Question 1
Important: Multiple-choice questions are to be completed within the Online Learning Environment in your TX2 Assignment Submission section. This portion of the assignment will be automatically graded. Do not include your answers in your Word document as they will not be graded.
Multiple choice
a. Marc is the son-in-law of Bernard. Bernard owns all the issued shares of Mammoth Inc., an import company whose taxation year ends December 31. In September 2011, Mammoth Inc. granted Marc a $10,000 loan, bearing interest at the market rate in effect at that time, so that he could purchase a snowmobile. Assuming that the loan is repaid in 2013 and Marc has always made his interest payments on time, what will be the tax consequences of this loan?
1. None.
2. Under section 80.4, Marc must include a taxable benefit in his income each year.
3. Bernard must include the amount of the loan in his 2011 income.
4. Marc must include the amount of the loan in his 2011 income.
b. Sophie-Anne wants to acquire a 20% interest in Bigprofit Inc. She must pay $250,000 to the corporation, which will issue her 10,000 voting and participating shares of the corporation, representing 20% of the voting and participating shares of the corporation after the issue. Why would Sophie-Anne want shares of a separate class from that of the current shareholders, who had subscribed their shares for $10 each?
1. She wants the PUC of her shares to be $250,000.
2. She does not want to dilute the ACB of her shares with that of the current shareholders.
3. She wants to avoid having a taxable benefit conferred on her.
4. She does not want to be taxed on the deemed dividend under subsection 84(4) that would result from the reduction of the PUC of her shares.
c. Caroline Murphy transfers to Fleury Inc., a corporation of which she is the sole shareholder, a piece of land having an FMV of $50,000 and an ACB of $20,000 in exchange for Class C shares having a PUC and an FMV of $75,000. No Class C shares were issued before the transaction. What are the tax consequences for Caroline?
1. A taxable benefit of $25,000 under section 15(1) and a taxable capital gain of
$15,000
2. A deemed dividend of $25,000 and a taxable capital gain of $27,500
3. A taxable benefit of $25,000 under subsection 15(1), a taxable capital gain of
$27,500, and a deemed dividend of $25,000
4. A deemed dividend of $25,000 and a taxable capital gain of $15,000
d. A corporation has two shareholders who each hold 50% of the common shares of the corporation. To one of them, who does not reside in Canada, the corporation sells a painting by a well-known European artist for $10,000. The corporation had paid $15,000 for this painting several years ago. At the time of the sale, the painting is evaluated at $23,000. What are the tax consequences of the transaction?
1. The corporation incurs a deductible capital loss of $2,500.
2. The corporation realizes a taxable capital gain of $4,000, and the shareholder has a taxable benefit of $5,000.
3. The shareholder has a deemed dividend of $13,000, and the corporation realizes a taxable capital gain of $4,000.
4. The shareholder has a taxable benefit of $5,000, and the corporation incurs a capital loss of $5,000.
e. When property is transferred under subsection 85(1), which one of the following conditions must be met?
1. The transferor must be a taxable Canadian corporation.
2. The transferor must be a Canadian resident.
3. The transferee must be a taxable Canadian corporation.
4. The transferee must be affiliated with the transferor.
f. What condition must be met to benefit from a rollover as provided for in section 85 in the transfer of a building?
1. The building must be situated in Canada.
2. The building must be property owned for rental purposes.
3. The building must not be included in the transferor's inventory.
4. The building must be the only property included in the prescribed class of property.
g. In a rollover under section 85, that portion of the agreed amount that is attributed to the preferred-share consideration, if any, is equal to the lesser of the FMV of the preferred shares after the disposition and which other amount?
1. The amount by which the agreed amount exceeds the FMV of the common shares after the disposition
2. The amount by which the agreed amount exceeds the FMV of the property transferred to the corporation
3. The amount by which the agreed amount exceeds the ACB of the property transferred to the corporation
4. The amount by which the agreed amount exceeds the FMV of the non-share consideration
h. When calculating the cost of the consideration received by the transferor, the agreed amount for the transferred property must be distributed among the assets received by the transferor. In what order is this distribution done?
1. Non-share consideration, preferred shares, common shares
2. Preferred shares, common shares, non-share consideration
3. Common shares, preferred shares, non-share consideration
4. No order is stipulated by the ITA. However, the transferor must inform CRA of the order chosen.
i. In 2000, Martin acquired 100 Class A shares of Sultan Ltd. from Michelle for $20,000. Before the sale to Martin, Michelle was the sole shareholder of Sultan Ltd., and she held 500 Class A shares. Michelle had acquired the 500 shares on the incorporation of Sultan Ltd., when she paid $5,000 for the issue of 500 shares. Following a dispute between Martin and Michelle, Martin wants to withdraw from Sultan. According to an offer made to him, Sultan Ltd. will purchase his 100 Class A shares from him for $50,000. What would be the tax consequences for Martin if he accepted the offer?
1. A taxable capital gain of $15,000
2. A deemed dividend of $30,000
3. A deemed dividend of $49,000 and a deductible capital loss of $9,500
4. A deemed dividend of $45,000 and a taxable capital gain of $15,000
j. Zarra transferred a piece of land to her holding company, Zarra Holding Ltd. The land had an adjusted cost base of $1,000 and a fair market value of $25,000. As consideration for the transfer, Zarra received a $24,999 note and a preferred share redeemable for $1. Zarra filed an election under subsection 85(1) to have the transaction take place with no tax consequences, and the agreed amount on the form is equal to the adjusted cost base of $1,000. What will be the tax consequences of the transfer for Zarra?
1. None
2. A taxable capital gain of $11,999.50
3. A taxable capital gain of $12,000
4. A deemed dividend of $24,000
Question 2
The accounting firm that you work for has a policy of holding conference lunches for its accounting employees to help them maintain and improve their knowledge in the fields related to their work. Each in their turn, staff members are called upon to make a presentation on a topic that they have recently had to deal with in the performance of their work, so that their colleagues can learn from it.
Knowing that you had to conduct a study in order to advise a client on a loan that he wanted to make to his daughter through the corporation that is wholly controlled by him, the head of the firm has asked you to make a short presentation next week on the subject of loans made by a private corporation to members of the principal shareholder's family. Your presentation is to focus solely on family members who are not employees of the corporation.
Required
Prepare the slides and notes for your presentation following the format below. Your presentation should be limited to a maximum of five slides.
b. A team leader from the accounting firm that attended the presentation realizes that he has little knowledge of the subject. He might not be able to clearly identify this type of situation in an engagement with a client. What should the team leader do?
Question 3
During 2011, Mary Todd transferred land to Sandy Development Ltd., a newly created corporation. The land was acquired a few years ago in order to build an income property on it. Mary is the sole shareholder of Sandy Development Ltd. The FMV of the land at the time of the transfer was $500,000 and its ACB was $120,000.
|
Mary received the following consideration in the transfer:
|
|
|
Note payable to Mary
|
$ 120,000
|
|
3,500 Class A preferred shares issued for $100 each, having a par value of $100, and retractable at $100
|
350,000
|
|
3,000 common shares issued for $10 each
|
30,000
|
|
|
$500,000
|
Mary has a net capital loss carryforward of $25,000 (based on a 50% inclusion rate).
Mary received the following consideration in the transfer:
No Class A preferred or common shares were issued prior to the transfer and no other shares have been issued since.
Mary comes to consult you on the tax consequences of the transfer. She was told that it was possible to make an election for tax purposes so that there would be no tax consequences on the transfer. Mary gives you all the information with no verification on your part.
Required
a.
In a letter addressed to Mary, give her your opinion on how the transfer should be carried out under subsection 85(1) so that she will have no immediate tax consequences and will benefit from all the available tax attributes. You should also tell her the PUC and ACB of the Class A preferred shares and the common shares that she has received and deal with the tax consequences on the eventual redemption of the 3,500 Class A preferred shares.
Mary informs you that in 2013, she will make a capital contribution of $100,000 to Sandy Development Ltd. to enable it to purchase and develop other pieces of land. The banker for the corporation requires that the contribution be made in the form of a share issue and not in the form of a loan made by Mary to the corporation. What recommendation will you make to Mary in order for her to be able to withdraw the $100,000 without future tax consequences?
Question 4
Sidney Rabinovitch, a client of long standing, has operated a business as a sole proprietor since 1996. Net business income has increased progressively and is presently approximately $90,000. Due to the reduced tax rates on the ABI of CCPCs, you have discussed the possibility of reducing his income taxes by transferring his business to a corporation.
Based on your discussions, Sidney forms a new corporation. Sidney owns 100% of the common shares of this new corporation. Sidney decides to transfer all of his business assets to the new corporation. In your file, you find the following list of the assets and liabilities of the business as at January 31, 2011, the date of the fiscal year end.
|
|
Cost
|
FMV
|
|
Accounts receivable
|
$ 21,000
|
$ 16,000
|
|
Inventory
|
27,000
|
27,000
|
|
Investment in shares
|
10,000
|
6,000
|
|
Land
|
11,000
|
25,000
|
|
Building (UCC - $60,000)
|
80,000
|
150,000
|
|
Office furniture (UCC - $20,000)1
|
24,000
|
18,000
|
|
Goodwill (CEC)2 (3/4 × $4,000)
|
3,000
|
46,000
|
|
Accounts payable and accrued liabilities
|
|
20,000
|
|
Mortgage payable
|
|
65,000
|
1 Assume that there is only one property in the class.
2 Assume that no amount was deducted under paragraph 20(1)(b).
On February 1, 2011, Sidney sells all his business assets to the new corporation for a price equal to FMV. The new corporation assumes all of Sidney's business liabilities. The new corporation's fiscal period will end on May 31.
Required
Plan the sale of assets by Sidney to the new corporation in such a way that he has minimum tax consequences and receives the maximum amount of non-share consideration without any immediate tax liability. If shares are to be issued as consideration, assume that they are non-voting retractable preferred shares, of a class in which no share is currently issued and with a legal capital and redemption value of $1 each.
a. Select the agreed amount or POD for each class of property and explain the tax consequences for Sidney, if any. In addition, use a table presented as follows for property transferred under section 85:
b. Specify the cost and ACB of the consideration received by Sidney.
c. Specify the PUC of the shares received by Sidney.
d. Indicate the cost of the property acquired by the new corporation.
e. Specify the deadline for the filing of the election form.
f. Assume that it is now November 2015, and Sidney has asked you to review his tax files for the last several years. You discover that George Saint-Jean, who is one of your partners in the firm and who advised Sidney on this transaction, still hasn't filed Form T2057 for the rollover of the business to the corporation. Write an internal memorandum to your partners in which you discuss George's conduct, setting out possible solutions and making recommendations on how the firm should proceed, including what it should do in relation to the client and George.