Question 1

Both ITA 87, Amalgamations, and ITA 88(1), Wind-Up Of A 90 Percent Owned Subsidiary, provide for a bump-up of asset values. Describe the two basic limits on the amount of this bump-up.

Accepted Answer

The limits on the asset bump up are described in the text as follows:
• The basic amount of the bump-up is found in ITA 88(1)(d)(i)and . This amount is the excess of the adjusted cost base of the subsidiary shares held by the parent, over the sum of:
• the tax values of the subsidiary's net assets at the time of the winding-up; and
• dividends paid by the subsidiary to the parent since the time of the acquisition (including capital dividends).
• ITA 88(1)(d)(ii)further limits the amount that can be recognized to the excess of the fair market value of the subsidiary's non-depreciable capital property over their tax values at the time the parent acquired control of the subsidiary.

Question 2

When new shares are issued in an ITA 86(1)or ITA 86(2)reorganization, how is their paid up capital determined?

Accepted Answer

The paid up capital (PUC)of new shares issued in either an ITA 86(1)or and ITA 86(2 reorganization would be equal to their legal stated capital, less a PUC reduction. This reduction calculation would start with the legal stated capital of the shares. From this total, the formula requires the subtraction of any excess of the PUC of the old shares over any non-share consideration received. If the non-share consideration exceeds the old PUC, the reduction will be equal to the legal stated capital, resulting in a PUC of nil. This calculation is not altered by the presence of a gift to a related party.

Question 3

Describe, in general terms, the type of situation in which ITA 85.1, Share For Share Exchange, is used. What is the major tax advantage of using this rollover provision?

Accepted Answer

The usual situation in which ITA 85.1 is applied involves a shareholder of a Canadian corporation (Corporation A)who wishes to sell his shares, on an arm's length basis, to another Canadian corporation (Corporation B). ITA 85.1 allows the shareholder to exchange his shares in Corporation A for shares of Corporation B, with the transaction taking place at the adjusted cost base of the Corporation A shares. That is, the proceeds of disposition for the Corporation A shares will be their adjusted cost base, and this will also be the cost of these shares to the acquiring company. The major tax advantage is the fact that any gain on the Corporation A shares is deferred until such time as the Corporation B shares are sold.

Question 4

Jerome Barris is 85 years old and, while his spouse is deceased, he has three children, ages 45, 50, and 52. He owns all of the outstanding common shares of Barris Ltd., a Canadian controlled private corporation. These shares have a PUC and adjusted cost base of $50,000, and a current fair market value of $3 million. He would like to retain operating control of Barris Ltd. However, given his advanced age, he would like to transfer any future growth in the value of the Company to his three children. Briefly explain how ITA 86, Exchange Of Shares In A Reorganization, could be used to accomplish the results desired by Mr. Barris.

Accepted Answer

The answer of Jerome Barris is 85 years old and,...

Question 5

ITA 86(2)has special rules that must be applied when a Section 86 reorganization involves a gift to a related party. What circumstances create such a gift situation?

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Question 6

Subsections 88(1)and 88(2)cover two different types of transactions. Describe these two types of transactions.

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Question 7

When new shares are issued in an ITA 86(1)or ITA 86(2)reorganization, how is their adjusted cost base determined?

Accepted Answer

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Question 8

Briefly describe the general rules applicable to the vendor in a Section 85.1 share for share exchange.

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Question 9

When preferred shares are issued in an ITA 86(1)reorganization, it is important that they contain provisions which establish the market value of such shares. List three provisions that are used to accomplish this goal.

Accepted Answer

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Question 10

Briefly describe the calculation of the PUC of new shares issued in a reorganization of capital under ITA 86(1).

Accepted Answer

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Question 11

List two conditions that are necessary for the ITA 87 amalgamation legislation to apply.

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Question 12

What is the tax position of the shareholders of a company that has been combined with another company under the provisions of ITA 87, Amalgamations.

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Question 13

Estate freezes can be carried out using either ITA 85(1)or ITA 86(1). What are the major advantages of using ITA 86(1), rather than ITA 85(1)?

Accepted Answer

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Question 14

In a reorganization of capital under ITA 86, it is necessary to calculate both a proceeds of redemption and a proceeds of disposition. How do these two calculations differ if there is no gift involved?

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Question 15

When a corporation is wound up under the provisions of ITA 88(2), assets will be sold and liabilities will be settled. When the resulting proceeds are distributed to shareholders, the distribution will usually be made up of several different components. Briefly indicate the components that can be included in this type of distribution.

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Question 16

When a reorganization of capital involves a gift to a related person, the provisions of ITA 86(2)modify the rules applicable to such reorganizations. Briefly describe the main changes that result from these modifications.

Accepted Answer

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Question 17

Several conditions must be met in order for the provisions of ITA 86, exchange of shares in a reorganization, to apply. List two of these conditions.

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Question 18

If a parent company wishes to incorporate the assets of a majority owned subsidiary into its operations, this goal can be accomplished either through an amalgamation, under ITA 87, or through the wind-up procedures established in ITA 88(1). Briefly describe the different tax effects that result from choosing one or the other of these alternative procedures.

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Question 19

The provisions of ITA 85.1, share for share exchange, apply automatically unless the vendor opts out. How does the vendor opt out of this Section?

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Question 20

There are several conditions that are required for an ITA 85.1 rollover to be applicable. List three of these conditions.

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Quiz 17: Other Rollovers and Sale of an Incorporated Business