Deck 12: Organization, Capital Structures, and Income Distributions of Corporations

Question 1

Corporation A is a Canadian controlled private corporation and Corporation B is a public Canadian corporation.The paid-up capital of both corporations was established with $25,000 in common shares.Both corporations have a paid-up capital balance of $25,000.Which of these statements is true,provided the proper legal steps are followed?

A) If the private corporation makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence.
B) If the private corporation makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.
C) If the public corporation makes a payment of $25,000 to its shareholders by reducing its paid-up capital, there will be no tax consequence.
D) If the public corporation makes a payment of $25,000 to its shareholders by reducing its paid-up capital, only 50% of the payment will be taxable.

Answer 1

A

Question 2

Compare shareholder equity to shareholder debt,addressing 1)return on investment,2)loss on investment,and 3)return of capital.

Question 3

Which of the following scenarios would be most appropriate for a Section 85 rollover?

A) A shareholder of a corporation wishes to transfer his vehicle to his corporation. The vehicle originally cost $20,000 and has a market value of $12,000.
B) A corporation wishes to convert land owned by the company into a parking lot.
C) A taxpayer wishes to transfer property worth $200,000 that originally cost $90,000 to her corporation.
D) A corporation is selling its equipment to another corporation and does not wish to own shares in the other corporation.

Answer 3

C

Question 4

Tony Brown sold 5000 of his shares back to ABC Co.for $25,000 during the current fiscal year.He purchased these shares from Carrie White three years ago for $15,000,who had originally purchased the shares from the corporate treasury for $10,000.Which of the following tax consequences will Tony recognize?

A)He will have a deemed dividend of $10,000 and no capital gain or loss.
B)He will have a deemed dividend of $15,000 and a capital loss of $5,000.
C)He will have a deemed dividend of $15,000 and a capital gain of $10,000.
D)He will have a deemed dividend of $10,000 and a capital gain of $10,000.

Question 5

Janko Corp.has transferred three assets to Jumbo Corp.,a Canadian controlled private corporation,under Section 85 of the Income Tax Act.The following assets were transferred:

Required:
Determine the following amounts:
a)The minimum amount that Janko may elect to transfer each asset.
b)Janko's income or loss for tax purposes
c)Jumbo's ACB for the assets acquired.
d)The ACB of the shares received by Janko.
e)The PUC of the shares received by Janko.

Question 6

Robert Smith owns 20% of the shares of Quarks Inc.,a Canadian qualified small business corporation.He purchased the shares from a previous shareholder for $50,000.The stated paid up capital of the shares is $10,000.Two other shareholders own equal portions of the remaining shares of Quarks.
Robert has decided to sell his shares,which have a market value of $120,000.The shares are to be sold either to the two other shareholders,or back to the corporate treasury.All three shareholders used all of their capital gains deductions earlier in the year.
Robert has employment income of $185,000,capital gains in the amount of $50,000,and property income of $20,000 for the current year.
All three shareholders are in a 45% tax bracket.The marginal rate on dividends is 33%.The corporate tax rate for Quarks is 15%.
Required:

A)Determine the total tax consequences for Robert is he sells his shares to:
1)the other shareholders,and
2)the corporate treasury.
B)Determine the cost of the share purchase for:
1)the other shareholders,assuming that the purchase will be made using dividend income paid to the two shareholders from the corporation,and
2)the corporation,assuming that the purchase will be made from business profits.
C)Which option is preferential for 1)Robert and 2)the other shareholders?

Question 7

Anthony is the sole shareholder of Glass Co.He would like to lend $500,000 to his company by way of a shareholder loan.He is not sure whether to issue an interest free loan or a loan with an interest rate of 10%.Anthony does not pay himself a salary,but rather issues all after-tax profits to himself in the form of a dividend.
Required:

A)Calculate the total combined tax liability for Anthony and Glass Co.under both alternatives.(Assume that the CRA's prescribed rate of interest is 2%; Anthony's personal tax rate is 45%; his marginal tax rate on dividends is 35%; and Glass Co.has income of $200,000,and is subject to a 15% tax rate.)
B)Briefly explain the reason for the tax differential in your results.

Question 8

Green Co.transferred a small piece of land to one of its shareholders as a dividend in kind.The land originally cost $50,000 and had a fair market value of $175,000 at the time of the transfer.The corporation will realize ________,and the shareholder will realize ________.

A) no tax effect; a dividend of $125,000.
B) a dividend of $125,000; no tax effect.
C) a capital gain of $125,000; a dividend of $175,000.
D) a capital gain of $50,000; a dividend of $125,000.

Question 9

Which of the following statements is true regarding the disposal of shares by a shareholder?

A) When a shareholder sells shares to other shareholders, the corporation's capital base increases.
B) The sale of shares to other shareholders is known as a 'buy-back'.
C) The sale of shares to the corporate treasury is not allowed in the Income Tax Act.
D) The sale of shares to the corporate treasury may result in a deemed dividend and a capital gain or loss to the shareholder.

Question 10

Ben is incorporating his proprietorship and wishes to transfer the following assets using a Section 85 rollover:

Ben wishes to defer all gains at this time.He will receive the maximum note receivable possible,and the remainder of the transfer in preferred shares.
Required:
1.What is the elected transfer amount for each of the assets under Section 85?
2.What is the value of the note receivable and preferred shares that Ben must receive in order to defer any gains at this point in time?