Chapter16Solutions

Chapter16Solutions - Chapter 16 - Solution 2 The following...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 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. which Pete can withdraw tax-free as he wishes and as funds become available....
View Full Document

This note was uploaded on 09/30/2008 for the course ACCT 360 taught by Professor Jones during the Summer '08 term at Windsor.

Page1 / 5

Chapter16Solutions - Chapter 16 - Solution 2 The following...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online