Microsoft Word - CACC842 winter 2022 midterm exam
Question One (8 marks)
On Fe
uary 1, 2022, Alto Corporation acquired 100% of the shares of Tenner Ltd. Both corporations provide online music lessons. At the time of acquisition, Tenner has the following assets:
FMV
Cost/ACB
UCC
Inventory
10,000
230,000
N/A
Company car (class 10.1)
95,000
120,000
15,000
Instruments (class 8)
25,000
70,000
52,000
Marketable securities
20,000
50,000
N/A
Brand name (class 14.1)
850,000
0
0
Tenner had non-capital losses of $100,000 and net capital losses of $18,000 at December 31, 2021. Tenner also incu
ed additional losses from regular business operations of $20,000 during January 2021.
Required
Determine the impact of making a paragraph XXXXXXXXXXe) designation at the deemed year end immediately before the acquisition of control (i.e. January 31, XXXXXXXXXXYour answer should clearly state which asset(s) should be selected for the designation and why, the minimum amount of elected proceeds, and explain the benefit of making a designation. Assume that Tenner Ltd. will meet the conditions to ca
yforward its unused non-capital losses.
Questions Two (15 marks)
Emily, a resident of Canada, is self-employed and the sole shareholder of Opco. She plans to incorporate her business by transfe
ing the assets listed below, which she owns personally, to Opco on November 1, 2021, in exchange for a note receivable and prefe
ed shares of Opco. She wishes to maximize the note receivable while still defe
ing the recognition of income for tax purposes on the transfer of the assets. Opco has a December 31 year-end.
FMV
Cost/ACB
UCC
Inventory
30,000
25,000
-
Accounts receivable
50,000
70,000
-
Land #1
100,000
65,000
-
Land #2
300,000
180,000
-
Building (class 1)
140,000
120,000
100,000
Equipment (class 8)
60,000
100,000
72,000
Small tools (class 12)
10,000
10,000
-
Goodwill (class 14.1)
200,000
-
-
Additional information:
· Land #1 houses the building used in the active business.
· Land #2 is a vacant lot acquired to resell to a condo developer in the future
REQUIRED:
Focusing only on the assets that can and should be transfe
ed using Section 85, determine the following:
(a) The elected amount for each asset as well as the maximum non-share consideration (i.e., note receivable) and share consideration Emily should take back on the transfer
(b) The adjusted cost base and paid-up capital of the prefe
ed shares received on the transfer
Your answer should ignore assets that will not be transfe
ed using section 85.
Questions Three (24 marks)
Acetti Sca
Cohorts Inc. (“ASCI”) is a Canadian-controlled private corporation (“CCPC”) providing specialized project management services. ASCI’s only client is Clean Chemicals (“Clean”), a large public company in the chemical and pharmaceutical manufacturing industry.
Clean relies on the technical expertise of ASCI to analyze the environmental impacts to soil and ground water around its manufacturing sites. ASCI has one employee, Jacob, an engineer with 30 years of experience. Jacob is also the sole shareholder of ASCI. When the workload becomes too much for Jacob to manage on his own, ASCI will subcontract project work to various independent contractors.
ASCI invests its surplus cash into an investment portfolio. The company has co
ectly calculated its net income for tax purposes to be $710,000 for the year ending December 31, 2021, as shown below:
Consulting income net of deductible expenses
$600,000
Taxable capital gains
52,000
Dividends from Canadian public companies
50,000
Interest on five-year bonds
8,000
Net income for tax purposes
710,000
Additional information:
· One of the independent contractors that ASCI subcontracts to is Green Project Management Solutions (“GPMS”), a CCPC owned 100% by Jacob’s son. ASCI paid GPMS $15,000 in fees for 2020. GPMS claimed the small business deduction on $125,000 of its own active business income during 2020.
· ASCI made charitable donations of $10,000 during the year
· ASCI had a balance in its eligible refundable dividend tax on hand (ERDTOH) account at the end of the previous year of $18,000. The balance in its noneligible refundable dividend tax on hand (NERDTOH) was zero.
· ASCI calculated a dividend refund of $4,000 for the previous year, based on dividends paid in the previous year.
· Eligible dividends of $160,000 and capital dividends of $50,000 were paid by ASCI on December 31, 2021. The company had sufficient GRIP to pay the eligible dividend.
· The following information was retrieved from the tax return of the previous year XXXXXXXXXXJacob is not sure if all this information is relevant for 2021.
o Dividends from Canadian public companies of $54,000 o Interest income of $9,500 o Net capital losses available for ca
yforward of $18,000 o Noncapital loss ca
yforwards are zero. o Taxable capital is under $10 million.
REQUIRED:
1. Determine ASCI’s Part I tax, Part IV tax, and dividend refund for 2021. Show all calculations, including a calculation of the NERDTOH/ERDTOH.
2. Could Canada Revenue Agency make an argument to deny ASCI’s small business deduction? Briefly explain why there is a risk and what steps can be taken to reduce the exposure.
3. Jacob would like you to
iefly explain the tax treatment of the amount paid to his son’s company, GPMS.
Question Four (7 marks)
Consider the following diagram.
Chase Stanley Brad prefe
ed shares
100
%
100%
60
%
40
%
voting
S Ltd.
SB Ltd.
C Ltd.
1. C Ltd.'s voting prefe
ed shares in SB Ltd. have a value of $1,000,000.
2. The common shares in SB Ltd. held by Stanley and Brad have a total value of $60,000.
3. Stanley and Brad are the adult children of Chase.
Required:
1. Are S Ltd and SB Ltd associated? Explain your reasoning in detail.
2. What are the tax implications of one or more corporations being associated?
Question Five (6 marks)
During its 2021 fiscal period ended December 31, 2021, ABC Limited made non-interest bearing advance to its sole shareholder and president, Stacey. $350,000 was advanced to Stacey on March 1, 2021 to aid her in the purchase of a water-front condo. At the time of the advance, Stacey signed a note with the corporation agreeing to repay the principal in equal annual instalments of $35,000 a year for the next ten years. The first principal repayment was due and paid Fe
uary 28, 2022. The company does not have a policy of making such loans to other employees and has never made a similar loan to an employee in the past.
Required:
Explain the tax consequences to Stacey on the above transactions.
END OF EXAM