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

Question 1

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, 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 for Brian, indicating the ACB and the PUC of the new preferred shares.

Answer 1

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 preferred 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 2

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

A) The corporations have only one, or relatively few, shareholders.
B) The business of these corporations is often sold due to the owner's wish to retire.
C) The sale of these corporations may be structured in a way that allows family members or employees with minimal funds to buy the business.
D) These corporations pay regular dividends to their public shareholders.

Answer 2

D

Question 3

Corporation A is selling a depreciable asset to Corporation

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

Answer 3

B

Question 4

Anne owns 100% of the shares of ABC Co. and her husband, Zane, owns 100% of the shares of XYZ Co. The shares of ABC Co. are valued at $50,000 with an ACB and PUC of $1000. The couple is planning for XYZ Co. to pay Anne $50,000 in cash for her shares in ABC Co. Which of the following will result from this sale?

A) Anne will recognize a capital gain of $50,000.
B) Anne will recognize a capital gain of $49,000.
C) Anne will recognize a deemed dividend of $50,000 and a capital gain of $0.
D) Anne will recognize a deemed dividend of $49,000 and a capital gain of $0.

Question 5

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, although 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?

Question 6

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 their shares to their son
B) Sell their shares to a third party who will hire their son
C) 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
D) Sell the assets in the corporation that have appreciated in value

Question 7

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