Question 1

Which of the following would not be considered part of the boot received by a transferor in an ITA 85(1) rollover?

Accepted Answer

Redeemable preferred shares of the transferee are considered shares and not boot in an ITA 85(1) rollover, as boot typically refers to non-share consideration like cash, debt securities, or assumption of debt.

Question 2

Lyndon Taylor transferred a piece of machinery to his corporation, making use of Section 85 of the Income Tax Act.The equipment's fair market value was $20,000 and its unde- preciated capital cost was $15,000.The elected transfer price was $15,000.As consideration, Lyndon received a $14,900 promissory note and 5,100 preferred shares with a redemption amount of $1 per share.What is the aggregate adjusted cost base of Lyndon's preferred shares?

Accepted Answer

The aggregate adjusted cost base of the preferred shares is calculated as the elected transfer price ($15,000) minus the promissory note ($14,900), which equals $100.

Question 3

Eric Lehnserr owns 100 percent of Magnus Products Ltd.The shares were originally issued in 1982 for $20,000.In 1986, they were acquired by Eric's father for $25,000.In 2002, Eric's father died and left the shares to Eric.At that time, they were deemed to have been disposed of for $100,000.On the terminal return for Eric's father, a capital gain of $75,000 was reported, and tax was paid on the taxable capital gain of $37,500.Eric wishes to transfer the shares, now valued at $250,000, to a holding corporation owned by himself, electing under Section 85(1) of the Income Tax Act.Magnus Products Ltd.has never paid dividends of any kind.
Which one of the following amounts represents the minimum possible elected amount under Section 85(1), ignoring the impact of consideration received?

Accepted Answer

The minimum possible elected amount under Section 85(1) is the adjusted cost base (ACB) of the shares to Eric, which is $100,000, the value at which they were deemed disposed of when Eric inherited them.

Question 4

Barry Hicks owns a building with a capital cost of $200,000, a UCC balance of $150,000, and a fair market value of $600,000.This property is transferred to a corporation under the provisions of ITA 85(1).The corporation assumes the $50,000 mortgage on the build- ing.In return for the building, Barry receives a promissory note for $40,000 and preferred shares with a fair market value of $510,000.If Barry elects a value that will maximize tax deferral, the adjusted cost base of the preferred shares is:

Accepted Answer

The elected amount under ITA 85(1) should be the lesser of the FMV of the consideration received ($600,000) and the UCC ($150,000) plus the mortgage assumed ($50,000), which is $200,000. The ACB of the preferred shares is the elected amount minus the promissory note, which is $200,000 - $40,000 = $160,000. However, the question asks for the ACB that maximizes tax deferral, which would be the elected amount minus the mortgage assumed, resulting in $200,000 - $50,000 = $150,000. Since the ACB of the preferred shares is the elected amount minus the promissory note, it is $150,000 - $40,000 = $110,000.

Question 5

If land is transferred in an ITA 85(1) rollover and the elected value is less than its adjusted cost base, a loss can always be recognized on the transfer.

Accepted Answer

If the elected value is less than the adjusted cost base, no loss can be recognized on the transfer under ITA 85(1) rollover as the transfer is deemed to be at the adjusted cost base.

Question 6

John Torros has an unlimited life franchise that cost $150,000.His cumulative eligible capital balance is $90,490 and the current fair market value of the franchise is $225,000.Using the provisions of ITA 85(1), this asset is transferred to a corporation in return for cash of $100,000 and common shares with a fair market value of $125,000.Which of the following amounts is the minimum value that John could elect for the transfer.

Accepted Answer

The minimum value that John could elect for the transfer is $120,653, which is the cumulative eligible capital balance of $90,490 plus the lesser of the fair market value of the franchise ($225,000) and the cash received ($100,000).

Question 7

If an asset is transferred in an ITA 85 rollover at an elected value that results in a capital gain to the transferor, the cost to the transferee for CCA purposes will be the transferor's cost, plus one-half of the excess of the elected value over the transferor's cost.

Accepted Answer

This statement is true according to the rules for calculating the transferor's deemed proceeds and the transferee's cost base for an ITA 85 rollover. The transferee's cost base will be the transferor's cost plus one-half of the capital gain realized on the transfer, which is represented by the excess of the elected value over the transferor's cost.

Question 8

Harold Warren incorporated Warren Enterprises Ltd.at the beginning of the current year. In addition to a $100,000 cash contribution, Harold contributed assets with a total tax value of $100,000 and a total fair market value of $150,000.In return, he receives
25,000 voting shares in the new corporation.If he elects a value that will result in mini- mum current Tax Payable, the adjusted cost base of the voting shares will be:

Accepted Answer

The answer of Harold Warren incorporated Warren Enterprises Ltd.at the...

Question 9

The elected transfer price in an ITA 85(1) rollover can never be below the amount of non-share consideration received.

Accepted Answer

According to section ITA 85(1), the elected transfer price should not be less than the non-share consideration received. Therefore, the statement is true.

Question 10

The adjusted cost base of the consideration received by a transferor in an ITA 85 rollover is always allocated first to the fair market value of any non-share consideration, with the re- maining value going to the common shares issued by the transferee.

Accepted Answer

The answer of The adjusted cost base of the consideration...

Question 11

Which of the following assets cannot be transferred to a corporation under the provisions of ITA 85(1)?

Accepted Answer

Under ITA 85(1), assets transferred to a corporation must be eligible for a rollover, which typically excludes inventory or properties held for resale, as these do not qualify for deferral of tax on gains.

Question 12

In an ITA 85 rollover, any required PUC reduction will be allocated first to the preferred shares, with any remaining value allocated to the common shares.

Accepted Answer

In an ITA 85 rollover, any required PUC reduction will be allocated proportionately to all shares, including both preferred and common shares, based on their respective PUC balances. There is no priority given to preferred shares over common shares.

Question 13

Accounts receivable cannot be transferred under the provisions of ITA 85(1).

Accepted Answer

Accounts receivable can be transferred under ITA 85(1) as part of a rollover transaction, provided certain conditions are met.

Question 14

In transferring a business to a corporation, accounts receivable can be transferred using either ITA 22 or ITA 85(1), but not both.One advantage of using ITA 22 is:

Accepted Answer

The answer of In transferring a business to a corporation,...

Question 15

Mary Hanson is holding 1,000 shares of Hanson Operations.They have an adjusted cost base and Paid Up Capital of $20,000.Their current fair market value is equal to $200,000.Electing under ITA 85 in a manner that will maximize tax deferral, the shares are transferred to Hanson Holdings Inc., in return for $8,000 in cash and 250 Hanson Holdings shares with a fair market value of $192,000.The Paid Up Capital of the Hanson Holdings shares will be:

Accepted Answer

The Paid Up Capital of the Hanson Holdings shares will be equal to the adjusted cost base of the Hanson Operations shares, which is $20,000.

Question 16

In a Section 85 rollover, the lowest value that can be elected for the transfer of cumulative eligible capital is the greater of the fair market value of the boot and the least of 4/3 of the cumulative eligible capital balance, the cost of the individual eligible capital property, and the fair market value of the individual eligible capital property.

Accepted Answer

This statement is true as per the provisions of section 85 of the Income Tax Act.

Question 17

The taxpayer who is the transferor in an ITA 85(1) rollover must receive at least one share of the transferee corporation.

Accepted Answer

According to ITA 85(1), the taxpayer who is the transferor in a rollover must receive at least one share of the transferee corporation. Therefore, the statement is true.

Question 18

Sharon Hartly is the owner-manager of a CCPC from which she receives an annual salary of $70,000 per year.For 2011, after deducting her salary, the CCPC will have additional
Income of $150,000.Sharon would like to take additional funds of $40,000 out of the corporation.Which of the following statements is correct?

Accepted Answer

Taking the funds out as salary will increase her earned income, which in turn will allow her to maximize her RRSP contribution room.

Question 19

The elected transfer price in an ITA 85(1) rollover can never be below the capital cost of the asset being transferred.

Accepted Answer

In an ITA 85(1) rollover, the elected transfer price can be set below the capital cost of the asset, as long as it is not below the lesser of the fair market value or the undepreciated capital cost of the asset.

Question 20

In general, the elected transfer price in an ITA 85(1) rollover will not serve as which of the following values?

Accepted Answer

The elected transfer price in an ITA 85(1) rollover generally serves as the adjusted cost base for the transferee and the proceeds of disposition for the transferor, but not as the capital cost of depreciable property transferred to the transferee. The capital cost for depreciable property is determined by other rules.

Quiz 2: Byrd Chens Canadian Tax Principles 2