Deck 14: Multiple Corporations and Their Reorganization

Question 1

John Green began a group of companies in 20x0 which he refers to as the 'Green Group'. The companies earn only active business income. The parent company of the group is Green Co., which is a successful CCPC with $300,000 of taxable income in 20x1. Green Co. has two wholly owned subsidiaries. Subsidiary 1, Black Co., has taxable income of $50,000 in 20x1, and Subsidiary 2, Red Co. has a loss of $20,000 in 20x1 and unused losses from 20x0 of $15,000. Green Co. and Black Co. did not incur losses in 20x0. The corporate tax rate is 13%. What is the combined tax liability for the Green Group corporations in 20x1?
A. $39,000
B. $40,950
C. $42,900

Answer 1

D

Question 2

The shareholders of Parent Co. and Sub Co. wish to combine the business activities of the two companies through a business combination. Both companies have assets that have appreciated in value above their capital cost. Parent Co. owns 85% of the shares of Sub Co.
Required:
Suggest a business combination (amalgamation or wind-up) that would defer the tax consequences associated with the increased value of the assets, and explain why you did not choose the other option.

Answer 2

Parent Co. and Sub Co. can choose to amalgamate in accordance with section 87, which will allow them to transfer the assets at their tax values, thereby deferring any tax consequences. Since Parent Co. owns less than 90% of Sub Co. a wind-up would not allow for a deferral of the tax gains.

Question 3

Mr. Chan has created a holding company between himself and his corporation (which earns only active business income). This will permit which of the following?
A. The corporation's income will not be taxed.
B. Mr. Chan will receive dividends from the holding company, free of tax.
The holding company will receive dividends from the corporation, free of tax.
D. Mr. Chan will receive dividends from the corporation, free of tax.

Answer 3

C

Question 4

Tom and Bob are equal shareholders of a profitable company which earns only active business income. The company is growing and dividend payouts are increasing. The two men have heard that 'holding corporations' might suit their needs. Which of the following would apply if they each created a holding corporation, each of which owned 50% of the company?
A. Dividends received by the holding corporations from the operating company must be invested in the same ventures.
The holding corporations would receive the dividends from the operating company, free of tax, to be invested in Tom's and Bob's separate choices.
C. The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal use without paying a second level of tax.
D. Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.

Question 5

Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free/deferred combination?
A. At least one of the corporations must be Canadian.
B. 50 percent of the assets and liabilities of the old corporation must become assets and liabilities of the new corporation.
C. The two corporations must be in a similar line of business.

Question 6

Jack Grey is the sole shareholder of Grey's Garden Tools Inc. He owns one class of common shares which have a value of $200,000. Jack is approaching retirement age and would like his two key employees to take over his company someday. At this point in time, the employees do not have enough excess cash to buy Jack's shares. Which of the following statements is true with regard to a corporate reorganization that would allow the employees to take over the ownership of the company?
A. A reorganization of share capital would allow Jack to convert his common shares to fixed value preferred shares, while also issuing nominal value common shares to his employees, resulting in an immediate tax consequence for Jack.
B. A reorganization of share capital would allow Jack to convert his common shares to fixed value preferred shares, while also issuing nominal value common shares to his employees, resulting in an immediate tax consequence for the employees.
C. A reorganization of share capital would allow Jack to convert his common shares to fixed value preferred shares, while also issuing nominal value common shares to his employees, resulting in an immediate tax consequence for the corporation.

Question 7

Hold Co. is a Canadian controlled private corporation that acquired 100% of the shares of Small Co. in 20x5. Hold Co. paid $50,000 for the shares. Big Co., an arm's length corporation, is now interested in purchasing Hold Co.'s investment in Small Co. Small Co.'s shares are currently worth $500,000 and the retained earnings of the company are $200,000. In order to reduce the fair market value of the shares, Small Co. will pay a dividend of $450,000 to Hold Co., and then sell the shares for $50,000. Small Co. has no RDTOH balances.
Required:

A) Applying the anti-avoidance rules of Subsection 55(2), what are the tax implications for Hold Co. resulting from these transactions?
B) What is the value of Small Co.'s 'safe income'?