Deck 14: Multiple Corporations and Their Reorganization

Question 1

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?

A)Section 86 of the Income Tax Act would allow Jack to restructure the ownership of his company and would result in an immediate tax consequence for him.
B)Section 86 of the Income Tax Act would allow Jack to restructure the ownership of his company and would result in the conversion of his common shares to preferred shares.
C)Section 86 of the Income Tax Act would allow Jack to restructure the ownership of his company and would result in a continual growth of the new preferred shares.
D)Section 86 of the Income Tax Act would allow Jack to restructure the ownership of his company and would result in an immediate tax consequence for his employees.

Answer 1

B

Question 2

Tom and Bob are equal shareholders of a profitable company with 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?

A)Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.
B)The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal expenditures without paying a second level of tax.
C)Dividends received by the holding companies from the operating company must be invested in the same ventures.
D)The holding companies would receive the dividends from the operating company, free of tax, to be invested in ventures of Tom and Bob's separate choices.

Answer 2

D

Question 3

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?

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

Answer 3

C

Question 4

When will Hardware be able to use the non-capital loss from Tools.

Question 5

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.

Question 6

The Browns have owned and operated The Tile Company Inc. for thirty years and are ready to retire. Their long-time employee wishes to buy the company but does not have the funds available to do so at this time. Which section of the Income Tax Act would allow the Browns to transfer the value of their common shares to preferred shares on a tax-deferred basis while issuing new common shares to the employee for a nominal value?

A)Section 87
B)Section 86
C)Section 88
D)This transaction is not within the spirit of the Income Tax Act and would be subject to GAAR.

Question 7

Which of the following is one of the conditions necessary for an amalgamation to result in a tax-free combination?

A)At least one of the corporations must be Canadian.
B)The two corporations must be in a similar line of business.
C)50 percent of the assets and liabilities of the old corporation must become assets and liabilities of the new corporation.
D)All of the shareholders of the old corporations must become shareholders of the new corporations.

Question 8

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)Presuming the anti-avoidance rules of Subsection 55(2)apply, how much is the capital gain that H will have to realize on this sale?
B)What is the value of Small Co.'s 'safe income'?