Deck 19: Business Acquisitions and Divestiturestax-Deferred Sales

Question 1

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 might Mr. and Mrs. Green consider in order to make the transfer possible without any immediate tax consequences?

A)Sell the assets in the corporation that have appreciated in value
B)Sell their shares to a third party who will hire their son
C)Sell their shares to their son
D)Reorganize their shares, exchanging their common shares for preferred shares of equal value, and then issue a new class of common shares to their son for a nominal value

Answer 1

D

Question 2

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

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

Answer 2

A

Question 3

Samantha is an architect, and she is also the sole shareholder of Sam's Gifts Inc. She wants to
semi-retire from the gift business soon and her three employees have all expressed great interest in taking over the company. They do not have the financial resources necessary to make the purchase at this point in time, however, 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 share reorganization is, and if it would be useful for Samantha in her plans to semi-retire from her gift store.
B)What is a significant risk factor that might be involved with a share reorganization?

Answer 3

A)A share reorganization (within the laws 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 own and operate the gift store effectively.

Question 4

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)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.
B)The vendor generally does not participate in financing the sale of the business.
C)The employees will purchase the corporation's original common shares from the vendor.
D)This method of sale is appropriate when the vendor is unsure of the purchaser's ability to manage the business.

Question 5

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. Brian will not receive any non-share consideration in
the transaction. 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 for Brian, indicating the ACB and the PUC of the new preferred shares.

Question 6

Which of the following is not an example of a method to defer taxes in business reorganizations?

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

Question 7

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