Reference no: EM132591977 , Length: 4 pages
Assignment
Question 1
Travis Lelulia is the sole shareholder of MPJ Computers Ltd., a corporation with an October 31 year-end. MPJ Computers Ltd. produces trivia games. Travis started the corporation with an initial capital investment of $30,000 for which he received 1,000 shares.
Travis 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, Travis has received two separate offers, both from individuals and both effective January 1, 2020.
Offer One
Mike Stapler is willing to pay $1,000,000 for the shares of MPJ Computers Ltd.
Offer Two
Sherri Reid is willing to buy the assets through an existing corporation that she owns. Sherri'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 MPJ Computers 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 UCC Class 14.1 (cost is $38,000; 20,500
acquired 2016)
Liabilities
Trade payables 47,000
Bank loan 118,000
2. The paid-up capital of the outstanding shares in MPJ Computers Ltd. is $30,000.
3. The capital dividend account of MPJ Computers Ltd. is $94,000 before any sale of assets under the offer above.
4. The refundable dividend tax on hand balance of MPJ Computers Ltd. was $18,000 on October 31, 2019.
5. Travis and Sherri 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. MPJ Computers Ltd. has the following tax rates:
a) 13% on active business income up to the small business deduction limit (there are no associated companies)
b) 40% on other income (before the 102/3% 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. Travis pays personal tax at the top marginal combined federal and provincial rate of 42.5% on actual dividends from the low-rate income of a CCPC and 50% on all other income.
8. Travis utilized all of his capital gains exemption on a previous sale of the shares of a qualified small business corporation.
Required:
a) If Travis sells the assets to Sherri and winds up MPJ Computers after the asset sale, what would be the net amount available for distribution to him after paying all liabilities?
b) If the funds are distributed to Travis, determine the amount and nature of the components of the distribution to him for tax purposes. Also calculate the net proceeds after tax.
c) Calculate the net proceeds after tax if Travis sells his shares in MPJ Computers to Mike. Which offer should Travis accept?
Question 2
Mr. Luke Skywalker, age 40 is the proprietor of a small manufacturing business that manufactures lightsabers. He would very much like to get Mrs. Luke Skywalker, age 42, involved in the business from an ownership perspective. To this end, Mr. Luke Skywalker has come up with the following plan. Mr. and Mrs. Luke Skywalker are both residents of Canada for tax purposes.
1. Mrs. Luke Skywalker will incorporate Use The Force Ltd. (UTF Ltd.) and subscribe for all of the common shares.
2. Mr. Luke Skywalker will transfer the assets of his current proprietorship to UTF Ltd. utilizing subsection 85(1) of the Income Tax Act.
3. UTF Ltd. will pay Mr. Luke Skywalker for the transfer of the proprietorship assets by assuming all of the existing proprietorship liabilities, issuing a note to Mr. Luke Skywalker for the maximum possible amount and issuing preferred shares to Mr. Luke Skywalker for the balance.
Mr. Luke Skywalker 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, 2019, 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
Land 200,000 339,000
Building 15,000 75,000
Equipment 35,000 5,000
Goodwill Nil 60,000
$446,000
Liabilities
Bank loan $69,000
Accounts payable 23,000
Mortgage on building 18,000
$110,000
Mr. Luke Skywalker 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) Mr. Luke Skywalker has never utilized any of his available capital gains deduction.
(3) 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.
(4) 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:
Cost UCC
Building $60,000 $15,000
Equipment 80,000 35,000
Assume that Mr. Luke Skywalker does wish to transfer the bank balance from his proprietorship to UTF Ltd. in order to have some ready cash in the account of the new corporation.
Required:
a) Indicate to Mr. Luke Skywalker which asset(s) should be transferred to UTF Ltd. but cannot or should not be transferred under subsection 85(1) and briefly explain why. For these assets Luke will take a note payable.
b) For the assets that should be transferred under a subsection 85(1) election to the corporation, indicate the maximum amount non-share consideration (to the nearest multiple of $100) that can be taken by Luke. 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.
Bonus Question
On August 5, 2020, the Toronto Raptors are scheduled to play the Orlando Magic. What do you think will be the total combined final score of that game? For example, the Raptors last played the Magic on November 29, 2019 where the total combined final score was 173 (Raptors 90 + Magic 83).