Identify and analyze the issues

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.

Reference no: EM133024828

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