Chapter16Solutions

Chapter16Solutions - Chapter 16 Solution 2 The following...

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Chapter 16 - Solution 2 The following assets cannot or should not be transferred using section 85: Tax value FMV Transfer price Debt Income Effect Cash (not eligible) .......................................... $ 22,000 $ 22,000 $ 22,000 $ 22,000 Nil Inventory (1) ..................................................... 44,000 39,500 39,500 39,500 $ (4,500) $ 66,000 $ 61,500 $ 61,500 $ 61,500 $ (4,500) The following assets should be transferred using section 85: Consideration Tax value FMV Minimum transfer price Debt Shares Income Effect Furniture & fixtures .................... $ 6,000 $ 8,000 $ 6,000 $ 6,000 $ 2,000 Nil Building ...................................... 45,000 55,000 45,000 45,000 10,000 Nil Land ............................................ 8,000 30,000 8,000 8,000 22,000 Nil Total ........................................... $ 59,000 $ 93,000 $ 59,000 $ 59,000 $ 34,000 There should be no adverse tax consequences on this transfer, since the FMV of the consideration received (i.e., debt and shares) was exactly equal to the FMVs of the transferred assets. In addition, the non-share consideration did not exceed the tax values of the transferred assets. Cost of shares received as consideration: Elected transfer price ............................................................................................................ $ 59,000 Deduct: non-share consideration .......................................................................................... 59,000 Adjusted cost base of shares ................................................................................................. Nil Legal stated capital before reduction ........................................................................................... $ 34,000 Subsection 85(2.1) reduction in PUC: (a) increase in LSC .......................................................................................... $ 34,000 (A) (b) elected amount ...................................................................... $ 59,000 less: boot ............................................................................... 59,000 excess, if any .............................................................................................. Nil (B) PUC reduction (A – B) ................................................................................................................ 34,000 Tax PUC after reduction .............................................................................................................. Nil The tax PUC after reduction reflects the fact that the tax-paid cost of the assets transferred has been recovered through the debt assumed. The tax basis of all assets was $59,000, which was also the amount Pete elected for the transfer price and was the amount of non-share consideration Pete wished to assume. This non-share consideration reduces the tax PUC of the common shares to nil, which is a logical result, as all the tax-paid value of the assets is now in the form of the debt which Pete can withdraw tax-free as he wishes and as funds become available. —NOTE TO SOLUTION (1) Since there is no possible income to defer on a transfer to the corporation, section 85 does not have to be used. The transfer could be made through a direct sale, taking back debt consideration equal to the fair market value, i.e., $39,500.
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Solution 4 (A) Shares of Supplyco Ltd. should not be transferred to the corporation, if they would jeopardize the qualification of the shares of the new corporation as QSBCS. At this time, the FMV of the Supplyco Ltd. shares is less than 10% of the FMV of all of the assets of the new corporation, but this could change in the future. There is no advantage to having the corporation owning these shares. Shares of Clientco Ltd. should not be transferred to the corporation. The accrued loss of $900 would be denied as a superficial loss [par. 40(2)( g )] and added to the adjusted cost base of the Clientco Ltd. shares held by the new corporation. There is also no advantage to having the corporation own these shares.
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