Solution%20to%20Assignment%20Problem%20Ch14%28II%29docx

Case 2 the tax consequences to michelle chawla

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Case 2 The tax consequences to Michelle Chawla resulting from the redemption of her shares would be as follows: Proceeds Of Redemption $2,600,000 PUC [(1/2)($5,000,000)] ( 2,500,000) ITA 84(3) Deemed Dividend $ 100,000 Proceeds Of Redemption $2,600,000 ITA 84(3) Deemed Dividend ( 100,000) ITA 54 Proceeds Of Disposition $2,500,000 Adjusted Cost Base [(1/2)($6,200,000)] ( 3,100,000) Capital Loss ($ 600,000) Inclusion Rate 1/2 Allowable Capital Loss ($ 300,000) The deemed dividend of $100,000 would be subject to either the eligible or non-eligible dividend gross up and tax credit procedures. The allowable capital loss can be used in the current year, only to the extent of taxable capital gains realized in the current year. Case 3 This transaction will result in an ITA 84(1) deemed dividend for all shareholders, calculated as follows:
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PUC Of New Shares [(42,000)($24.10)] $1,012,200 Increase In Net Assets (Liability Eliminated) ( 900,000) ITA 84(1) Deemed Dividend $ 112,200 This would be allocated to all 275,000 (233,000 + 42,000) shares outstanding, on the basis of $0.408 per share ($112,200 ÷ 275,000). This would be a taxable dividend, subject to either the eligible or non- eligible dividend gross up and tax credit procedures. The $0.408 per share dividend would also be added to the adjusted cost base of all 275,000 shares.
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The tax consequences of Sue selling her shares would be as follows: Proceeds Of Disposition [(10%)(233,000)($24.85)] $579,005 Adjusted Cost Base [(23,300)($22.50 + $0.408)] ( 533,756) Capital Gain $ 45,249 Inclusion Rate 1/2 Taxable Capital Gain $ 22,625 Case 4 The analysis of the $3,175,000 distribution would be as follows: Cash Distributed $3,175,000 PUC Of Shares ( 400,000) ITA 84(2) Deemed Dividend $2,775,000 ITA 83(2) Capital Dividend ( 427,000) ITA 88(2)(b) Wind-Up Dividend $2,348,000 The capital dividend would be distributed tax free. The $2,348,000 wind-up dividend would be subject to either the eligible or non-eligible dividend gross up and dividend tax credit procedures. Cash Distributed $3,175,000 ITA 84(2) Deemed Dividend ( 2,775,000) ITA 54 Proceeds Of Disposition $ 400,000 Adjusted Cost Base ( 1,450,000) Capital Loss ($1,050,000) Inclusion Rate 1/2 Allowable Capital Loss ($ 525,000) The allowable capital loss can be used in the current year, only to the extent of taxable capital gains realized in the current year.
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