Reference no: EM133024828
Problem 1
Karen, a resident of White Rock B.C., owns all the common shares of Cyber Corp. which was incorporated in 2003. Karen invested S1,000 into the share capital of Cyber Corp.
Cyber Corp is located in White Rock and distributes computer equipment and games to retail stores in southern B.C. The following is the balance sheet.
Cyber Corp.
Balance Sheet as at December 31. 2020
Assets
|
|
FN 111
|
Cash
|
S 4,500
|
S 4,500
|
Marketable securities
|
300,000
|
700,000
|
Accounts receivable
|
800,000
|
780,000
|
Inventory
|
920,000
|
920,000
|
Prepaid expenses
|
1,000
|
1,000
|
Investment in Cyber Sub Inc
|
1,000
|
100,000
|
Fixed assets
|
140,000
|
150,000
|
Goodwill-Class 14.1
|
-
|
200,000
|
|
$2,166,500
|
S2,855,500
|
Liabilities & Shareholders'Equity
|
|
|
Accounts payable and accrued liabilities
|
|
S 600,000
|
Loans payable
|
|
400,000
|
Future income taxes
|
|
100,000
|
Share capital
|
|
1,000
|
Retained earnings
|
|
1,065,500
|
|
|
$2,166,500
|
The investment in Cyber Sub Inc., a CCPC, was made two years ago to distribute a new line of games. It is 25% owned by Cyber Corp and uses all of its assets in a Canadian active business.
The relative values of Cyber Corp's assets have remained stable over the past three years. The marketable securities comprise Cyber Corp's investment portfolio which is not held as part of the corporation's business activities. The estimated value of the goodwill of the business is $200,000.
Karen was recently offered $1,800,000 for the shares of Cyber Corp.
Karen would like to know whether, if she sold her shares of Cyber Corp, she would be able to claim the capital gains exemption on the sale. If they do not qualify for the CGE then she wants to know if there is anything that can be done to qualify.
For the next meeting you agree that you will:
(A) Assess the situation.
(B) Identify the issues.
(C) Analyze the issues.
(D) Advise/recommend.