Reference no: EM133151262
Question - For the last six years, Ms. Sarah Delmor has carried on the business called operated Delmor Industries as a sole proprietor. The business has been very successful and, as a consequence, has experienced rapid growth. Given this situation, Ms. Delmor has concluded that in order to enhance her ability to raise additional capital, the business should be incorporated to a new corporation, Delmor Inc. in which she will be the sole shareholder.
On July 1, 2021, the tax costs (ACB, Capital cost or UCC) and FMV of the properties and liabilities of the business are as follows:
Tax Cost FMV
Accounts Receivable $ 120,000 $ 112,000
Temporary Investments 42,000 37,000
Inventories 220,000 231,000
Depreciable Property - CCA Class 8 (Note One) 53,000 61,500
Machinery (Note Two) 197,000 273,000
Land 150,000 311,000
Building (Note Three) 416,000 523,500
Goodwill Nil 200,000
Total $1,198,000 $1,749,000
Liabilities (72,000) (72,000)
Net (Owner's Equity) $1,126,000 $1,677,000
Note One - There are two properties in Class 8. Property A has a capital cost of $27,000 and a FMV of $32,500. Property B has a capital cost of $33,000 and a FMV of $29,000.
Note Two - The capital cost of the Machinery is $212,500.
Note Three - The capital cost of the Building is $472,000.
The sale/transfer of the Delmor Industries' properties to Delmor Inc. will take place on July 1, 2021, and an election will be filed under ITA 85(1). Delmor Inc. will assume the liabilities of Delmor Industries and, in addition, will issue $800,000 in new debt (a promissory note) to Ms. Delmor. With respect to share consideration, the new Company will issue preferred shares with a FMV of $200,000 and common stock with a FMV of $677,000.
Any shares issued by Delmor Inc. as part of this rollover will be issued to Ms. Delmor. Delmor Inc. does not have a balance in its GRIP account in any of the taxation years under consideration.
Required -
A. Determine whether the Accounts Receivable and Temporary Investments should be transferred under the provisions of ITA 85(1). Explain your conclusion and, if you recommend that ITA 85(1) should not be used, indicate the appropriate alternative treatment.
B. Without regard to your conclusions in Part A, assume that all of the properties are sold/transferred to the new corporation using the provisions of ITA 85(1). Indicate the minimum amounts that can be elected for each property. Explain how the election would apply to Property A and B in Class 8.
C. Assume the sale/transfer of the business properties to Delmor Inc. is going to be made using the provisions of ITA 85(1). Ms. Delmor will elect the amounts determined in Part B, and transfer all of the properties of Delmor Industries (whether or not appropriate). Determine the ACB of the consideration received by Ms. Delmor. In addition, determine the PUC of the preferred stock and common shares.
D. Determine the income tax consequences to Ms. Delmor if the preferred and common shares received as consideration were immediately redeemed by the new corporation at FMV.