of a deemed yr end on AOC, corp could elect deemed disposition of any dep/non dep prop which CG or recapture have been accrued

-Elected amount or deemed POD LESSER of:
1) FMV of prop
2) Greater of: a) ACB of prop b) designated amount

-When there’s a deemed disposition of dep prop
a) Capital cost of asset to acquiring company= POD of same assets for acquired company
b) UCC of same asset after election= org cost+50% capital gain

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7
Q

Accumulated losses at deemed yr end

A

-Noncapital losses-> include busi losses other than ABILs and prop losses:
a) ABILS and prop losses expire on AOC, MUST be removed from noncapital loss balance
b) Only busi losses and farm losses may be CF. ONLY APPLIED TO SIMILAR INCOME
c) Terminal losses are noncapital loses and maybe CF

-Net capital losses and LPP
a) Expire on AOC and may not be CF

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8
Q

AOC PC6 example

A
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9
Q

Partnerships

A

-2 or more persons carrying on busi with the intention of making a profit

-General partnerships all partnership general partners is jointly liable for the debts of the partnerships

-Limited partnerships:1 general partner & 1> limited partners-> limited partners exposure to liab limited to their net investment in partnership

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10
Q

General partnership income and losses

A
  • Partnerships income or loss is first determined @ partnership level
    -Partnership draws are added back to NI upon reconciliation
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11
Q

Partnership interest

A

-Investment in a general partnership is considered a non dep capital prop

-Individuals may acquire an interest in partnership by either becoming a founding member or by acquiring an interest in an existing partnership
1) Founding member: initial cost base=FMV of prop contributed to partnership
2) Interest acquisition: initial cost base= amount paid

-ACB of partnership interest at any point in time=
org cost+ income allocation + additional capital cont - partnership draws

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12
Q

Trusts

A
  • A settlor: is an individual who transfers title of prop to a trustee: the individual who holds title to the prop and manages the prop for benefits of the beneficiaries of the trust.
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13
Q

Reasons to establish personal trust

A

1) Management of assets: trustee have significantly more experience in managing assets when compared to beneficiaries

2) Protecting assets: the settlor of the trust may want to protect assets from creditors

3) Control distributions: prop and income may be distributed over time

4) Privacy: after death a will is probated and becomes a public document–> trust is a priv document

5) Access to multiple exemptions: may provide access to CGE or/and PRE

6) Income splitting: subject to certain limitations, a trust may be used to split income amount fam members by distributing income to the trust to members in lower tax brackets

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14
Q

Types of trusts

A

1) Testamentary trust: a trust that arises as a result of the death of an individual
a) The trust wither be established under the decreased will or if not specified in the will the estate of the deceased will become a trust for tax purposes

2) Inter vivos trust: trust that’s not a testamentary trust–> established by the settlor during their lifetime

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15
Q

Taxation of trust

A
  • For tax purposes, considered an ind
  • General rule: income retained in a trust is taxxed at the highest combined federal and prov tax rates for the province of the resident of the trust (33%)
  • Income retained by the trust considered graduated rate estate (GRE) is taxed the same way as TI for individuals
  • GRE is an estate that arose as a consequence of an ind death if:
    1) No more than 36 months have passed since the date of the taxpayer’s death
    2) estate is considered a testamentary trust
    3) estate designates itself as the GRE of the ind
    4) no other estate is designated as the GRE of the ind

Estate qualifies for GRE only 36 months, after which its taxed at the highest rate

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16
Q

Net and TI of a trust

A

-Income allocated to beneficiaries is deductible in determining NI for the trust & is taxed at the hand of beneficiaries
Subsequent distributions of after-tax income are tax-free to beneficiaries

-Losses realized in a trust may not be allocated to beneficiaries

-General rule is that income earned by a trust loses is character when distributed to the beneficiaries

-Following designations are available so the character of certain types of income is retained on flow through

17
Q

Deductible amounts in determine NI for a trust

A

1) Amounts paid or payable to beneficiaries
2) Interest and other exp incurred in earning income of the trust
3) Trustee or executor fee
4) Amounts paid by trust to 3rd party to provide goods and services to beneficiary that are allocated to beneficiary income

18
Q

Fiscal yr end of trusts

A

-Testamentary trusts that are GRE must have fiscal yr end no later than 1yr after the death of the settlor
-Once it’s no longer a GRE the yr end of the trust becomes a calendar yr end
-Trust returns (T3s) are required to be filed within 90 days of the trust fiscal period

19
Q

Purchase/sale of busi

A

-General rule: buyer pref to buy assets, sellers pref to sell shrs

-Need to analyze after-tax proceeds

20
Q

Purchaser POV

A

-Risk management starts with a share purchase:
1) Inc due diligence procedures, including search for unrecorded liab
2) Right to set off contingent or unknown liab from the purchase price
3) Holdbacl of a portion of the purchase price to cover unknown liab

21
Q

Seller POV

A
22
Q

Sale of shrs- after-tax proceeds

A

1) Determine capital gain
2) Multiply by 50% for TCG
3) If CGE deduction is available deduct it to determine the taxable amount of the TCG
4) Apply taxpayer marginal tax rate to TCG to determine personal tax payable
5) Determine after-tax cash kept as the SP for the shrs - personal tax paid on the sale

23
Q

Sale of assets-after tax proceeds

A

1) Determine tax impact to the corp on the sale of each asset–> determine the effect on ABI, AII, CDA, NERDTOH

2) Determine corp tax payable on income generated from sale of assets and on any income earned in the corp up to the date the assets were sold

3)Determine after tax cash in the corp that is available to redeem the shrs

4) Determine deemed div and capital gain/loss arising on the redemption of the shrs

5) Determine personal TP as a result of shrs and any bonus paid to the SH prior to winding up the corp

6) Determine after tax cash retained as the dif between the cash used to redeem the shrs and personal TP in step 5

24
Q

1) Determine ABI, AII, CDA, NERDTOH account

A

-ABI: includes amounts that are fully deductible or taxable
-AII: includes 50% of CG
-CDA: includes nontaxable half of CG
-NERDTOH: 30.67% of amounts classified as AII added to NERDTOH

25
Q

2) Determine corp tax payable on income generated from asset sale

A
26
Q

3) Determine after-tax cash in corp available to redeem the shrs

A

-Selling price of assets=total FV
-Deduct all legal liab of the corps (ie AP, bank debt, SH)

27
Q

4) Determine deemed dividend and capital gain/loss on redemption of shrs

A

-Deemed div=cash used to redeem shrs-PUC
-PUC amount that can be returned to SH on redemption or cancellation of shrs without tax consequences
a) normally PUC=FMV of prop trf

-PUC is calculated at the corporate level and attaches itself to a particular class or series of shares, not to particular shareholders. Therefore, any increase or decrease in PUC affects all shareholders of a particular class or series equally.

-ACB is calculated at the shareholder level and relates to a particular class of shares or series of shares held by a particular taxpayer and may well be a unique amount for each shareholder
a) Adj cost base is determined for shrs using the average weighted method

28
Q

5) Determine personal TP on redemption of shrs and any bonus paid to shr prior to windup

A

-For deemed dividends, need to determine if eligible or non-eligible:
a) First-> designated sufficient dividends as noneligible to obtain full refund on the balance in the NERDTOH account
b) Next–> if deemed div is subject to tax–> non eligible div required to obtain a full refund on NERDTOH account, designate remaining as eligible

29
Q

QSBC

A
  1. CCPC
  2. SBC test: 90% of assets on a FMV basis are used principally in active business
    - if not met requ purification
  3. Holding period test:Through 24 month ending no one other than related parties must have owned the shrs
  4. Basic asset test: Through the 24 month period, more than 50% of the FC of assert were used principaly in active business in Canada.
30
Q

HST on sale of busimess

A

-Sale of shrs is an exempt supply, so no HST would be charged on the sale.

-Sale of assets would be HST chargeable, which will make the option more expensive. However, an election can be filed by BOTH parties if the following conditions are met:

  1. The election is available in situations where all or substantially all of the assets (that is, 90% or more) that can reasonably be regarded as being necessary to carry on the business are sold to a purchaser who will continue to carry on that business
  2. The election cannot be made if the vendor is a registrant but the purchaser is a non-registrant since the non-registrant would not have been entitled to claim an ITC on the purchase.