chap15 - CHAPTER 15 Corporate Distributions Windings-up and...

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CHAPTER 15 Corporate Distributions, Windings-up and Sales Problem 1 [ITA: 89(1)] Surplus Accounts Limited, a Canadian-controlled private corporation, whose fiscal year-end is December 31, provides you with the following data concerning its tax accounts and capital transactions for 2005. The balance in its capital dividend account was nil on January 1, 2005. Surplus Accounts Limited is considering winding up the corporation and wishes to determine the impact of the sale of all its capital assets on its tax surplus accounts. The following capital assets are recorded in the books of account: Assets Cost U.C.C./ C.E.C. Estimated proceeds Estimated selling costs Investments .......... $ 60,000 $ 22,000 $ 500 Land ..................... 40,000 200,000 10,000 Building ............... 70,000 $ 45,000 125,000 6,000 Equipment ........... 35,000 Nil 8,000 400 Customer lists (Note 1) ............... 40,000 16,000 60,000 Additional Information (1) The balance in the cumulative eligible capital account reflects the purchase of the customer lists in 1995 for $40,000 less the tax write-offs for 1995 to 2004, inclusive. (2) In addition to the above assets, there is $35,000 of goodwill which will also be sold. REQUIRED Compute the effect on income and the capital dividend account balance immediately after the above transactions. 103
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104 Introduction to Federal Income Taxation in Canada Solution 1 Effect on Income Investments: A.C.L. 1 / 2 × ($22,000 – ($60,000 + $500)) ............................................................ $ (19,250) Land: T.C.G. 1 / 2 × ($200,000 – ($40,000 + $10,000)) ................................................................ 75,000 Building: T.C.G. 1 / 2 × ($125,000 – ($70,000 + $6,000)) ............................................................. 24,500 Building: recapture ($45,000 – $70,000) ..................................................................................... 25,000 Equipment: recapture (($8,000 – $400) – nil) .............................................................................. 7,600 Eligible capital property: goodwill and customer lists: Proceeds ( 3 / 4 × (60K + 35K)) ........................................................................ $ 71,250 Less: C.E.C. balance ...................................................................................... 16,000 $ 55,250 Previous CECA claims (( 3 / 4 × $40,000) – $16,000) ...................................... 14,000 $ 41,250 Income ( 2 / 3 × $41,250) .................................................................................. 27,500 Income (recapture of CECA) ......................................................................... 14,000 41,500 Income effect ............................................................................................................................... $ 154,350 Capital Dividend Account Balance: January 1, 2005 ............................................................................................................. Nil Investments: 1 / 2 × ($22,000 – ($60,000 + $500)) ........................................................................ $ (19,250) Land: 1 / 2 × ($200,000 – ($40,000 + $10,000) .............................................................................. 75,000 Building: 1 / 2 × ($125,000 – ($70,000 + $6,000)) ......................................................................... 24,500 Eligible capital property: goodwill and customer lists: 2 / 3 × $41,250 27,500 Balance: December 31, 2005 ....................................................................................................... $ 107,750 The above can be summarized in tabular form as follows: Asset Income effect Capital dividend account Untaxed fraction of net cap. gains Capital dividend received Untaxed fraction of net gain on E.C.P. Untaxed life ins. proceeds Capital dividend paid Balance A.B.I. Invest. Investments ..... $ (19,250) $ (19,250) $ (19,250) Land ................ 75,000 75,000 75,000 Building ........... $ 25,000 24,500 24,500 24,500 Equipment ....... 7,600 E.C.P ............... 41,500 $ 27,500 27,500 $ 74,100 $ 80,250 $ 80,250 Nil $ 27,500 Nil Nil $ 107,750
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Problem 2 [ITA: 89(1)] You have been asked to compute the capital dividend account of Granatstein Ltd., a Canadian-controlled private corporation incorporated in 1983. You have reviewed the tax returns of the corporation for the period January 1, 1983 to December 31, 2005 and made the following notes: 1985 Disposed of bonds resulting in a capital gain of $10,000. 1987 Received taxable dividend of $2,000 and capital dividend of $5,000. 1988 Disposed of shares resulting in a capital loss of $4,000. 1990 Disposed of equipment resulting in a capital gain of $6,000 and recapture of $3,000. 1992 Eligible capital property was purchased for $40,000.
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