P 19-2 Solution - Buckwold and Kitunen, Canadian Income...

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Buckwold and Kitunen , Canadian Income Taxation, 2010-2011 Ed. 1 Solution to P 19-2 Part 1 Keeping in mind that Karl Shane will continue to own KS Holdings for the purpose of maintaining an investment portfolio, it is not necessary to consider the ultimate tax consequences that would occur if the proceeds from the sale are distributed to Karl Shane personally. Sale of Shares for $1,200,000 : Proceeds $1,200,000 ACB (200,000 ) Capital gain $1,000,000 Taxable gain (1/2) $500,000 Tax @ 47 2/3% to KS Holding $238,335 Available for reinvestment: Proceeds $1,200,000 less tax (238,335 ) $961,665 Sale of Assets by Shane Plastics : It is recognized that the buyers would not likely want to purchase the bonds ($100,000) as they are not needed for the business. Even if the bonds were sold, no tax consequence would result as their fair value is equal to their cost base. Assets sold: Current assets $ 500,000 Land 100,000 Building 720,000 Equipment 300,000 Goodwill 400,000 2,020,000 less liabilities assumed (700,000 ) 1,320,000 Tax to Shane Plastics (below) (198,617 ) 1,121,383 Add bonds remaining 100,000 Available for reinvestment $1,221,383
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Buckwold and Kitunen , Canadian Income Taxation, 2010-2011 Ed. 2 Tax on Sale: Taxable Tax- Business Capital Free Income Gains Gain Land ($100-$50=$50) (1/2) $ 25,000 $ 25,000 Building ($720-$600=$120) (1/2) 60,000 60,000 Building ($600-$490=$110) $110,000 Equipment ($300-$100) 200,000 Goodwill ($400) (3/4)(2/3) 200,000 . 200,000 $510,000 $85,000 $285,000 Tax on $510,000 @ 31% $158,100 Tax on $85,000 @ 47 2/3% 40,517 $198,617 Refundable tax $85,000 x 26 2/3% = $22,667. However, the refundable tax will not be recovered until such time as KS Holdings pays a dividend. On the asset sale, the tax payable by Shane Plastics could have been reduced if the sale date chosen was the first day of a new taxation year. If this were done, there would be no other business income earned (from operations) in that year and consequently the small business deduction would be available on the first $500,000 of business income from the sale [S.125(1)&(2)]. Evaluation : Based on the after-tax proceeds available for reinvestment, Shane would prefer an asset sale as it would leave $1,221,383 available for reinvestment compared to $961,665 under the share sale. However, this difference of $259,718 should be tempered by the following:
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This note was uploaded on 04/28/2011 for the course RSM 424 taught by Professor Kitunen during the Spring '11 term at University of Toronto- Toronto.

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P 19-2 Solution - Buckwold and Kitunen, Canadian Income...

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