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

Question 1

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.

Answer 1

D

Question 2

Corporation A is a Canadian controlled private corporation and Corporation B is a public Canadian corporation. 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 for the shareholders.
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 for the shareholders.
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 2

A

Question 3

Which of the following scenarios would be 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, with an ACB of $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

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 (an interest free loan and a loan with 10% interest). (Assume that CRA's prescribed rate of interest is 2%, Anthony's personal tax rate is 50%, his marginal tax rate on dividends is 43%, and Glass Co. has income of $200,000, subject to a 13% tax rate.)
B) Has double taxation occurred in either scenario?

Question 5

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 6

Janko Corp. has transferred the following three assets to Jumbo Corp., a Canadian controlled private corporation, under section 85 of the Income Tax Act.
Required:
Determine the following amounts:

A) The minimum amount that Janko may elect to transfer each asset in the rollover based on the information provided
B) Janko's income or loss for tax purposes as a result of the rollover
C) The ACB of the shares received by Janko following the rollover
D) The PUC of the shares received by Janko following the rollover

Question 7

Ben is incorporating his proprietorship and transferring all of the assets to the new company, which he will continue to operate. His long-term assets consist of:
The transfer will also include the company's inventory and accounts receivables. The inventory originally cost $25,000 and has a fair market value of $30,000. The accounts receivable have a fair market value of $10,000 and a tax value of $12,000.
Ben wishes to minimize the tax effect of this business decision. He will receive the maximum note receivable possible and the remainder of the transfer in preferred shares.
Required:

A) What is the elected value for each of the assets transferred under section 85?
B) What is the value of the note receivable that Ben will receive from those assets which benefit from section 85? (Show the amounts for each asset, and the total for all.)
C) What is the value of the preferred shares that Ben must receive in order to defer any income inclusions at this point in time?
D) Identify which assets would not benefit from section 85.
E) If Ben elects to transfer the accounts receivable using a section 22 election, what is the amount of Ben's business loss that must be included in the corporation's income?

Question 8

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. Carrie had originally purchased the shares from the corporate treasury for $10,000. Which of the following tax consequences will Tony recognize?

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