Question 67 (5 Minutes) (Chapter 14)

Question 67 (5 minutes) [Chapter 14]
Your client, Jean Beliveau, received a Notice of Reassessment in respect of his 2009 taxation
year dated August 1, 2011. His 2009 tax return was originally assessed by a Notice of Assessment
dated August 13, 2010.
The reassessment was in respect of a 2009 transaction that was reported as a capital gain but is
being reassessed by the CRA as business income. As a result, the additional tax owing in respect
of that 2009 transaction is assessed at $25,000.
You have reviewed your documentation of your analysis of the transaction and you realize that
the facts support a strong argument by the CRA for business income. You have discussed this
with Jean and you have agreed not to pursue an appeal of the reassessment. Jean has agreed to
pay the tax owing and the appropriate interest today, October 24, 2011.
Required:
Compute the amount of total tax and interest that Jean must pay on October 24, 2011. Ignore the
fact that instalments may have been deficient. Assume, as necessary, that the basic prescribed
rates for employee and shareholder loans, throughout each of the indicated calendar years are:
2009 — 5%; 2010 — 2%; and 2011 — 3%. Ignore the effects of any leap year.
Solution 67
Tax owing at April 30, 2010: $25,000
Tax owing compounded at 6% to December 31, 2010 (245 days):

[$25,000 (1 + .06/365)245] $26,027
Compounded at 7% to October 24, 2011 (298 days):

[$26,027 (1 + .07/366)298] $27,553
Therefore, Jean should pay $27,553 on October 24, 2011.

At the time of her death, on October 2, 2011, at the age of 97, your client, Ima Deceased, owned
the following assets, all of which are to be transferred, according to her will, to her son, who is
her only beneficiary:
Cost FMV
Term deposits $ 75,000 $ 75,000
Shares of Bell Canada Enterprise (a public corporation) 250,000 370,000
In 2011, she had received the following amounts up to the date of death:
Fees for acting as an art consultant $20,000

Pension income 36,000
Interest on term deposits 1,500
Dividends on Bell shares 8,960
Interest on the term deposits is payable on April 30 and October 31. Since April 30, 2011, when
the above $1,500 was paid, additional interest of $1,275 accrued to the date of death. Also, a
dividend of $1,120 was declared on the Bell shares, payable to all shareholders of record on
September 30, 2011, but the cheque was not mailed until October 6, 2011.
Required:
(A) Briefly explain the determination of when the terminal income tax return is due.
(4 minutes)
(B) Compute Ms. Deceased’s income for 2011 and recommend to the executor of her estate the
most appropriate manner to report the income to minimize income tax.
(10 minutes)
Solution 68
Part (A)
The executor will have at least six months from the date of death to file the terminal return, unless
the normal filing deadline for the year (i.e., June 15, 2012, since she has income from business) is
later.
Since the six-month period ends on April 2, 2012, the terminal return can be filed on June 15,
2012.
Part (B)
The executor should file a terminal return and a rights or things return as follows:
Terminal return
TCG on Bell shares [½ × ($370,000 – $250,000)] $ 60,000

Consulting fees received 20,000
Pension income received 36,000
Interest received 1,500
Grossed-up dividend received [1.41 × $8,960] 12,634
Accrued interest (not receivable at death) 1,275
Income to be reported on terminal return $131,409
Rights or Things return
Grossed-up dividend receivable at date of death (1.41 × $1,120) $ 1,579

The father (Mr. Lucifer) of one of your clients (Mrs. Damien) passed away on the evening of
October 31, 2011. Mr. Lucifer was 66 years old. Mrs. Damien is the sole beneficiary of her
father’s estate.
Mrs. Damien has given you the following information with respect to her father’s income from
January 1, 2011 to the date of his death.
(1) Salary — $4,000 a month for January through October, paid on the last day of the month.
(2) Mr. Lucifer was owed a bonus by his employer amounting to $3,000. This was received by
the estate on November 30, 2011.
(3) Bond interest — interest of $950 was accrued on a bond that doesn’t mature until June 30,
2012; interest is payable only upon maturity of the bond.
(4) Bank account interest — interest of $150 was accrued on his chequing account from
January 1 through October 31, 2011.
(5) Dividend income — dividends of $200 were declared on his shares in Underground
Explorations Limited; the dividends were payable October 30, 2011, but had not been paid as
of the date of Mr. Lucifer’s death.
(6) The shares in Underground Explorations Limited were purchased for $13 in 2004. The fair
market value of the shares, on October 31, 2011, was $39. Underground Explorations Limited
is a public company.
(7) Mr. Lucifer had made RRSP contributions of $1,500 monthly for the months of January
through October 2011. These total contributions of $15,000 were to be towards his 2011
RRPS contribution limit. His earned income for 2010 was $98,000 and he had no pension
adjustment for 2010.
(8) The fair market value of Mr. Lucifer’s RRSP at October 31, 2011 was $78,000. This includes
the contributions mentioned in (6), above.
Required:
a) What is the due date of Mr. Lucifer’s 2011 personal income tax return?
(1 minute)
b) What are the tax implications of each of the above items assuming that no elective returns are
utilized?
(19 minutes)
c) Which of the above items are eligible to be included on an elective return? Identify the name
of the elective return. What is the filing deadline for this return?
(7 minutes)
Solution 69
(a) Due date is April 30, 2011
(b) No Elective Returns

Salary of $36,000 received — taxable on terminal return
Salary of $4,000 receivable — taxable on terminal return
Bond interest accrued — taxable on terminal return
Bank account interest accrued — taxable on terminal return
Dividends payable — taxable on terminal return (note that the dividend gross up is 41%
and the dividend tax credit is theoretically 41%
Shares — capital gain/deemed disposition at $26 per share — taxable on terminal return
RRSP contribution of $15,000 — deductible on terminal return
RRSP left to daughter — taxable to estate, not to daughter/no means to defer
(c) Elective Return – Rights and Things
Rights and things return due later of one year after death/90 days after assessment of
terminal return
Can include: Bonus owing at date of death; dividends declared not paid
The following four situations are independent.
Required:
Provide a brief and specific answer to the questions posed.
(a) Sly Don passed away on April 1, 2011. He had been a sole practitioner of tax in a public
accounting practice until the date of his death. At that date, he had not filed his personal
income tax return for 2010 and certainly not for 2011. What is the filing deadline for:
(i) the 2010 return?
(ii) the 2011 return?
(1 minute)
(b) Ms. JSK is a sole practitioner in public accounting practice. The fiscal year-end of her
practice is December 31. Her only source of income is from the practice, which is expected
to generate net income of $80,000 in fiscal 2011. She expects to pay $21,000 in tax in
respect of 2011. She paid $13,200 in tax in respect of 2010 and $12,900 in tax in respect of
2009.
Provide Ms. JSK with a schedule indicating the date and the calculation of the minimum
amount of each instalment that she is required to pay in respect of 2011.
(5 minutes)
(c) RFL Inc., a Canadian-controlled private corporation, has a July 31 year-end. It is not
associated with any other corporation. Its tax manager has estimated its 2011 federal income
tax liability at $48,000 on taxable income estimated to be $250,000. Its federal income tax
liability for 2010 was $24,000 on taxable income of $187,000, and its federal income tax
liability for 2009 was $18,000 on taxable income of $140,000. RFL Inc does not have a
“perfect compliance history” when it comes to paying quarterly instalments.
(i) Provide the tax manager with a schedule indicating the date and minimum amount
of each instalment that the corporation is required to pay in respect of its 2011
taxation year.
(5 minutes)
(ii) When must the final balance of federal income tax be paid for the 2011 taxation
year? Specify the conditions to permit that date.
(2 minutes)
(iii) What is the filing deadline for the 2011 income tax return of the corporation?
(1 minute)
(d) Mr. ARFL filed his 2010 personal income tax return on March 10, 2011. He received a
Notice of Assessment on May 9, 2011, disallowing a tax credit in respect of tuition paid to
the University of Pennsylvania. The Notice of Assessment had been mailed May 3, 2011.
What is the filing deadline for a Notice of Objection, if he wished to dispute the issue?
Specify the options for this deadline.
(2 minutes)
Solution 70
(a) (i) October 1, 2011, i.e., six month after the date of death, in this case
(ii) June 15, 2012
(b) Ms. JSK should pay quarterly instalments in 2011 as follows:
March 15: ¼ × $12,900 $3,225

June 15 ¼ × $12,900 3,225
September 15 ½ × ($13,200 − (2 × $3,225)) 3,375
December 15 ½ × ($13,200 − (2 × $3,225)) 3,373
(c) (i) RFL Inc. should pay the following instalments in its 2011 taxation year:
August 31 and September 30, 2010

1/12 × $18,000 $1,500
Last day of each of October 2010 to July 2011
1/10 × ($24,000 – (2 × $1,500)) $2,100
(ii) Where a small business deduction is claimed and taxable income for the preceding
year was less than $500,000, the balance of tax in respect of the 2011 taxation year
is due on October 31, 2011, i.e., three months after the taxation year-end.
(iii) January 31, 2012, i.e., six months after the 2011 year-end.
(d) The deadline for a Notice of Objection to be filed by an individual is the later of:
(i) April 30, 2012, i.e., one year after the filing-due day of the tax return for the year,
and
(ii) August 1, 2011, i.e., 90 days after mailing the Notice of Assessment.
As Director of Taxation of Verblonget Ltd., a Canadian-controlled private corporation, you are

responsible for ensuring that corporate income tax instalments are correctly calculated and paid on
time. The corporation has a December 31 year-end and operates only in Canada. In 2009, the
corporation paid $33,000 in income tax on $150,000 of active business income. In 2010, it paid
$40,000 on $180,000 of active business income. At the beginning of 2011, you expected active
business income to be a little lower than last year, at $175,000, and this would result in income tax of
$38,000 for the year.
Required:
(a) By showing your calculations for all of the options, what is the minimum amount that
should be paid in instalments for 2011 to be sure of not having to pay any interest on a
deficiency of instalments, and on what specific dates must these instalments be paid?
(11 minutes)
(b) Assume that your estimate of the income tax for 2011 was inaccurate because the actual
income tax amount turns out to be $45,000 for 2011. Also, assume that the corporation paid
the minimum monthly (not quarterly) required instalments computed in (a) on time. How
much is the balance due and on what specific date must it be paid?
(3 minutes)
(c) Assume that, at the end of November, it looked to you like the corporation had overpaid its
monthly tax by instalments for 2011, because income was a little lower than expected in the
preceding two months, so the corporation paid no instalments for November and December.
Assume, however, that it turns out that even your original estimate of income tax for the year
was too low, because actual income tax owing was $45,000 for 2011. Also, assume that the
corporation pays the full amount owing on the balance-due date. How much interest is
payable on that date, if the prescribed rate for the first two quarters of 2010 was 10%, for the
second two quarters of 2011 was 9%, and for all of 2012 was 8%? What is the amount due
on that date?
(9 minutes)
(d) If the CRA issues a Notice of Assessment for the 2011 corporate tax return on September 10,
2012, and the interest on the deficient instalments was incorrectly calculated by the CRA,
what is the specific date deadline for filing a Notice of Objection?
(1 minute)
(e) What is the specific date deadline for the CRA to issue a Notice of Reassessment for the
2011 corporate return?
(1 minute)
Solution 71
(a) Instalments due on last day of each month in 2011

Least of:
(i) 1/12 × $38,000 = $ 3,167
(ii) 1/12 × $40,000 = $ 3,333
(iii) 1/12 × $33,000 = $ 2,750 (Jan 31, Feb. 28)
1/10 × ($40,000 − 2 × $2,750) = $ 3,450 (Mar. 31 – Dec. 31)
Option (iii) should be used to avoid a deficiency and obtain a better cash flow result than
option (ii).
OR
If Verblonget Ltd. fulfills the following criteria it can pay quarterly instalments:
a) The company has a perfect compliance history

b) A small business deduction was claimed either last year or this year
c) Verblonget Ltd including all its associated companies in either the current or previous
taxation year has taxable income not exceeding $500,000 and taxable capital employed in
Canada for the taxation year not exceeding $10,000,000
Assuming all criteria above are met:
Instalments due on last day of each quarter in 2011

Three options are:
(i) 1/4 × $38,000 = $ 9,500
(ii) 1/4 × $40,000 = $10,000
(iii) 1/4 × $33,000 = $ 8,250 (Mar. 31)
1/3 × ($40,000 − $8,250) = $10,583 (Jun. 30, Sept. 30, and Dec. 31)
(b) Balance due on March 31, 2012 (CCPC eligible for SBD)
$45,000 – (2 × $2,750 + 10 × $3,450) = $ 5,000
(c)
Date Amt. Owing Instal. Amt. Amount Owing Int.
Op. Balance Due Paid Cl. Balance
Nov. 30/11 Nil $3,450 Nil $3,450 (1+ .09/365)31
Dec. 31/11 $3,476 3,450 Nil 6,926 (1 + .08/365)90 $ 26
Mar. 31/12 7,064 5,000 $12,064 Nil 138
$164
(d) Notice of Objection deadline is December 9, 2012 (i.e., 90 days from date of mailing Notice of
Assessment on September 10, 2012)
(e) Statute-barred assessment period
September 10, 2015 (i.e., three years (CCPC) from date of mailing of Notice of
Assessment on September 10, 2012)
Ms. Slidon died on July 15, 2011. She was survived by her husband and her daughter. You are the
executor of her estate. One of your responsibilities is to determine the tax treatment that results in the
lowest possible tax on the estate in respect of the following items.
(a) A rental property, purchased in 1996 with the following tax features, was left to Ms. Slidon's
daughter:
Capital UCC— FMV—
Asset Cost Dec.31/2010 July 15/2011
Land $39,000 N/A $120,000

Building 66,000 $36,000 168,000
(b) The rental property generated net rental income of $5,300, before CCA, in the period from
January 1, 2010 to July 15, 2011.
(c) Ms. Slidon’s will directed that 100 shares of Underground Airways Ltd., a public
corporation, that were purchased in 2001 for $17,300 be transferred to her husband. The
shares had a fair market value of $38,700 on July 15, 2011. Ms. Slidon did not have any net
capital losses available to offset the unrealized gain at the time of her death.
(d) The following taxable dividends from a Canadian-controlled private corporation were
declared in 2011 from its low-rate income, prior to her death, and paid in 2011, as indicated:
Declared Paid Amount

January 3 January 31 $305
April 6 April 30 330
July 5 July 31 360
(e) Ms. Slidon’s accounting practice, which had a December 31 year-end, generated $64,000 of
income in the period in 2011 before her death.
(f) Term life insurance of $100,000, to cover her business debts, was paid to Ms. Slidon's estate
on her death.
(g) Ms. Slidon had declared her husband a beneficiary for her RRSP. As a result, the $73,000
(fair market value) was paid to him.
(h) Ms. Slidon’s late father had made her a beneficiary of his testamentary trust that was
established on his death on March 15, 1989. The year-end of the trust was chosen to be the
anniversary of her father’s death. The trustees had distributed interest income of $12,200 on
March 15, 2011 and $4,100 in the period from March 16, 2011 to July 15, 2011.
Required:
Determine the income for tax purposes under Division B in a way that will result in the minimum
possible tax consequences in the circumstances. Comment on the adjusted cost base or the tax
position of the individuals who inherit property after giving effect to Ms. Slidon’s will.
Solution 72
Terminal Rights or Trust Income Stub
Return Things Return Period Return
Rental Property
Land — TCG(a) $40,500
Building — recapture(a) 30,000
— TCG(a) 51,000
Net rental income(b) 5,300
Shares of public corporation(c) Nil
Dividend income(d) 794 $ 450
Income from business(e) 64,000
Life insurance(f) Nil
RRSP(g) Nil
Income from trust(h) 12,200 4,100
Notes to Solution
(a) The land will be deemed to have been disposed of at fair market value of the time of
Ms. Slidon's death. A taxable capital gain on the land of $40,500 [½ ($120,000 − $39,000)]
will be included in Ms. Slidon's terminal return.
Ms. Slidon's daughter will be deemed to have acquired the land at its fair market value.
Therefore, she will have an adjusted cost base of $120,000.
The building will be deemed to have been disposed of at fair market value. The proceeds will
be $168,000. Therefore, recapture of $30,000 ($66,000 − $36,000) and a taxable capital gain
on the building of $51,000 [½ ($168,000 − $66,000)] will be included in Ms. Slidon's
terminal return.
Ms. Slidon's daughter will be deemed to have acquired the building at a cost equal to the
deemed proceeds of $168,000.
(b) The net rental income of $5,300 will be included in Ms. Slidon's terminal return. No CCA
can be claimed as the rental property was deemed disposed of immediately before her death.
(c) The shares will be deemed disposed of at their adjusted cost base of $17,300 and no capital
gain will be realized.
Ms. Slidon's husband will be deemed to have acquired the shares for $17,300.
Unless she had net capital losses to offset, there would be no benefit in electing the transfer
to be at FMV.
(d) The dividend paid on January 31 and April 30 will be included in Ms. Slidon's terminal
return. The taxable amount would be $793.75 [1.25($305 + $330)].
The dividend declared on July 5, before Ms. Slidon's death, but not paid until July 31, after
her death, may be included on a separate rights or things return in the amount of $450 (1.25
× $360), with an additional personal credit.
(e) The income of Ms. Slidon's accounting practice of $64,000 must be included in her terminal
return.
(f) The life insurance is not taxable on Ms. Slidon's terminal return or to the estate.
(g) The full amount of Ms. Slidon's RRSPs must be included in her husband’s return for the
year of receipt. An election is available to allow a deductible contribution to her husband’s
RRSP within 60 days of the end of the year of receipt.
(h) The income from the testamentary trust for the March 15, 2011 year-end of $12,200 must
be included in Ms. Slidon's terminal return. An election can be made to include the income
of $4,100 for the period March 16, 2011 to July 15, 2011 in a separate return with a further
additional personal credit.
Adam, an Ontario taxpayer, has come to you for advice on the payment of income tax instalments.
He has provided you with the following information on his actual or estimated combined federal and
provincial tax liability and the actual or estimate amounts of withholding by his employer:
Estimated
2009 2010 2011
Total income tax liability $29,000 $25,000 $35,000
Total income tax withheld 28,000 22,000 27,000
Required:
(a) Briefly explain whether Adam is required to make income tax instalments in respect of 2011.
(3 minutes)
(b) Calculate the options for the instalment payments in 2011 and indicate when they are due.
(7 minutes)
(c) Which of these options will be reflected in the Canada Revenue Agency’s Instalment
Reminder Notices for the 2011 instalments?
(1 minute)
(d) What are the consequences of not paying the final instalment until Adam files his tax return
on April 30, 2012? Assume that the basic prescribed rate on employee or shareholder loans is
6%. (Ignore the effects of any leap year).
(3 minutes)
Solution 73
(a) 2009 2010 2011 (est.)

Total income tax liability $ 29,000 $ 25,000 $ 35,000
Total income tax withheld (28,000) (22,000) (27,000)
Balance of tax $ 1,000 $ 3,000 $ 8,000
 instalments are due because the balance of tax owing is at least $3,000 in the current year
2011 and $2,000 (in years prior to 2010) in either of the two preceding years (2010, in
this case)
(b) instalments are computed as the least of:
(1) 1/4 × $8,000 (2011 est.) = $2,000 on Mar. 15/11, June 15/11, Sept. 15/11,
and Dec. 15/11
(2) 1/4 × $3,000 (2010 act.) = $ 750 on same dates as for (i), above
(3) 1/4 × $1,000 (2009 act.) = $ 250 on Mar. 15/11 and June 15/11
1/2 × ($3,000 − 2 × $250) = $1,250 on Sept. 15/11 and Dec. 15/11
(c) option (iii)
(d) interest compounded daily from December 15 2011 to April 30, 2012, at a rate of 10% (i.e.,
6% + 4%), will result in an amount owing on April 30, 2012 computed as follows:
$1,250 (1 + .10/365)137 − $1,250 = $48

Question 74 (30 minutes) [Chapters 13, 14, 15]
The following are short independent questions.
1. Consider the following asset mix for Prince of Peace Manufacturing Limited and Holy-
Owned Ltd.
Prince of Peace Manufacturing Limited:
Assets used in an active business carried on in Canada 25%
Investment in shares of Holy-Owned Ltd. 30%
Other assets 45%
100%
Holy-Owned Limited: (owned 100% by Prince of Peace Manufacturing Limited)
Assets used in an active business carried on in Canada 95%
Other assets 5%
100%
Required: (6 minutes)
Does Prince of Peace Limited satisfy the “basic asset test” or the “modified asset test”
(i.e., the third test) in the definition of “qualified small business corporation shares”?
Support your conclusion with the facts given above. Assume that the proportions of the
fair market values of assets shown have remained constant for at least the preceding
24 months. Do not consider the SBC or Holding Period Tests in the QSBCS
definition.
2. Michael had net tax owing in 2009 of $7,000, net tax owing for 2010 of $2,500, and
expects to have net tax owing for 2011 of $8,500.
a) Is he required to make instalment payments for the 2011 taxation year? Explain.
b) Assuming that he is required to make instalment payments for the 2011 taxation year,
calculate the options for the instalment payments and indicate when they are due.
3. SmithCo has a December 31 year-end. For 2009, its tax payable was $152,000, while for
2010 the amount was $104,000. For 2011, it is estimated tax payable is $67,000.
a) Calculate the options for the monthly instalment payments for SmithCo for the 2011
taxation year.
b) When are the monthly instalments due?
4. Amy Granted died on February 15, 2011. Her 2009 income included income from an
unincorporated business.
a) What is the filing deadline for her 2010 personal income tax return?
b) What is the filing deadline for her 2011 personal income tax return?
5. MercyMe Ltd. issued its first 100,000 shares at a price of $1.10 each. Two years later, an
additional 50,000 shares were issued for $1.35. During the current year, a further
30,000 shares were issued for $1.82. One of the investors in the company acquired
2,400 shares of the first group of shares issued, and an additional 3,850 shares from the
most recent issue.
Determine the total PUC of this investor’s shares.
6. The following situations deal with Canadian-controlled private corporations and their
non-arm’s length shareholders. Each of the two (2) transactions described below are
separate and distinct.
a) A Inc. issued, to the son of its only shareholder, redeemable/retractable preferred

shares with a redemption/retraction value of $10,000. A Inc. added $10,000 to the
paid-up capital of its shares as a result of this transaction. The son paid $500 for these
shares.
b) Mr. B, the sole common shareholder of B Ltd. is considering returning capital to
himself in the form of a return of paid-up capital in the amount of $18,000. The
common shares that he holds have a fair market value of $50,000 and a paid-up
capital of $10,000. Mr. B’s adjusted cost base in his common shares of B Ltd. is
$20,000.
Discuss the tax consequences of the above transactions.
Solution 74
Part 1:
Basic asset test: only 25% of assets are used directly in AB; therefore, test not met because needs
to be at least 50% used directly
Modified asset test: HOL has 95% of its assets used directly in AB
because HOL has at least 50% of its assets used in AB then
investment in HOL held by POP is qualified to use for modified asset test
POP has 25% used directly and 30% qualified investment in HOL — 55% qualified
Therefore, modified asset test IS met because HOL > 90% and POP > 50%
Part 2:
Yes — because current year tax owing plus one of previous 2 years > $3,000
Instalments are the least of:
 ¼ × $8,500 = $2,125 each
 ¼ × $2,500 = $625 each
 ¼ × $7,000 = $1,750 for first 2 instalments; $2,500 – (2 × $1,750) = Nil for remaining
2 instalments
Instalments are due: Mar. 15; June 15; Sept. 15; Dec. 15
Part 3:
Instalments are the least of:
1
/12 × $67,000 = $5,583 each for 12 instalments
1
/12 × $104,000 = $8,667
1
/12 × $152,000 = $12,667 for first two instalments; 1/10 × [$104,000 – (2 × $12,667)] = $7,867
last 10 instalments
Instalments are due the last day of each month of the year starting January 31.
Part 4:
a) 2010 return due six months from February 15 = August 15, 2011
b) 2011 return due April 30, 2012 if no unincorporated business income; due June 15, 2012 if
unincorporated business income
Part 5:
Paid-up capital = 100,000 × 1.10 = $110,000
50,000 × 1.35 = 67,500
30,000 × 1.82 = 54,600
180,000 $232,100 = 1.28944/share × 6,250 shares = $8,059
Part 6:
a) Deemed dividend [ssec. 84(1)] $10,000 increase in PUC
(500) increase in net assets
$ 9,500
b) Deemed dividend [ssec. 84(4)] $18,000 return of capital
(10,000) PUC
$ 8,000
Reduce ACB of shares by $10,000 tax-free return of capital
Hal Lelulia is the sole shareholder of Microcosm Ltd., a corporation with an October 31 year-end.
Microcosm Ltd. produces trivia games. Hal started the corporation with an initial capital
investment of $30,000 for which he received 1,000 shares.
Hal has let it be known that he wants to sell his business to enable him to build up a new tax
consulting business. As a result, Hal has received two separate offers, both from individuals and
both effective November 1, 2011.
Offer One
Tu Taxed is willing to pay $1,000,000 for the shares of Microcosm Ltd.
Offer Two
Shel Ter is willing to buy the assets through an existing corporation that she owns. Shel’s offer is
as follows:
Asset Offer
Marketable securities $ 14,000
Accounts receivable 60,000
Inventory 254,000
Land 372,000
Building 330,000
Equipment 12,000
Goodwill 180,000
Total offer $1,222,000
You have been given the following additional information.
1. Details of the assets and liabilities of Microcosm Ltd.

Assets Tax Value
Cash $ 15,000
Marketable securities adjusted cost base 26,000
Accounts receivable $62,000
Less: allowance (6,000) 56,000
Inventory cost amount 230,000
Land adjusted cost base 144,000
Building UCC (capital cost is $235,000) 203,000
Equipment UCC (capital cost is $65,000) 22,000
Goodwill CEC (cost is $38,000) 11,000
Liabilities
Trade payables 47,000
Bank loan 118,000
2. The paid-up capital of the outstanding shares in Microcosm Ltd. is $30,000.
3. The capital dividend account of Microcosm Ltd. is $94,000 before regard to any sale of assets
under the offer above.
4. The refundable dividend tax on hand balance of Microcosm Ltd. was $18,000 on October 31,
2011.
5. Hal and Shel have agreed to file an election under section 22 of the Income Tax Act for the
transfer of the accounts receivable should they eventually agree to a deal.
6. Microcosm Ltd. has the following tax rates:

a) 20% on active business income up to the small business deduction limit (there are no
associated companies)
b) 40% on other income (before the 6⅔% additional refundable tax on aggregate investment
income and before the refundable Part I tax on investment income)
The corporation will have a nil GRIP balance at the time of a winding-up.
7. Hal pays tax at the top marginal combined federal and provincial rate of 31% on actual
dividends from the low-rate income of a CCPC and 46% on all other income.
8. Hal utilized all of his $750,000 capital gains exemption on a previous sale of the shares of a
qualified small business corporation.
Required:
Advise Hal as to which offer will provide him with the most after-tax funds.
Solution 75
After-tax retention on Tu Taxed’s offer for shares:

Proceeds $1,000,000
ACB (30,000)
Capital gain $ 970,000
Taxable capital gain $ 485,000
Personal tax @ 46% $ 223,100
Net cash retained $ 776,900
After-tax retention on Shel Ter’s offer for assets:

Asset Proceeds ABI Inv. Inc. CDA RDTOH
Opening $94,000 $18,000
Cash $ 15,000
Mkt. Sec 14,000 $ (6,000) (6,000)
A/R 60,000 $ 6,000
(2,000)
Inventory 254,000 24,000
Land 372,000 114,000 114,000
Building 330,000 32,000 47,500 47,500
Equip 12,000 (10,000)
Goodwill 180,000 17,500
71,000 71,000
Liab. (165,000)
$1,072,000 $138,500 $155,500 $320,500
Tax (100,267) × 20% × 46⅔% 41,467
RDTOH 59,467 59,467
$1,031,200
Funds available $1,031,200

PUC (30,000)
Deemed dividend on winding up 1,001,200
Capital dividend (320,500)
Taxable dividend $ 680,700
Funds available $1,031,200

Less: deemed dividend (1,001,200)
Proceeds $30,000
ACB (30,000)
Capital gain/loss Nil
Funds distributed $1,031,200
Tax on dividend
31% × $680,700 211,017
After-tax retention (proceeds less tax) $ 820,183
Conclusion: Hal retains more cash on the asset sale.

Your client, I.M. Dunn, a Canadian resident, owned all of the issued shares of Beenthere Dunnit
Ltd. (BDL), which has carried on an electrical service operation. The taxation year-end of the
corporation was September 30. On your advice, he agreed to sell all of the assets of the company
(except the cash) to one purchaser for $1,215,000. The sale was effective September 30, 2011. In
the 2011 taxation year, service operations broke even for tax purposes. The following is the
balance sheet for BDL with the fair market value (FMV) of assets as indicated:
Beenthere Dunnit Ltd.
BALANCE SHEET
As at September 30, 2011
Assets FMV
Current:
Cash $ 74,000
Marketable securities 25,000 $ 15,000
RDTOH 13,000
Accounts receivable $ 176,000
Less: reserve for doubtful debts 6,000 170,000 172,000
Inventories, at cost 230,000 240,000
$ 512,000
Property and plant
Land, at cost 60,000 110,000
Buildings & equipment, at cost (Note 1) $ 750,000
Less accumulated amortization 290,000 460,000 490,000
Intangibles, at cost (Note 1) $ 100,000
Less accumulated amortization 57,500 42,500 188,000
$1,074,500 $1,215,000
Liabilities & Shareholder's Equity
Current liabilities $ 208,000
Future income taxes 20,000
Shareholder's equity
Common share capital
Authorized — 50,000 shares
Issued — 1,000 shares $ 1,000
Retained earnings (Note 2) 845,500 846,500
$1,074,500
Additional Information:
1. The tax values of all assets are identical to amounts for book purposes, except for the
building and equipment and the intangibles. The following pertains to these assets:
Cost UCC FMV
Building $600,000 $304,000 $423,000
Equipment 150,000 76,000 67,000
$750,000 $380,000 $490,000
Intangibles $100,000 $ 27,200 $188,000
2. Retained earnings include a balance in the Capital Dividend Account of $12,000.

3. BDL pays corporate tax at the 20% rate on active business income of $500,000 eligible
for the small business deduction and at the 40% rate on any other income plus the 6⅔%
additional refundable tax on investment income before applicable dividend refund of tax.
BDL will have a nil GRIP balance at the time of a winding-up.
4. BDL and the purchaser of all of the assets elected under section 22 with respect to the
accounts receivable.
5. The cost of the BDL shares to I.M. Dunn was $1,000.
Required:
(a) Compute the amount available for distribution to Mr. Dunn on the sale of assets.
(22 minutes)
(b) Determine the components of the distribution to the shareholder on a winding-up of the
corporation.
(7 minutes)
Solution 76
Part (A) — Funds available for distribution:

Proceeds ABI Investment C.D. a/c RDTOH
Op. bals. $12,000 $13,000
Cash $ 74,000
Mkt. secs. 15,000 $(5,000) (5,000)
A/R 172,000 $ 2,0001
Inventories 240,000 10,000
Land 110,000 25,000 25,000
Buildings 423,000 119,000
Equipment 67,000 (9,000)
Intangibles 188,000 91,8002 44,0003
Cur. Liabs. (208,000)
Inc. Tax (52,093)4 $213,800 $20,000 5,3335
RDTOH 18,333 $18,333
$1,047,240 $76,000
1
Reserve inclusion $ 6,000
Business loss ($176K − $172K) (4,000) [s. 22 election made]
Net business income $ 2,000
2
CEC a/c bal. $ 27,200
Less: ¾ × proceeds (141,000)
(113,800)
CECA recapture to business income
(¾ × $100,000 − $27,200) $ 47,800
Remainder × ⅔ to business income
(⅔ × ($113,800 − $47,800)) 44,000
Total business income $ 91,800
3
Proceeds $188,000
Cost (100,000)
Gain $ 88,000
½ × gain $ 44,000
4
ABI: 20% of $213,800 $ 42,760
Inv.: 46⅔% of $20,000 9,333
$ 52,093
5
26⅔% of $20,000 $ 5,333
Part (B) — Components of distribution:

Deemed dividend
Funds available for distribution $1,047,240
Less: PUC (1,000)
Deemed dividend (s. 84(2)) 1,046,240
Less: Capital Dividend (s. 83(2)) (76,000)
Deemed taxable dividend $ 970,240
Capital gain (loss)
Proceeds $1,047,240
Deemed dividend (1,046,240)
Proceeds of disposition 1,000
ACB (1,000)
Capital gain (loss) Nil
The following transactions pertain to independent Canadian-controlled private corporations and their
shareholders. Each transaction described below is separate and distinct from the other transactions.
(a) Ethan Ltd. issued 150 preferred shares with a PUC equal to $100 for each share for $11,000
cash and other assets with a fair market value of $3,000.
(6 minutes)
(b) Maya Ltd. redeemed its preferred shares, which have a PUC of $11,000 in total, for $15,000.
The shareholder, who owns all of these shares, paid $10,000 for them.
(10 minutes)
Required:
For each of the above transactions, describe the effect:
(i) on the income of the shareholder,
(ii) on the PUC of the shares to the corporation after the transaction, and
(iii) on the ACB of the shares to the shareholder after the transaction.
Show all calculations.

Solution 77
(a) (i) Income:

increase in PUC of preferred (150 × $100) $15,000
increase in net assets ($11,000 + $3,000) (14,000)
s. 84(1) deemed dividend $ 1,000
(ii) PUC: $15,000
(iii) ACB: ($11,000 + $3,000 + $1,000) $15,000
(b) (i) Income:

redemption proceeds $15,000
PUC (11,000)
s. 84(3) deemed dividend $ 4,000
Grossed-up dividend (1.25 × $4,000) $ 5,000
redemption proceeds $15,000

deemed dividend (4,000)
proceeds of disposition 11,000
ACB (10,000)
capital gain $ 1,000
taxable capital gain $ 500
(ii) PUC: ($11,000 − $11,000) Nil
(iii) ACB ($10,000 − $10,000) Nil

Adam intends to wind up his corporation, ARFL Inc., a CCPC. He recently caused ARFL Inc. to sell
all of its assets for cash and to pay off all of its liabilities, including its income tax liability. As a
result, the following account balances remain in the corporation:
Cash $450,000
PUC 25,000
Capital Dividend Account 20,000
RDTOH 35,000
GRIP Nil
Adam had purchased the shares at their fair market value many years ago for $15,000 from the
person who had originally incorporated the corporation.
Required:
Compute the net cash that Adam will retain from the winding-up of ARFL Inc. Assume a combined
federal and provincial personal tax rate of 46% and a provincial dividend tax credit of 6⅔% of the
grossed-up dividend.

Solution 78
Cash $450,000
RDTOH 35,000
Total cash available for distribution $485,000
Less: PUC 25,000
s. 84(2) deemed dividend (sufficient to clear RDTOH) $460,000
Less: capital dividend 20,000
Taxable dividend $440,000
Total cash available for distribution $485,000

Less: s. 84(2) deemed dividend 460,000
Proceeds of disposition $ 25,000
Less: ACB 15,000
Capital gain $ 10,000
Net cash retained

Total cash distributed $485,000
Less: income tax
Grossed-up dividend (1.25 × $440) $550,000
Taxable capital gain (½ × $10,000) 5,000
Income $555,000
Tax @ 46% (combined) $255,300
Less: dividend tax credit (combined)
[(13.33% + 6.67%) of $550,000] 110,000 (145,300)
Net cash $339,700
Julstan Multi-Enterprise Limited (JML) is a Canadian-controlled private corporation. It has operated

with a December 31 year-end. At its December 31, 2005 tax year-end, the balance in its capital
dividend account was nil, with no negative amounts carried for future offset.
The following transactions occurred in the indicated taxation years thereafter.
May 24, 2006: sale of shares held in a public corporation for proceeds of $48,000; the shares had
cost $72,000 and JML paid a sales commission of $2,000
June 30, 2007: acquisition of an unlimited-life franchise for $49,000
August 20, 2008: received $25,000 as a dividend from the capital dividend account of a wholly
owned subsidiary
October 31, 2009: sold the following assets pertaining to the franchise
Proceeds of Original UCC/ Selling
Disposition Cost CEC Costs
Investments $ 36,000 $47,000 n/a $1,000
Land 40,000 26,000 n/a 2,000
Building 118,000 92,000 87,000 6,000
Equipment 12,000 17,000 10,500 Nil
Franchise rights 55,000 49,000 31,500 Nil
Goodwill 30,000 Nil Nil Nil
June 9, 2010: received $100,000 from a life insurance policy on the life of a key employee; the
corporation had paid total premiums of $19,000 on the policy
July 22, 2011: elected to pay a dividend of $75,000 out of the capital dividend account
Required:
Compute the balance in JML’s capital dividend account at December 31, 2011.
Show all supporting calculations.

Solution 79
untaxed net cap. div. untaxed net untaxed cap. div.

CG received ECP gains life ins. paid
2006 shares $(13,000)1
2008 capital dividend $ 25,000
2009 investments (6,000)2
land 6,0003
building 10,0004
equipment Nil
franchise $ 3,0005
goodwill 15,0006
2010 life insurance $ 81,0007
2011 capital dividend $(75,000)
Totals $ Nil8 $ 25,000 $18,000 $ 81,000 $(75,000)
Balance: $49,000
Supporting calculations:
1
½ × ($48,000 − $72,000 − $2,000)
2
½ × ($36,000 − $47,000 − $1,000)
3
½ × ($40,000 − $26,000 − $2,000)
4
½ × ($118,000 − $92,000 − $6,000)
5
½ × ($55,000 − $49,000)
6
½ × ($30,000 − nil)
7
$100,000 − $19,000
8
Negative balance of $3,000 held to offset future untaxed net capital gains.
Les Canadiens Ltd. is a Canadian-controlled private corporation started about 20 years ago by
Molson Habitant. His initial investment in the common shares of the corporation was $10,000.
Molson is the only shareholder of the corporation and would like to retire while his business is at a
peak. He is considering his alternatives for the sale of the business to help finance his retirement.
The following is a projected balance sheet with estimated fair market values (FMV) at the expected
date of disposition, late in December of 2011.
LES CANADIENS LTD.

BALANCE SHEET
December 31, 2011
Assets
Current assets:
Cash $10,000
Marketable securities, at cost (FMV: $13,000) 20,000
RDTOH 30,000
Accounts receivable (net of $5,000 reserve; FMV: $43,000) 40,000
Inventory, at cost (FMV: $57,000) 50,000
$150,000
Fixed assets:
Land, at cost (FMV: $400,000) 160,000
Building, at UCC (FMV: $975,000, cost: $280,000) 136,000
Equipment, at UCC (FMV: $25,000, cost: $70,000 34,000
Intangibles, at CEC a/c balance (FMV: $ 430,000; cost: $320,000) 180,000
$660,000
Liabilities and Shareholder’s Equity
Current liabilities:
Accounts payable $ 15,000
Bank indebtedness 35,000
50,000
Future income taxes 75,000
Shareholder’s equity:
Common share paid-up capital 10,000
Capital dividend account 25,000
Other retained earnings 500,000
$660,000
The corporation is taxable at a total corporate rate of 20% on active business income eligible for the
small business deduction and an initial 40% rate for investment income, plus 6⅔% additional
refundable tax on investment income. Assume that business operations broke even for the fiscal year
ended December 31, 2011, before a sale of assets takes place. A business limit of $225,000 has been
allocated to Les Canadiens Ltd. The corporation will have a nil GRIP at the time of a winding-up.
Required:
(a) If Molson sells the assets on the open market (i.e., no single buyer) and winds up the
corporation in 2011, what would be the net amount available for distribution to him after
paying all liabilities?
(27 minutes)
(b) If the funds are distributed to Molson, determine the amount and nature of the components of
the distribution to him for tax purposes.
(6 minutes)
(c) Determine the amount that Molson would retain from this distribution after tax. Assume that
Molson’s marginal tax rate on income from this transaction is 46% (including provincial tax)
on income other than taxable dividends and 31% (net) on actual dividend income from
CCPC income taxed at the low rate (including the effect of the dividend gross-up and tax
credit and of provincial tax).
(3 minutes)
Solution 80
(a) Asset Proceeds ABI Income Investment CD a/c RDTOH
Op. Bal. $ 25,000 $ 30,000
Cash $ 10,000
Mkt. Secs. 13,000 $ (3,500) (3,500) (933)
A/R1 43,000 $ 5,000 (1,000) (1,000) (267)
Inventory 57,000 7,000
Land 400,000 120,000 120,000 32,000
Building 975,000 144,000 347,500 347,500 92,667
Equipment 25,000 (9,000)
Intangibles2 430,000 115,000 55,000
Bank & A/P (50,000)
262,000
Bonus (37,000) (37,000)
Income tax (261,067) $225,000 $463,000
RDTOH 153,467 $153,467 × 3 =
$1,758,400 $543,000 $460,401
× .20 × 46⅔%
$ 45,000 $216,067
(b) Funds available for distribution $1,758,400
Less: PUC 10,000
Deemed dividend on winding-up 1,748,400
Less: capital dividend 543,000
Deemed dividend (sufficient to clear RDTOH) $1,205,400
Funds available for distribution $1,758,400
Less: deemed dividend on winding-up 1,748,400
P of D 10,000
Less: ACB 10,000
CG (CL) Nil
(c) Funds distributed $1,758,400
Less: tax on deemed dividend @ 31% of $1,205,400 373,674
After-tax cash from distribution 1,384,726
Add: after-tax bonus [$37,000 (1 − .46)] 19,980
After-tax cash $1,404,706
Notes:
1. Section 22 is not available, since the assets are not being purchased by one purchaser who will carry on the
business. The reserve is reversed to active business income. The loss is a capital loss, only ½ allowable.
2. Proceeds × ¾ $322,500
CEC a/c balance 180,000
$142,500
Previous CECA (¾ × $320,000 − $180,000) (60,000)
Balance $ 82,500
Income:
⅔ × $82,500 $ 55,000
Recapture of CECA 60,000
Total $115,000
Capital dividend account:
Proceeds $430,000
Cost (320,000)
Gain $110,000
½ × gain $ 55,000
Ms. Maya Regierk wants to transfer the assets of her unincorporated wholesaling business to a
newly incorporated company of which she is the only shareholder. She has just received the
pro forma financial statements that you prepared as at December 31, 2011 and wants to transfer
the assets by January 1, 2012.
Maya wants to avoid triggering any income tax on the transfer. Liabilities of the proprietorship,
except for the mortgage, are to be assumed by the corporation, first, in payment for assets
transferred to the corporation other than under a subsection 85(1) election and, then, in payment
for assets transferred to the corporation by a subsection 85(1) election. The mortgage is to be
assumed by the corporation in partial payment for the land and the building. New debt is to be
issued (to the nearest $100) by the corporation to the maximum that will permit a full deferral of
unrealized income on assets transferred. She will own only common shares after the transfer.
The following is the pro forma balance sheet of Maya Wholesaling, as at December 31, 2011,
along with expected fair market values at that time. The proprietorship has used the same asset
values and depreciation for accounting and tax purposes.
Maya Wholesaling
(a sole proprietorship)
Pro Forma Balance Sheet
as at December 31, 2011
Assets Book Value FMV
Cash $ 14,200 $ 14,200
Marketable securities, at cost 13,000 7,600
Accounts receivable (face value: $138,800; reserve: $10,900) 127,800 109,300
Inventory 28,400 40,400
Prepaid insurance 3,300 3,300
Land in Waterloo held for speculation, at cost 54,600 273,000
Fixed assets (see schedule below) 175,900 235,000
Purchased customer list (cost: $9,800; CEC balance: $4,800) 6,400 12,000
$423,600 $694,800
Liabilities and Proprietor’s Equity
Bank loan $ 68,800
Accounts payable and accrued liabilities 95,100
Mortgage on land and buildings 101,600
265,500
Owner's capital 158,100
$423,600
Maya has indicated that she has recently received an unsolicited offer of $746,500 for all of the
assets of his business together (without the assumption of liabilities). This amount appears to be a
good indication of the fair market value of her business.
Schedule of Fixed Assets
Cost UCC FMV
Land $ 87,400 $103,800
Class 1 (building) 60,100 $ 47,000 92,900
Class 8 (office furniture) 54,600 24,000 20,800
Class 10 (computer and automotive equipment;
no accrued capital gains on any asset) 41,200 17,500 15,300
Class 12 (computer software) 5,500 Nil 2,200
Required:
Analyze in technical detail the following issues in preparation of your advice to Maya.
(a) With respect to the assets described above consider:
(i) which assets should not be transferred to the corporation, with a very brief
explanation of why;
(ii) which assets should be transferred to the corporation, but cannot or should not be
transferred to the corporation under a subsection 85(1) election, with a very brief
explanation and an indication of how these assets should be transferred and what
amount of assumed and new (if any) debt consideration should be taken for each
such asset; and
(iii) which assets should be transferred to the corporation under a subsection 85(1)
election and the consideration that should be received for each asset so
transferred.
(45 minutes)
(b) Compute the adjusted cost base and the paid-up capital for tax purposes of the common
share consideration, showing the technical details of your calculation of these amounts.
(7 minutes)
(c) Maya’s good friend, Janna, who considers herself somewhat of a tax expert, has indicated
that it would be a good idea for income splitting purposes to have Maya’s husband
incorporate the company and subscribe for 100 common shares with $100 of his own
funds, since he is in the lower tax bracket. Then, Maya would take, as consideration for
the assets transferred under a subsection 85(1) election, preferred shares with a fair
market value of $60,000 and no common shares. Explain, briefly, to Maya, with any
numbers derived technically or conceptually, as necessary, the immediate tax
consequences of her friend’s advice.
(9 minutes)
(d) Eleven years from now, the common shares issued to Maya in part (a)(iii), above, plus
some additional common shares issued to her on a later capital contribution of $25,000 in
cash are expected to be worth $325,000. The only change to the adjusted cost base or
paid-up capital computed in part (b), above, will be as a result of this one additional issue
of common shares. Maya will have fully utilized her $750,000 capital gains exemption on
other shares. At that time in 11 years, Maya will want to freeze the value of her
investment in the corporation using a capital reorganization under section 86 in which she
receives debt of the corporation, if possible, and preferred shares. What is the maximum
amount of debt (to the nearest $100) that she can receive without realizing any income,
using section 86? What are the fair market value, adjusted cost base and paid-up capital
of the preferred shares that she will receive under section 86? Show all technical
calculations necessary to prove your answers to these questions.
(15 minutes)
Solution 81
(a) (i) Assets not transferred to the corporation:
Asset Explanation
Marketable securities not needed by corporation; loss would be denied to individual
Land held for speculation not needed by corporation; land held as inventory not eligible for s. 85
election; no deferral
(ii) Assets transferred to the corporation other than by s. 85(1) election:
Asset Tax FMV Transfer Assumed Explanation for not transferring by s. 85(1)
Value Price Debt election
Cash $ 14,200 $ 14,200 $ 14,200 $ 14,200 - not eligible; no income to defer
138,800 109,300 109,300 109,300 - s. 22 better; allows full business loss of $29,500,
A/R which offsets the reserve inclusion of $10,900;
corporation eligible for reserve and /or write-off
Ppd ins. 3,300 3,300 3,300 3,300 - not eligible; no income to defer
24,000 20,800 20,800 20,800 - no income to defer; terminal loss of $3,200 denied,
Class 8
but eligible for CCA deducted by individual
17,500 15,300 15,300 15,300 - no income to defer; terminal loss of $2,200 denied,
Class 10
but eligible for CCA deducted by individual
$197,800 $162,900 $162,900 $162,900
There is $1,000 (i.e., $68,800 + $95,100 − $162,900) of assumed debt left as consideration for
assets transferred under s. 85(1).
(iii) Assets transferred to the corporation by s. 85(1):
Asset Tax FMV Elected Assumed New Common Income
Value Amount Debt Debt Shares
Inventory $ 28,400 $ 40,400 $ 28,400 $ 1,000 $ 27,400 $ 12,000 Nil
Land 87,400 103,800 87,400 87,400 16,400 Nil
Building 47,000 92,900 47,000 14,200 32,800 45,900 Nil
Comp. Soft. Nil 2,200 1 2,200 $1
Cust. List & G/W 6,400* 63,700** 6,400* 6,400 57,300 Nil
$169,200 $303,000 $169,201 $102,600 $66,600 $133,800
*
Could separate GW and elect at $1 on it and $6,400 on customer list, resulting in an additional $1 of
ACB and PUC.
**
FMV of customer list and goodwill = $12,000 + ($746,500 − $694,800)
(b) ACB of common shares:

Elected amount $169,201
Allocated to debt consideration:
Assumed debt $102,600
New debt 66,600 169,200
ACB of common shares $ 1
PUC of common shares:
LSC before reduction $133,800
s. 85(2.1) reduction:
(1) Increase in LSC $133,800 (A)
(2) elected amount $169,201
less: boot 169,200
excess, if any 1 (B) (133,799)
Tax PUC $ 1
(c) Benefit (may be derived conceptually) to husband:
FMV of property transferred $303,000
Less: greater of
(i) FMV of all consideration
($102,600 + $66,600 + $60,000) $229,200
(ii) Elected amount $169,201
Greater amount 229,200
Benefit $ 73,800
 reasonable to regard this as a benefit that Maya desired to confer on her husband (related
person)
 must step up elected amount by $73,800, resulting in income subject to tax on the transfer
 cost of assets to corporation can be increased
 no increase in ACB of shares of either Maya or her husband, resulting in future tax on gain in
value of his common shares
 the PUC of Maya’s shares will increase by $73,800, reflecting the increase in tax-paid cost as a
result of the increase in elected amount
(d) Maximum debt $ 25,000
Preferred shares FMV 300,000
LSC 300,000
ACB Nil
PUC Nil
Issuance of new shares:
(1) Reduced PUC [s. 86(2.1)(a)]
LSC of preferred shares $ 300,000
Less: PUC of old common ($1 + $25,000) $25,001
Less: boot 25,000 1
PUC reduction $ 299,999
Tax PUC ($299,999 − $299,999) $ 1
(2) Cost of preferred shares
ACB of old common ($1 + $25,000) $25,001
Less: FMV of non-share consideration 25,000
Cost of preferred shares $ 1
Redemption of old shares:
(1) Deemed dividend
Proceeds on redemption of old shares
FMV of boot $25,000
Reduced PUC of preferred shares 1 $ 25,001
Less: PUC of old common 25,001
Deemed dividend $ Nil
(2) Capital gain (capital loss)

Add: FMV of boot 25,000
Proceeds of redemption $ 25,001
Less: deemed dividend Nil
Adjusted P of D $ 25,001
ACB 25,001
Capital gain (loss) $ Nil
Rudolph Holdings Limited (“Rudolph”) has received an offer from Dasher Inc. (“Dasher”) to
purchase all of Rudolph’s common shares in its wholly owned subsidiary, Reindeer Operations
Limited (“Reindeer”). All three corporations are Canadian-controlled private corporations and
have December 31 year-ends.
The common shares of Reindeer have an adjusted cost base of $1,000,000, a paid-up capital of
$100,000, and a fair market value of $4,500,000. Reindeer has realized and retained income for
tax purposes of $1,500,000 since 1971. All of this realized income was derived from active
business assets.
Dasher Inc. cannot afford to pay $4,500,000 for the shares of Reindeer. The real estate in
Reindeer is valued at $2,500,000 and does not have any accrued gains or recapture.
Dasher Inc.’s proposal to purchase Reindeer is as follows:
1. Reindeer will distribute the real estate as a dividend-in-kind to Rudolph.
2. After the above distribution, the value of Reindeer will drop by $2,500,000 to $2,000,000.
3. Dasher Inc. will pay Rudolph $2,000,000 for the shares of Reindeer.
Required:
On the basis of the fact that the “dividend-in-kind” is taxable in exactly the same manner as a
cash dividend, advise Rudolph as to the tax implications of the proposed transactions.
Solution 82
A portion of the dividend will be reclassified as proceeds of disposition.
Proceeds of disposition $2,000,000

Add:
Dividend paid to Rudolph $2,500,000
Less: safe income (1,500,000) 1,000,000
Adjusted proceeds $3,000,000
Less: ACB of shares (1,000,000)
Capital gain $2,000,000
Taxable capital gain $1,000,000
Ms. Shlemeel was the sole proprietor of a business that retailed specialty coffees. The business has a
December 31 year-end. With the advice of her lawyer, Mr. Shlemozzel, she proposes to transfer the
assets of the business on January 2, 2012 to a newly incorporated company called Shlemeel Coffees
Unlimited Ltd., the common shares of which are owned by her husband. This corporation has a
December 31 year-end.
Ms. Shlemeel has provided you with the following balance sheet and additional information
concerning her proprietorship:
SHLEMEEL COFFEES
BALANCE SHEET
December 31, 2011
Assets
Current assets
Cash $ 15,000
Accounts receivable (FMV: $30,000) $ 35,000
Less: reserve for doubtful debts 13,000 22,000
Inventory (not real estate), at cost (FMV: $40,000) 37,000
Shares in Koffee Kart Ltd., at cost (FMV: $32,000) 45,000
Prepaid rent 2,000
$121,000
Fixed assets
Land, at cost (FMV: $210,000) 60,000
Building, at cost (FMV: $180,000) $160,000
Less: accumulated amortization 95,000 65,000
Equipment, at cost (FMV: $49,000) $100,000
Computer system, at cost (FMV: $12,000) $ 25,000
Computer software, at cost (FMV: $4,000) $ 6,000
Less: accumulated amortization 6,000 Nil
$309,000
Liabilities and Proprietor's Equity

Current liabilities
Accounts payable $ 20,000
Current portion of mortgage 27,000
$ 47,000
Long-term debt
Mortgage payable $115,000
Less: current portion 27,000 88,000
$135,000
Proprietor's equity 174,000
$309,000
Additional Information
1. Incomes for tax and financial accounting purposes have always been the same.
2. The proprietorship has developed goodwill that has a fair market value of $71,000.
3. Liabilities are to be assumed by the corporation. In addition, Ms. Shlemeel wants to take, as
consideration for the transfer of assets under subsection 85(1), the maximum (to the nearest
multiple of $1,000) in notes payable by the corporation to permit the maximum deferral of
taxation on the transfer. She wants the remainder of the maximum fair market value of
consideration in voting preferred shares. The shares will be retractable with a legal stated
capital equal to their fair market value and sufficient votes to control the corporation.
4. Koffee Kart Ltd. is an arm's length Canadian-controlled private corporation. All of the
corporation's assets are used in an active business carried on in Canada. Ms. Shlemeel owns
15% of the shares of Koffee Kart Ltd.
Required:
Ms. Shlemeel has come to you, her accountant, for income tax advice on this proposed transaction.
(a) Identify, with a brief explanation, the business assets that:

(12 minutes)
(i) should not be transferred to the corporation at all, and
(ii) should be transferred to the corporation, but cannot or should not be transferred
under a subsection 85(1) election and the amount and type of consideration that
should be received for each asset.
(b) For the assets that should be transferred under a subsection 85(1) election to the corporation,
indicate the maximum amount of debt (to the nearest multiple of $1,000) that can be taken.
Also, indicate the amount of the shares that can be taken as consideration to defer all possible
capital gains, losses and other income and to avoid other adverse tax consequences.
(13 minutes)
(c) Compute the ACB of the consideration and the PUC for tax purposes of the shares received
from the corporation on the transfer under a subsection 85(1) election.
(3 minutes)
Solution 83
(a) (i) Item not transferred to the corporation at all

Shares of Koffee Kart Ltd. not needed by corporation; loss would
be denied to individual
(ii) Items transferred to the corporation, but not under s. 85(1)
FMV
Cash $15,000 (not eligible property; no income to defer)
Accounts receivable 30,000 (use s. 22; allows full business loss of $5,000;
corporation eligible for reserve and/or write-off)
Prepaid rent 2,000 (not eligible property; no income to defer)
Computer system 12,000 (no income to defer; terminal loss of $5,000 denied)
$59,000 (take back debt for this total)
(b) Items transferred to the corporation under s. 85(1)

Asset Tax FMV EA Assumed New Pref. Income
value debt debt shares
Inventory $ 37,000 $ 40,000 $ 37,000 $ 37,000 Nil $ 3,000 Nil
Land 60,000 210,000 60,000 60,000 Nil 150,000 Nil
Building 65,000 180,000 65,000 38,000 $27,000 115,000 Nil
Equipment 46,000 49,000 46,000 Nil 46,000 3,000 Nil
Software Nil 4,000 1 Nil Nil 4,000 $1.00
Goodwill Nil 71,000 1 Nil Nil 71,000 $0.50
$208,000 $554,000 $208,002 $135,000 $73,000 $346,000
(c) ACB of preferred shares received

Elected amount $ 208,002
Allocated to:
New debt 73,000 (208,000)
Preferred shares $ 2
PUC for tax purposes of preferred shares

LSC $ 346,000
s. 85(2.1) reduction in PUC
(a) LSC $346,000 (A)
(b) Elected amount $208,002
Boot (208,000)
Excess, if any 2 (B)
(A − B) (345,998)
Tax PUC $ 2
Mr. Nicolas is the proprietor of a small toy manufacturing business. He would very much like to
get Mrs. Nicolas involved in the business from an ownership perspective. To this end,
Mr. Nicolas has come up with the following plan. Mr. and Mrs. Nicolas are both residents of
Canada for tax purposes.
1. Mrs. Nicolas will incorporate Jolly Old Nicolas Ltd. (JON Ltd.) and subscribe for all of the
common shares.
2. Mr. Nicolas will transfer the assets of his current proprietorship to JON Ltd. utilizing
subsection 85(1) of the Income Tax Act.
3. JON Ltd. will pay Mr. Nicolas for the transfer of the proprietorship assets by assuming all of
the existing proprietorship liabilities, issuing a note to Mr. Nicolas for the maximum possible
amount and issuing preferred shares to Mr. Nicolas for the balance.
Mr. Nicolas has informed you that his objectives with respect to the transfer of his business are to
defer all possible capital gains and other income and any other possible adverse tax consequences
while at the same time maximizing the amount of non-share consideration payable to him.
The assets and liabilities of the proprietorship, as at December 31, 2011, are as follows:
Assets Book value Fair market value
Cash $20,000 $20,000
Accounts receivable 90,000 85,000
Inventories 86,000 92,000
Shares in Public Co. 50,000 20,000
Shares in Elf Services Ltd. 150,000 325,000
Land 200,000 339,000
Building 15,000 75,000
Equipment 35,000 5,000
Goodwill Nil 60,000
$646,000
Liabilities
Bank loan $69,000
Accounts payable 23,000
Mortgage on building 18,000
$110,000
Mr. Nicolas has provided the following additional information:
(1) The accounts receivable are net of a reserve for doubtful accounts of $6,000. This was the
closing reserve for the previous fiscal period.
(2) Elf Services Ltd. is a Canadian-controlled private corporation that carries on an active
business that provides consulting and other related services to toy manufacturers. Mr. Nicolas
owns 15% of the common shares in this corporation. The common shares are the only shares
outstanding in Elf Services Ltd. Mr. Nicolas has been assured by the corporation’s tax
advisors that Elf Services Ltd. is a qualified small business corporation as that term is defined
in the Income Tax Act. The book value of these shares represents the amount paid by
Mr. Nicolas for the shares. The paid-up capital of these shares is $1,000.
(3) Mr. Nicolas has never utilized any of his available capital gains deduction.
(4) The book value of the land is its original cost. This land is the property upon which the
building is situated and represents the only site of the business operations.
(5) The book value of the building and equipment represents original cost less accumulated
financial accounting depreciation.
The tax data related to the building are as follows:
Original
Cost UCC
Building $60,000 $15,000
Equipment 80,000 35,000
Assume that Mr. Nicolas does wish to transfer the bank balance from his proprietorship to
JON Ltd. in order to have some ready cash in the account of the new corporation.
Required:
a) Very briefly explain to Mr. Nicolas the purpose of subsection 85(1) of the Income Tax Act,
and the benefit to him of utilizing this subsection for the transfer of some or all of his
proprietorship assets. Do not do any calculations; a qualitative explanation is all that is
required.
(4 minutes)
b) Indicate to Mr. Nicolas which asset(s) should not be transferred to JON Ltd. at all. Provide a
brief explanation for each such asset.
(7 minutes)
c) Indicate to Mr. Nicolas which asset(s) should be transferred to JON Ltd. but cannot or should
not be transferred under subsection 85(1) and briefly explain why. For each such asset,
indicate the type and maximum amount of consideration that should be paid to Mr. Nicolas
for the transfer.
(14 minutes)
d) For each asset that should be transferred to JON Ltd. under subsection 85(1), indicate the
elected transfer price, the maximum amount of non-share consideration (rounded to the
nearest $100), as well as the value of preferred shares that should be received by Mr. Nicolas.
(21 minutes)
e) What is Mr. Nicolas’s cost of the preferred shares received for the transfer of his assets under
subsection 85(1)?
(2 minutes)
f) What is the PUC for tax purposes of the preferred shares that Mr. Nicolas receives for the
transfer of his assets?
(2 minutes)
g) What is the tax cost to JON Ltd. of each of the assets transferred to it under subsection 85(1)?
(9 minutes)
h) Mr. Nicolas wishes to sell his shares in Elf Services Ltd. (ESL) to his mother-in-law,
Mrs. Scrooge. Mrs. Scrooge has indicated that she wishes to purchase the shares indirectly by
having her wholly owned corporation, Scrooge Holdings Limited (SHL), purchase the shares
from Mr. Nicolas. Mrs. Scrooge is a resident of Canada. Mr. Nicolas is proposing to sell his
shares in ESL to SHL for a note payable equal to the fair market value of his shares.
Describe the tax implications to Mr. Nicolas of a sale of his shares in ESL to SHL for the
proposed consideration. Provide any suggestions you have for Mr. Nicolas to improve the
transaction in order to minimize and/or eliminate any taxable income that otherwise results
from his proposed plan.
(13 minutes)
Solution 84
a) The purpose of subsection 85(1) is to allow a taxpayer to defer gains that are accrued on
assets transferred to a Canadian corporation.
b) Should not be transferred at all
 Shares in Public Co.
 because this is not a business asset OR because holding this investment may cause
problems with the QSBC status of JON Ltd. OR other reasonable explanation
 Shares in Elf Services Ltd. because this is not a business asset OR it is a personal
investment OR other reasonable explanation
c) Should be transferred but cannot or should not use section 85

Asset Reason Consideration
Cash  Not an eligible asset $20,000 note or assumed liabilities
A/R  No gain to defer, OR $85,000 note or assumed liabilities
 Section 22 better
Equipment  No gain to defer, OR $5,000 note or assumed liabilities
 Accrued terminal loss
$110,000 note OR assumed liabilities
d) Assets transferred using section 85
Asset Tax Value FMV ETP Liabilities Note Preferred Shares
Inventory $86,000 $92,000 $86,000 $86,000 $6,000
Land 200,000 339,000 200,000 24,000 176,000 139,000
Building 15,000 75,000 15,000 15,000 60,000
Goodwill Nil 60,000 1 60,000
$301,000 $566,000 $301,001 $110,000 $191,000 $265,000
e) Cost of the preferred shares = $1
f) PUC of the preferred shares =$1
g) Tax cost to JON Ltd. of the assets
Asset UCC/CEC Capital cost/ACB/Cost
Inventory $ 86,000
Land 200,000
Building $15,000 60,000
Goodwill 0.75
h) Subsection 84.1 will apply (this can be implicit if students do the deemed dividend)
Deemed dividend
Note $325,000
Less: greater of: PUC ($1,000) & “hard cost” of old shares (150,000)
$175,000
Capital gain
Proceeds $325,000
Less: deemed dividend (175,000)
Deemed proceeds $150,000
Less: ACB (150,000)
Capital gain Nil
To avoid the deemed dividend, Mr. N should limit his note/“boot” to $150,000 (“hard cost”
of shares) and take share consideration for the balance of $175,000 to equal FMV.
Question 85 (64 minutes) [Chapter 16, 17]
Mr. Dundastard began to operate Dundas Plumbing, a residential plumbing services business, as a
proprietorship, choosing a December 31 year-end. Until quite recently, he has been withdrawing
virtually all of the income of the business for personal purposes. Since the debt of the business was
fully secured, there was no good reason to incorporate. However, the business has become very
profitable, and Mr. Dundastard can see the benefit of deferring tax on income retained in the
business. Therefore, he intends to incorporate the proprietorship, effective January 2, 2012. The
corporate name will become Dundas Manufacturing Inc.
Mr. Dundastard wants to accomplish the incorporation without any immediate tax liability. Liabilities
of the proprietorship are to be assumed by the corporation, in return for assets transferred to the
corporation by the subsection 85(1) election. New debt is to be issued (to the nearest $100) by the
corporation to the maximum that will permit a full deferral of unrealized income on assets
transferred. Mr. Dundastard will receive 1,000 of the authorized common shares of the corporation.
Expected balance sheet amounts at December 31, 2011 are as follows:
Assets
Cash $ 20,000
Marketable securities, at cost (FMV: $5,000) 9,000
Accounts receivable (FMV: $190,000) $215,000
Less: reserve for doubtful debts (deducted for tax in 2009) 15,000 200,000
Inventory, at lower of cost or market (FMV: $62,000) 54,000
Prepaid insurance 4,000
Land held for speculation, at cost (FMV: $25,000) 5,000
Fixed assets (Note 1) 245,000
Goodwill (FMV: $80,000) Nil
$537,000
Liabilities and Proprietor Equity

Bank loan $ 20,000
Accounts payable and accrued liabilities 10,000
Equipment loan 65,000
Mortgage on land and building 35,000
$130,000
Proprietor equity 407,000
$537,000
Note to Balance Sheet data:

1. Net book
Cost value UCC FMV
Land $ 60,000 $ 60,000 - $100,000
Building (Class 1) 40,000 30,000 $ 28,600 75,000
Machinery and equipment (Class 43) 125,000 78,000 53,000 70,000
Furniture and fixtures (Class 8) 80,000 52,000 36,800 30,000
Computer hardware (Class 10) 30,000 20,000 17,300 16,000
Computer software (Class 12) 7,000 5,000 Nil 3,000
$342,000 $245,000 $135,700 $294,000
Required:
Analyze in technical detail, showing all calculations, the following issues in preparation of your
advice to Mr. Dundastard.
(a) With respect to the assets described above consider:

(36 minutes)
(i) which assets should not be transferred to the corporation, with a very brief
explanation of why;
(ii) which assets should be transferred to the corporation, but cannot or should not be
transferred to the corporation under a subsection 85(1) election, with a very brief
explanation and an indication of how these assets should be transferred and what
amount of new debt consideration should be taken for each such asset; and
(iii) which assets should be transferred to the corporation under a subsection 85(1)
election and the consideration that should be received for each asset so transferred.
(b) Compute the adjusted cost base and the paid-up capital for tax purposes of the common share
consideration, showing the details of your calculation of these amounts.
(7 minutes)
(c) Mr. Dundastard’s good friend, Ms. Nosbor, who considers herself somewhat of a tax expert,
has indicated that it would be a good idea to implement an income splitting plan. For this
purpose, common shares can be issued to Mr. Dundastard’s spouse, who is in a lower tax
bracket. Then, Mr. Dundastard could receive, as consideration for the assets transferred
under a subsection 85(1) election, the debt determined in (a)(iii) and preferred shares with a
fair market value of $50,000, but no common shares. Explain, briefly, to Mr. Dundastard the
tax consequences of his friend’s advice.
(9 minutes)
(d) Thirteen years from now, the common shares issued to Mr. Dundastard in part (a)(iii), above,
will be worth $550,000. There will not have been any changes to the adjusted cost base or
paid-up capital computed in part (b), above. Mr. Dundastard will have fully utilized his
$750,000 capital gains exemption on other shares. At that time, Mr. Dundastard will want to
freeze the value of his investment in the corporation using a capital reorganization under
section 86 in which he receives debt of the corporation, if possible, and preferred shares.
What is the maximum amount of debt that he can receive without realizing any income,
using section 86? What are the fair market value, adjusted cost base and paid-up capital of
the preferred shares that he will receive under section 86? Show all calculations necessary to
prove your answers to these questions.
(12 minutes)
Solution 85
(a)(i) Assets not transferred to the corporation:
Asset Explanation
Marketable securities not needed by corporation; loss would be denied to individual
Land held for speculation not needed by corporation; land held as inventory not eligible for
s. 85 election; no deferral
(ii) Assets transferred to the corporation other than by s. 85(1) election:
Asset Tax FMV Transfer New Explanation for not transferring by s. 85(1)
Value Price Debt election
Cash $20,000 $20,000 $20,000 $20,000 - not eligible; no income to defer
A/R 215,000 190,000 190,000 190,000 - s. 22 better; allows full business loss of $25,000;
corporation eligible for reserve and /or write-off
Ppd. ins. 4,000 4,000 4,000 4,000 - not eligible; no income to defer
Class 8 36,800 30,000 30,000 30,000 - no income to defer; terminal loss of $6,800 denied,
but CCA deductible by individual
Class 10 17,300 16,000 16,000 16,000 - no income to defer; terminal loss of $1,300 denied,
$293,100 $260,000 $260,000 $260,000
(iii) Assets transferred to the corporation by s. 85(1):
Asset Tax FMV Elected Assumed New Debt Common Income
Value Amount Debt Shares
Inventory $ 54,000 $ 62,000 $ 54,000 $ 54,000 $ 8,000 Nil
Land 60,000 100,000 60,000 60,000 40,000 Nil
Building 28,600 75,000 28,600 16,000 12,600 46,400 Nil
M&E 53,000 70,000 53,000 53,000 17,000 Nil
Comp. Soft. Nil 3,000 1 3,000 $1.00
G/W Nil 80,000 1 80,000 $0.50
$195,600 $390,000 $195,602 $130,000 $65,600 $194,400
(b) ACB of common shares:
Allocated to debt consideration:
New debt 65,600 195,600
ACB of common shares $ 2
PUC of common shares:
LSC before reduction $ 194,400
s. 85(2.1) reduction:
(1) Increase in LSC $194,400 (A)
(2) elected amount $195,602
less: boot 195,600
excess, if any 2 (B) (194,398)
Tax PUC $ 2
(c) Benefit to spouse:
FMV of property transferred $390,000
Less: greater of
(i) FMV of all consideration $245,600
(ii) Elected amount $195,602
Greater amount 245,600
Benefit $144,400
 reasonable to regard this as a benefit that Mr. Dundastard desired to confer on his spouse
(related person)
 must step up elected amount by $144,400, resulting in income subject to tax on the transfer
 cost of assets to corporation can be increased
 no increase in ACB of shares of either Mr. Dundastard or his spouse, resulting in future tax on
gain in value of her common shares
 the PUC of Ms. Dundastard’s shares will increase by $50,000, reflecting the limited (to LSC)
increase in tax-paid cost as a result of the increase in elected amount
(d) Maximum debt $ 2

LSC 549,998
ACB Nil
PUC Nil
(1) Reduced PUC [s. 86(2.1)(a)]
LSC of preferred shares $549,998
Less: PUC of old common $2
Less: boot 2 Nil
PUC reduction $549,998
Tax PUC ($549,998 − $549,998) Nil
ACB of old common $ 2
Less: FMV of non-share consideration 2
Cost of preferred shares $ Nil
(1) Deemed dividend
FMV of boot $2
Reduced PUC of preferred shares Nil $ 2
Less: PUC of old common 2
P of D of old common shares
Add: FMV of boot 2
Proceeds of redemption $ 2
Adjusted P of D $ 2
ACB 2
Question 86 (28 minutes) [Chapters 16, 17]
Carter T. David decided to retire and sell his shares of David Inc., which meet all the tests for QSBC
shares. His son, Brian, was interested in buying the company and they both agreed on the appraised
value of $1,050,000, which is clearly the fair market value for the shares owned by Carter. Carter’s
shares have a paid-up capital of $500 and a cost of $1,000. Carter has not used any of his capital
gains exemption.
(a) If Brian buys these shares through a holding company (Holdco), in which he owns all of the
common shares, Carter will transfer his shares of David Inc. to Holdco. As consideration,
Carter will receive from Holdco debt of $751,000 and retractable, redeemable, non-voting
preferred shares with a legal stated capital and fair market value of $299,000. Carter and
Holdco will elect under subsection 85(1) to have an elected amount of $751,000, in order to
use up Carter’s capital gains exemption.
(15 minutes)
(i) What are the income tax consequences to Carter of the above transactions?
(ii) Very briefly indicate what should be done to avoid any immediate income tax
consequences?
(b) If the capital structure of David Inc. is reorganized, Carter will trade his common shares of
David Inc. for debt of $751,000 issued by David Inc. and retractable, redeemable, non-voting
preferred shares of David Inc., with a legal stated capital and fair market value of $299,000.
(13 minutes)
(i) What are the income tax consequences to Carter of the above transactions?
(ii) Very briefly indicate what should be done to avoid any immediate income tax
consequences?
Solution 86
(a) (i) Tax consequences of transfer to holding corporation (Holdco):

Asset Tax Value FMV Elected Amount Note Pref. Shares Inc.
David Inc. s. 84.1 deemed div.
shares $ 1K $1,050K $751K $751K $299K No capital gain (loss)
PUC reduction [s. 84.1(1)(a)]

(a) increase in LSC of Holdco $299,000 (A)
less:
(b) greater of:
(i) PUC of David Inc. shares $ 500
(ii) ACB of David Inc. shares $ 1,000 $ 1,000
less: FMV of boot 751,000
excess, if any Nil (B)
PUC reduction (A) − (B) $299,000
Tax PUC ($299,000 − $299,000) Nil
Deemed dividend [s. 84.1(1)(b)]
Sum of:
(a) increase in LSC of Holdco $ 299,000 (A)
(b) FMV of boot 751,000 (D)
(A) + (D) $1,050,000
Less sum of:
(c) greater of:
(i) PUC of David Inc. shares $ 500
(ii) ACB of David Inc. shares $ 1,000 $ 1,000 (E)
(d) PUC reduction above 299,000 (F)
(E) + (F) 300,000
Deemed dividend (A) + (D) - [(E) + (F)] $ 750,000
Disposition of David Inc. shares

Less: s. 84.1 deemed dividend 750,000
Proceeds of disposition $ 1,000
Less: ACB 1,000
Capital gain Nil
Less: capital gains exemption Nil
Taxable income on transaction Nil
(ii) Avoiding the deemed dividend
Do not take more than $1,000 of debt consideration in this case.
(b) (i) Tax consequences of capital reorganization:

(1) Reduced PUC [s. 86(2.1)(a)]
Less: PUC of old common $ 500
Less: boot 751,000 Nil
Tax PUC ($299,000 − $299,000) $ Nil
(2) Cost of non-share consideration (= FMV) $ 751,000
Cost of preferred shares
ACB of old common $ 1,000
Less: FMV of boot 751,000

(1) Proceeds on redemption of old shares
Boot $ 751,000
PUC of preferred shares Nil $ 751,000
Deemed dividend on redemption [s. 84(3)]
Proceeds on redemption $ 751,000
Less: PUC of old common 500
Deemed dividend $ 750,500
(2) P of D of old common shares

Add: cost of boot 751,000
Proceeds $ 751,000
Less: s. 84(3) deemed dividend 750,500
P of D $ 500
Capital gain (loss)
P of D for old common shares $ 500
Less: ACB of old common shares 1,000
Capital gain (loss) $ (500)
(ii) Avoiding the deemed dividend

Do not take more than $500 of debt consideration in this case.
Ethan owned common shares in an operating company, EJK Inc. These shares are qualifying
small business corporation shares. On incorporation in 1972, the shares were issued by EJK Inc.
to Ethan for $1,000 in cash. At the present time, they are valued at $65,000. Ethan was advised to
crystallize $50,000 of his capital gains exemption. A holding corporation, Ethyholdco Ltd., was
incorporated. He transferred his common shares in EJK Inc. to Ethyholdco Ltd., electing at
$51,000 under subsection 85(1). As consideration, Ethan received from Ethyholdco Ltd. a note
for $51,000 and common shares valued at $14,000.
Required:
Describe, supported by detailed technical computations, all of the tax consequences to Ethan
of the transfer of the EJK Inc. common shares to Ethyholdco Ltd.
Solution 87
Since the conditions for subsection 84.1 to apply are met, the following would result:
PUC reduction (s. 84.1(1)(a)):
(1) increase in LSC of Ethyholdco Ltd. ($65,000 − $51,000) $14,000 (A)

less:
(2) greater of:
(a) PUC of EJK Inc. shares $1,000
(b) Modified ACB of EJK Inc. shares $1,000
greater amount $ 1,000
less: FMV of boot 51,000
excess, if any Nil (B)
PUC reduction (A) – (B) $14,000
PUC of Ethyholdco Ltd. after the reduction Nil
Deemed dividend (s. 84.1(1)(b)):
Sum of:
(1) increase in LSC of Ethyholdco Ltd. $14,000 (A)
(2) FMV of boot 51,000 (D)
(A) + (D) 65,000
Less sum of:
(3) greater of:
(a) PUC of EJK Inc. shares $1,000
(b) Modified ACB of EJK Inc. shares $1,000
greater amount $ 1,000 (E)
(4) PUC reduction under s. 84.1(1)(a) 14,000 (F)
(E) + (F) 15,000
Deemed dividend (A + D) – (E + F) $50,000
Capital gain on transfer of EJK Inc. shares:

Less: s. 84.1 deemed dividend 50,000
Proceeds of disposition 1,000
Less: ACB 1,000
Capital gain Nil
Less: capital gains exemption Nil
Effect on taxable income Nil
Mrs. Dancer owned 100 common shares in Dancers Unlimited Incorporated (“Dancers”). Dancers
reorganized its capital structure during the year. In the course of this reorganization, Mrs. Dancer
exchanged all of her common shares for cash and preferred shares. Mrs. Dancer’s common shares
had an adjusted cost base of $10,000, paid-up capital of $5,000 and a fair market value of
$55,000. As consideration for the exchange of her common shares, Mrs. Dancer received cash of
$5,000 and preferred shares with a fair market value and legal stated capital of $50,000.
Required:
a) What is the adjusted cost base and paid-up capital of the preferred shares received by
Mrs. Dancer as partial consideration for the exchange of her common shares?
(4 minutes)
b) What are the tax implications to Mrs. Dancer of the exchange of her common shares?
(5 minutes)
Solution 88
Adjusted cost base of new shares

ACB of old shares less “boot” = $10,000 − $5,000 = $5,000
PUC of new shares

PUC of old shares less “boot” = $5,000 − $5,000 = $Nil
Tax implications on exchange of old shares

Redemption
Proceeds of redemption ($5,000 + Nil)
— must be in conjunction with DD calc $ 5,000
Less: PUC of old shares (5,000)
Deemed dividend Nil
Capital gain
Proceeds = ACB of new shares + “boot” $ 10,000
Less: ACB of old shares (10,000)
Capital gain Nil
Vixen Limited purchased all of the shares of Comet Limited on June 8, 2005. The cost of the
shares to Vixen Limited was $90,000. The current fair market value of the shares of Comet is
$175,000. Comet’s only asset is land, which was purchased for a cash amount of $10,000 on
October 15, 1997. The land had a value of $100,000 on June 8, 2005, and is currently valued at
$175,000.
Required:
What are the income tax implications to Vixen Limited and Comet Limited of an amalgamation,
effective immediately, using section 87 of the Income Tax Act?
Solution 89
Deemed year end to Vixen and Comet Limited

Comet’s land can be increased for tax purposes; “bump” is available
Maximum “bump” is $90,000 − $10,000 = $80,000
“Room” for bump on land is $100,000 − $10,000 = $90,000
Therefore, ACB of land can be increased by $80,000 to $90,000
Mr. Alexander owns all of the common shares of Baker’s Dozen Food Products Inc. The ACB and
PUC of his shares are $25,001, resulting from their issue to him thirteen years ago on the
incorporation of the business and a later issue of common shares for a $25,000 cash contribution. The
total value of the shares is now $325,000. Since Mr. Alexander has fully utilized his $750,000 capital
gains exemption on other shares, he wants to freeze the value of his investment in the corporation
using a capital reorganization under section 86 in which he receives debt of the corporation, if
possible, and preferred shares.
Required:
What is the maximum amount of debt (to the nearest $100) that he can receive without realizing any
income, using section 86? What are the fair market value, adjusted cost base, and paid-up capital of
the preferred shares that she will receive under section 86?
Show all calculations and/or give all explanations necessary to prove your answers to these
questions.
Solution 90
Maximum debt $ 25,000

LSC 300,000
ACB 1
PUC 1
(1) Reduced PUC [s. 86(2.1)(a)]

Less: PUC of old common ($1 + $25,000) $25,001
Less: boot 25,000 1
Tax PUC ($300,000 − $299,999) $ 1

ACB of old common ($1 + $25,000) $25,001
Less: FMV of non-share consideration 25,000
(1) Deemed dividend

FMV of boot $25,000
Reduced PUC of preferred shares 1 $ 25,001
Less: PUC of old common 25,001

Add: FMV of boot 25,000
Proceeds of redemption $ 25,001
Adjusted P of D $ 25,001
ACB 25,001

Question 67 (5 Minutes) (Chapter 14)

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Question 67 (5 Minutes) (Chapter 14)

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What are the income tax implications to Vixen Limited and Comet Limited of an amalgamation, effective immediately, using section 87 of the Income Tax Act?

What are the income tax implications to Vixen Limited and Comet Limited of an amalgamation, effective immediately, using section 87 of the Income Tax Act?

What are the fair market value, adjusted cost base, and paid-up capital of the preferred shares that Mr. Alexander will receive under section 86?

What are the fair market value, adjusted cost base, and paid-up capital of the preferred shares that Mr. Alexander will receive under section 86?

Question 67 (5 minutes) [Chapter 14]

Tax owing at April 30, 2010: $25,000

Tax owing compounded at 6% to December 31, 2010 (245 days):

Compounded at 7% to October 24, 2011 (298 days):

Therefore, Jean should pay $27,553 on October 24, 2011.

Fees for acting as an art consultant $20,000

TCG on Bell shares [½ × ($370,000 – $250,000)] $ 60,000

Rights or Things return

Grossed-up dividend receivable at date of death (1.41 × $1,120) $ 1,579

(a) Due date is April 30, 2011

(b) No Elective Returns

(c) Elective Return – Rights and Things

The following four situations are independent.

(b) Ms. JSK should pay quarterly instalments in 2011 as follows:

March 15: ¼ × $12,900 $3,225

August 31 and September 30, 2010

As Director of Taxation of Verblonget Ltd., a Canadian-controlled private corporation, you are

(a) Instalments due on last day of each month in 2011

a) The company has a perfect compliance history

Assuming all criteria above are met:

Instalments due on last day of each quarter in 2011

$45,000 – (2 × $2,750 + 10 × $3,450) = $ 5,000

(e) Statute-barred assessment period

Land $39,000 N/A $120,000

Declared Paid Amount

(a) 2009 2010 2011 (est.)

(b) instalments are computed as the least of:

(c) option (iii)

$1,250 (1 + .10/365)137 − $1,250 = $48

The following are short independent questions.

a) A Inc. issued, to the son of its only shareholder, redeemable/retractable preferred

You have been given the following additional information.

1. Details of the assets and liabilities of Microcosm Ltd.

6. Microcosm Ltd. has the following tax rates:

After-tax retention on Tu Taxed’s offer for shares:

After-tax retention on Shel Ter’s offer for assets:

Funds available $1,031,200

Funds available $1,031,200

Funds distributed $1,031,200

Conclusion: Hal retains more cash on the asset sale.

2. Retained earnings include a balance in the Capital Dividend Account of $12,000.

Part (A) — Funds available for distribution:

Part (B) — Components of distribution:

Show all calculations.

(a) (i) Income:

(ii) PUC: $15,000

(iii) ACB: ($11,000 + $3,000 + $1,000) $15,000

(b) (i) Income:

redemption proceeds $15,000

(ii) PUC: ($11,000 − $11,000) Nil

(iii) ACB ($10,000 − $10,000) Nil

Show all calculations.

Total cash available for distribution $485,000

Net cash retained

Julstan Multi-Enterprise Limited (JML) is a Canadian-controlled private corporation. It has operated