Deck 19: Business Acquisitions and Divestitures-Tax-Deferred Sales

Question 1

Corporation A is selling a depreciable asset to Corporation B. The asset has a fair market value of $200,000. The original cost of the asset was $175,000 and the undepreciated capital cost is $160,000. The two corporations wish to structure the sale in a manner that will defer all taxes at this time. Corporation A has no unused losses.
Which of the following is FALSE?

A) Corporation A will receive shares from Corporation B in the transaction.
B) The sale can include cash or a note receivable to a maximum value of $160,000.
C) For legal purposes, the asset will be sold for $200,000.
D) The elected value for tax purposes will be $175,000.

Answer 1

D

Question 2

Brian Snow owns all of the common shares of Treeline Boots Ltd., a
Canadian-controlled private corporation. The shares have a fair market value of
$150,000, an ACB of $30,000, and a PUC of $5,000. Brian would like to retire soon, so he has offered the company to his son, Walter. Walter is young and does not have a lot of disposable income, and as such, a Section 86(1)
reorganization of share capital has been recommended to Brian. Brian's common shares will be converted to preferred shares, which are redeemable for $150,000. Walter will then purchase a new class of common shares at a nominal value.
Required:
Discuss the immediate tax consequences of the reorganization of share capital fo Brian, indicating the ACB and the PUC of the new preferred shares.

Answer 2

Income tax reference: ITA 86(1) Section 86(1) allows for a deferral on the accrued gain of the common shares, through the exchange of the shares.
The common shares are deemed to have been disposed of at their ACB of
$30,000, which then becomes the ACB of the new shares. As there is no non-share consideration, a deemed dividend does not arise. Since the
non-share consideration is NIL, the PUC of the new shares is equal to the
$5,000 PUC of the old shares.

Question 3

Samantha is an architect, and she is also the sole shareholder of Sam's Shoes Inc. She wants to semi-retire from the shoe business soon and her three employees have all expressed great interest in taking over the company. However, they do
not have the financial resources necessary to make the purchase at this point in
time. Samantha is not in a hurry to receive the proceeds from the business as she will continue with her architectural work for another five years.
Samantha has heard about something called a 'share reorganization' and she has asked you to explain what it means and if it would apply to her situation.
Required:

A) Explain what a Subsection 86(1) share reorganization is, and if it would be useful for Samantha in her plans to semi-retire from her shoe store.
B) What is a significant risk factor that might be involved with a share reorganization?

Answer 3

A) Subsection 86(1) of the Income Tax Act allows shareholders to
reorganize their shares by exchanging their common shares for preferred shares of the same value in the corporation. New common shares are then issued to the purchasers of the business, often for a nominal amount.
This method would satisfy Samantha's wish to semi-retire, as the
employees would become the new common shareholders and would then run the company. It would also satisfy the employees' desire to purchase the company with limited resources.
B) A significant risk factor involved with such a transaction is that
Samantha's ability to realize the value of her preferred shares rests with her employees' ability to run the shoe store once she is no longer in charge.

Question 4

Which of the following is not a common feature of closely held corporations?

A) The corporation has only one, or relatively few, shareholders.
B) The corporation may be sold to family members or employees who do not have enough cash to buy the business.
C) The corporation is often sold due to the owner's wish to retire.
D) The corporation pays regular dividends to its public shareholders.

Question 5

Which of the following statements most accurately describes an aspect of a tax-deferred sale of a business to a group of employees, through share reorganization?

A) This method of sale is appropriate when the vendor is unsure of the purchaser's ability to manage the business.
B) The vendor generally does not participate in financing the sale of the business.
C) There is a risk to the original shareholder, as the value of his/her preferred shares depends on the success of the corporation following the sale.
D) The employees will purchase the corporation's original common shares from the vendor.

Question 6

Which of the following is not typically used to defer taxes in business reorganizations?

A) Transfer of non-depreciable assets at their fair market values, from one corporation to another.
B) Transfer of shares at their adjusted cost base, from one corporation to another.
C) An amalgamation
D) Transfer of depreciable assets at their undepreciated capital costs, from one corporation to another.

Question 7

Match the following situations with the appropriate sections of the Income Tax Act.
Situation
Shares are exchanged between two corporations at their tax costs. As a formal ta agreement is not required, this is a useful method for public corporations with
many shareholders.
Shares of two or more corporations are exchanged for shares of a new entity, and all of the assets of the corporations are transferred to the new entity.
Common shares are converted to preferred shares and held by the seller. New common shares are issued (often at a nominal value) to the purchaser.
Assets are sold from a vendor corporation to a buyer corporation at an elected
value, usually the assets' tax costs (i.e. UCC or ACB), in exchange for shares and a non-share payment not exceeding the elected value.
Section from the Income Tax Act
_______ Subsection 85(1)
_______ Subsection 85.1(1)
_______ Subsection 86(1)
_______ Subsection 87(1)

Question 8

Mr. and Mrs. Green would like to transfer their family business to their son. However, their son does not have the required funds to purchase the company at this time. Which of the following can Mr. and Mrs. Green chose to do in order to make the transfer possible without any immediate tax effects to themselves?

A) They can reorganization their share capital.
B) They can choose to do a wind-up.
C) They can sell their shares to their son.
D) They can choose to amalgamate the company.