Question 1

Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free combination?&#10;A)At least one of the corporations must be Canadian.&#10;B)50 percent of the assets and liabilities of the old corporation must become assets and liabilities of the new corporation.&#10;C)The two corporations must be in a similar line of business.&#10;D)All of the shareholders of the old corporations must become shareholders of the new corporation.

Accepted Answer

For an amalgamation to be tax-free, all shareholders of the old corporations must become shareholders of the new corporation, ensuring continuity of ownership.

Question 2

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?&#10;A)The corporation's income will not be taxed.&#10;B)Mr.Chan will receive dividends from the holding company, free of tax.&#10;C)The holding company will receive dividends from the corporation, free of tax.&#10;D)Mr.Chan will receive dividends from the corporation, free of tax.

Accepted Answer

By creating a holding company, Mr. Chan can receive dividends from the corporation free of tax. This is because dividends received by one Canadian corporation from another Canadian corporation are generally not subject to tax, as they are considered a form of inter-corporate income. However, option A is incorrect as the corporation's income will still be subject to tax, just not at the same high rate as if it was earned personally by Mr. Chan. Option B is also incorrect as dividends received by Mr. Chan from the holding company will still be subject to tax. Option D is incorrect as dividends received by Mr. Chan directly from the corporation would still be subject to tax.

Question 3

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; Black Co.(with taxable income of $50,000 in 20x1),and Red Co.(with 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
D)$45,500

D

Accepted Answer

D

Question 4

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 a NIL RDTOH balance.
Required:

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

Accepted Answer

The answer of Hold Co.is a Canadian controlled private corporation...

Question 5

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.
B)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.

Accepted Answer

Dividends received by holding corporations from an operating company are typically tax-free due to inter-corporate dividend tax rules, allowing Tom and Bob to invest according to their preferences.

Question 6

Stan is the sole shareholder of Hardware Ltd.Hardware purchased all of the shares of Tools Inc.in 20x4 for $500,000.Tools incurred a non-capital loss of $25,000 in the year ended December 31,20x3.Stan has decided to initiate a Section 88 wind-up of Tools Inc.into Hardware Ltd.on June 23,20x7.Due to the seasonal nature of his sales,Stan would like to maintain the April 30^th year end that he has used since beginning his business.
Stan's accountant has prepared the following balance sheet for Tools Inc.as of June 22,20x7.The fair market value of the assets on both June 22,20x7 and the date of acquisition in 20x4 are presented in the following table:

Tools paid dividends of $8,000 to Hardware in 20x7.
Required:
Answer the following questions pertaining to the wind-up of Tools Inc.into Hardware Ltd.:
1)Hardware will be deemed to have acquired the following assets of Tools at what values?

2)Calculate the value of the section 88(1)(d)"bump" available on the ACB for the non-depreciable capital property.
3)Identify the assets which may use the bump,and the amount of the bump available for each asset identified.Also identify any unusable bump amount.
4)When will Hardware Ltd.be able to use the non-capital loss from Tools Inc.

Accepted Answer

The answer of Stan is the sole shareholder of Hardware...

Question 7

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.
D)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 no immediate tax consequences.

Accepted Answer

A corporate reorganization can be structured to allow Jack to convert his common shares to preferred shares and issue nominal value common shares to employees without triggering immediate tax consequences, as long as it meets certain tax regulations and requirements.

Question 8

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.

Accepted Answer

The answer of The shareholders of Parent Co.and Sub Co.wish...

Deck 14: Multiple Corporations and Their Reorganization