Deck 17: Other Rollovers and Sale of an Incorporated Business

Question 1

Both ITA 87, Amalgamations, and ITA 88(1), Wind-Up Of A 90 Percent Owned Subsidiary, provide for a bump-up of asset values. Describe the two basic limits on the amount of this bump-up.

Answer 1

The limits on the asset bump up are described in the text as follows:
• The basic amount of the bump-up is found in ITA 88(1)(d)(i)and . This amount is the excess of the adjusted cost base of the subsidiary shares held by the parent, over the sum of:
• the tax values of the subsidiary's net assets at the time of the winding-up; and
• dividends paid by the subsidiary to the parent since the time of the acquisition (including capital dividends).
• ITA 88(1)(d)(ii)further limits the amount that can be recognized to the excess of the fair market value of the subsidiary's non-depreciable capital property over their tax values at the time the parent acquired control of the subsidiary.

Question 2

When new shares are issued in an ITA 86(1)or ITA 86(2)reorganization, how is their paid up capital determined?

Answer 2

The paid up capital (PUC)of new shares issued in either an ITA 86(1)or and ITA 86(2 reorganization would be equal to their legal stated capital, less a PUC reduction. This reduction calculation would start with the legal stated capital of the shares. From this total, the formula requires the subtraction of any excess of the PUC of the old shares over any non-share consideration received. If the non-share consideration exceeds the old PUC, the reduction will be equal to the legal stated capital, resulting in a PUC of nil. This calculation is not altered by the presence of a gift to a related party.

Question 3

Describe, in general terms, the type of situation in which ITA 85.1, Share For Share Exchange, is used. What is the major tax advantage of using this rollover provision?

Answer 3

The usual situation in which ITA 85.1 is applied involves a shareholder of a Canadian corporation (Corporation A)who wishes to sell his shares, on an arm's length basis, to another Canadian corporation (Corporation B). ITA 85.1 allows the shareholder to exchange his shares in Corporation A for shares of Corporation B, with the transaction taking place at the adjusted cost base of the Corporation A shares. That is, the proceeds of disposition for the Corporation A shares will be their adjusted cost base, and this will also be the cost of these shares to the acquiring company. The major tax advantage is the fact that any gain on the Corporation A shares is deferred until such time as the Corporation B shares are sold.

Question 4

Jerome Barris is 85 years old and, while his spouse is deceased, he has three children, ages 45, 50, and 52. He owns all of the outstanding common shares of Barris Ltd., a Canadian controlled private corporation. These shares have a PUC and adjusted cost base of $50,000, and a current fair market value of $3 million. He would like to retain operating control of Barris Ltd. However, given his advanced age, he would like to transfer any future growth in the value of the Company to his three children. Briefly explain how ITA 86, Exchange Of Shares In A Reorganization, could be used to accomplish the results desired by Mr. Barris.

Question 5

ITA 86(2)has special rules that must be applied when a Section 86 reorganization involves a gift to a related party. What circumstances create such a gift situation?

Question 6

Subsections 88(1)and 88(2)cover two different types of transactions. Describe these two types of transactions.

Question 7

When new shares are issued in an ITA 86(1)or ITA 86(2)reorganization, how is their adjusted cost base determined?

Question 8

Briefly describe the general rules applicable to the vendor in a Section 85.1 share for share exchange.

Question 9

When preferred shares are issued in an ITA 86(1)reorganization, it is important that they contain provisions which establish the market value of such shares. List three provisions that are used to accomplish this goal.

Question 10

Briefly describe the calculation of the PUC of new shares issued in a reorganization of capital under ITA 86(1).

Question 11

List two conditions that are necessary for the ITA 87 amalgamation legislation to apply.

Question 12

What is the tax position of the shareholders of a company that has been combined with another company under the provisions of ITA 87, Amalgamations.

Question 13

Estate freezes can be carried out using either ITA 85(1)or ITA 86(1). What are the major advantages of using ITA 86(1), rather than ITA 85(1)?

Question 14

In a reorganization of capital under ITA 86, it is necessary to calculate both a proceeds of redemption and a proceeds of disposition. How do these two calculations differ if there is no gift involved?

Question 15

When a corporation is wound up under the provisions of ITA 88(2), assets will be sold and liabilities will be settled. When the resulting proceeds are distributed to shareholders, the distribution will usually be made up of several different components. Briefly indicate the components that can be included in this type of distribution.

Question 16

When a reorganization of capital involves a gift to a related person, the provisions of ITA 86(2)modify the rules applicable to such reorganizations. Briefly describe the main changes that result from these modifications.

Question 17

Several conditions must be met in order for the provisions of ITA 86, exchange of shares in a reorganization, to apply. List two of these conditions.

Question 18

If a parent company wishes to incorporate the assets of a majority owned subsidiary into its operations, this goal can be accomplished either through an amalgamation, under ITA 87, or through the wind-up procedures established in ITA 88(1). Briefly describe the different tax effects that result from choosing one or the other of these alternative procedures.

Question 19

The provisions of ITA 85.1, share for share exchange, apply automatically unless the vendor opts out. How does the vendor opt out of this Section?

Question 20

There are several conditions that are required for an ITA 85.1 rollover to be applicable. List three of these conditions.

Question 21

When used in an ITA 86(1)exchange of shares in a reorganization, preferred shares cannot have voting rights.

Question 22

In an ITA 85.1 share-for-share exchange, the vendor must not receive any non-share consideration.

Question 23

ITA 85.1 was designed to be used in situations where a public company acquires a widely held corporation with a large number of shareholders.

Question 24

In an ITA 86(1)exchange of shares in a reorganization, the transferor cannot receive any non-share consideration.

Question 25

If an investor uses a conversion provision to exchange his debt securities for common shares in the same company, there is a rollover provision which can prevent any excess of the value of the common stock over the value of the debt security from being subject to tax.

Question 26

If, when a corporation is wound up under the provisions of ITA 88(2), the distribution of assets to the shareholders exceeds the PUC of the shares being cancelled, the excess will be treated as a capital gain, one-half of which will be included in the taxpayer's Net Income For Tax Purposes.

Question 27

The vendor of a business may have a significant amount of assets that are used under the provisions of capital leases. In most situations, any existing leasing arrangements can be transferred in the process of selling a business. Further, some leased properties may have experienced significant increases in value (e.g., a long-term lease on office space in a market where such space has become scarce). In such circumstances, a long-term lease may be of significant value to the purchaser of a business. Despite the presence of such values, it is not uncommon for leases to be ignored in the purchase agreement and, as a consequence, in the allocation of tax values for the purchasing company. This, in effect, means that the value of these leases ends up as a component of purchased goodwill.
Discuss the tax consequences, to both the purchaser and the vendor, of not specifying the value of any long-term capital leases in the agreement of purchase and sale of a business.

Question 28

In an ITA 86 exchange of shares in a reorganization, if the transaction involves a gift to a related party, the proceeds of the disposition for capital gains purposes on the old shares will be equal to the lesser of:
• the non-share consideration, plus the gift and
• the fair market value of the old shares.

Question 29

In general, the purchaser of a corporation would prefer to buy its assets rather than its shares. Provide three reasons for this preference.

Question 30

In an ITA 86 exchange of shares in a reorganization, if the transferor receives shares with a fair market value that is greater than the fair market value of the shares given up, it may be considered a gift to a related party.

Question 31

In an ITA 87 amalgamation, losses carried forward from the amalgamating companies cannot be used by the amalgamated company until the first taxation year beginning subsequent to the amalgamation.

Question 32

In an ITA 86 exchange of shares in a reorganization, if the transferor received non-share consideration in excess of the PUC of the old shares, the PUC of the new shares issued will be reduced to nil.

Question 33

When a 90 percent owned subsidiary is wound up under the provisions of ITA 88(1), the subsidiary will not be able to claim CCA in its final year as a separate entity.

Question 34

The most common application of the ITA 86 exchange of shares in a reorganization is to transfer an unincorporated business to a corporation.

Question 35

In an ITA 86 exchange of shares in a reorganization, the transferor must transfer all of the shares of all classes that he owns in the transferee corporation.

Question 36

When a taxpayer receives a payment for signing a restrictive covenant, the general rule is that the full amount must be included in the taxpayer's income when it is received or receivable. The proposed legislation on this subject provides for three exceptions to this general rule. Briefly describe these exceptions.

Question 37

Companies sometimes issue bonds that can be converted, at the discretion of the holder, into common shares of the company. In general, conversion will only occur if the fair market value of the common shares available upon conversion exceed the fair market value of the bonds. What are the tax consequences to the holder of such bonds when they exercise their option to convert?

Question 38

If a parent company has a subsidiary, its assets can always be transferred to the parent on a tax free basis using either an ITA 87 amalgamation or, alternatively, an ITA 88(1)winding-up of a 90 percent owned subsidiary.

Question 39

When the assets of a Canadian controlled private corporation are sold, the following assets will usually be involved in the sale:
• Accounts Receivable
• Inventory
• Depreciable Assets
• Goodwill
Briefly describe the tax implications resulting from the sale of each of the preceding types of assets to the selling company.

Question 40

In a share for share exchange under ITA 85.1, the transferor cannot control the acquiring company subsequent to the rollover transaction.

Question 41

Which of the following is NOT an advantage that can be obtained by using ITA 85.1 in a situation where a diverse group of shareholders will exchange their shares in one company for shares in an acquiring corporation?

A)There is no need for each shareholder to file an election, the provisions of ITA 85.1 apply automatically
B)Individual vendors may choose to defer the gain from the transaction in their income.
C)The vendor can receive cash equal to an amount of the PUC of the shares tax-free.
D)Individual vendors may choose to include the gain or loss from the transaction in their income.

Question 42

Tiffany owns shares in the public corporation, Zoom Inc. She has received an offer from the public corporation Mooz Inc. to exchange all of her shares in Zoom Inc. Her adjusted cost base for these shares is $28,000. They have a fair market value of $39,000 and a PUC of $10,000. Her Zoom shares would be exchanged for shares of Mooz Inc. with a fair market value of $39,000 and a legal stated capital of $39,000. What is the adjusted cost base of the Mooz Inc. shares received by Tiffany under the provisions of Section 85.1, "Share For Share Exchanges"?

A)$10,000
B)$28,000
C)$33,500
D)$39,000

Question 43

Jerome Owen owns 70 percent of the common shares of Nexto Ltd. Jerome's shares have an adjusted cost base of $1,050,000. The Nexto common shares have a total PUC of $2,300,000 and a total fair market value of $2,500,000. Using the provisions of ITA 86, Jerome exchanged his shares for cash of $1,050,000 and preferred shares with a legal stated capital and fair market value of $700,000. What is the PUC of Jerome's preferred shares?

A)Nil.
B)$560,000.
C)$140,000.
D)$700,000

Question 44

Which of the following statements related to ITA 87 amalgamations is correct?

A)An amalgamation cannot increase the total amount of income eligible for the manufacturing and processing deduction.
B)By bringing together a profitable and an unprofitable company, an amalgamation can result in a faster write off of capital assets through CCA deduction.
C)An acquisition of control can be effected through an amalgamation which would enable prior year net capital losses of both predecessor companies to be used.
D)After an amalgamation, the losses of one of the predecessor companies cannot be used against the taxable income of the other predecessor company.

Question 45

John Smurt owns 80 percent of the common shares of Smurt Ltd. John's shares have an adjusted cost base of $600,000. The Smurt common shares have a total PUC of $1,000,000, and a total fair market value of $2,500,000. Using the provisions of ITA 86, John exchanged his shares for cash of $600,000 and preferred shares with a legal stated capital and fair market value of $1,400,000. What is the adjusted cost base of John's preferred shares?

A)Nil.
B)$250,000.
C)$1,400,000.
D)$650,000.

Question 46

Mr. Couture would like to transfer his corporation to his son who has started to work in the business. His son will not have the funds to purchase all of the shares for at least 5 years. Which of the following will permit Mr. Couture to transfer the future growth of the company to his son without any immediate tax effect for himself?

A)A sale of his shares to his son with payment in 5 years
B)A reorganization of share capital
C)An amalgamation
D)A wind-up

Question 47

In a situation where a parent decides to combine with a subsidiary, which of the following statements is correct?

A)If the parent owns 90% or more of any class of capital stock of the subsidiary, it is possible to combine the companies using either ITA 87 or ITA 88(1).
B)If the parent owns 90% or more of any class of capital stock of the subsidiary, it will be able to take advantage of a bump up in asset values, regardless of the approach taken to complete the transaction.
C)If the parent owns 90% or more of the shares of each class of capital stock of the subsidiary, it will be able to take advantage of a bump up in asset values, regardless of the approach taken to complete the transaction.
D)If the parent owns 90% or more of the shares of each class of capital stock of the subsidiary, it is possible to combine the companies using either ITA 87 or ITA 88(1).

Question 48

Which of the following statements is NOT correct with respect to the asset bump up available in some ITA 87 amalgamations and wind-up transactions under ITA 88(1)?

A)The bump up is available in a vertical amalgamation when the parent company owns 100 percent of the subsidiary and in a wind up when the parent company owns 90 percent or more of the subsidiary.
B)The bump up is only available in a wind up when the parent company owns 100 percent of the subsidiary.
C)In a wind up, the bump up is only available on non-depreciable assets of the subsidiary.
D)In a vertical amalgamation, the bump up is only available on the non-depreciable assets of the subsidiary.

Question 49

With respect to the application of ITA 87 to amalgamations, which of the following statements is correct?

A)Any capital dividend accounts that existed in the records of the two predecessor companies cannot be carried forward.
B)There is no "bump-up" of the asset values of the two predecessor companies.
C)Losses of the two predecessor company cannot be used until the first taxation year of the amalgamated company that begins after the date of the amalgamation.
D)The depreciable capital property of the predecessor companies will be carried forward to the tax records of the amalgamated company at UCC values.

Question 50

Shareholders of predecessor corporations that amalgamate are deemed to have disposed of their shares for proceeds equal to the adjusted cost base of the shares as long as certain conditions are met. Which of the following is NOT one of the necessary conditions?

A)The shareholders must not receive any consideration other than shares of the amalgamated company.
B)The original shares must be capital property of the shareholders.
C)The shareholders must receive non-share consideration that is equal to the adjusted cost base of their shares.
D)The amalgamation must not result in a deemed gift to a person related to the shareholders.

Question 51

When preferred shares are issued in an ITA 86 reorganization, it is important that they have characteristics that serve to establish their fair market value. Which of the following would NOT be useful in establishing the fair market value of preferred shares?

A)A fixed dividend rate.
B)A claim to assets that has priority over the common shares in the event of liquidation.
C)A provision which requires redemption at a specified value at the discretion of the shareholder.
D)Voting rights.

Question 52

An individual owns 100 percent of the shares of a CCPC. He wishes to exchange these shares for shares of a large public company without incurring a tax liability. Which rollover provision would be the easiest to use for this purpose?

A)ITA 85(1)- Transfer of property to a corporation.
B)ITA 87 - Amalgamation.
C)ITA 85.1 - Share for share exchange.
D)ITA 51 - Convertible property.

Question 53

Which of the following statements about ITA 85.1 is NOT correct?

A)This provision is commonly used in business combination transactions.
B)The vendor and the purchaser must be dealing with each other at arm's length.
C)The vendor can receive a combination of shares and non-share consideration in return for the shares he is giving up.
D)The vendor will be deemed to have disposed of his shares for proceeds equal to their adjusted cost base.

Question 54

Which of the following values will NOT flow through from a predecessor company to an amalgamated company as a result of an amalgamation under ITA 87?

A)Eligible RDTOH of a public company.
B)GRIP when the amalgamated company is a CCPC.
C)Non-capital losses.
D)Net capital losses.

Question 55

Jeri Nardwal owns 80 percent of the common shares of Nardwal Ltd. Her son owns the other 20 percent. Her common shares have an adjusted cost base and PUC of $960,000. The fair market value of her shares is $4,800,000. She exchanges these shares for $500,000 in cash and preferred shares with a legal stated capital and fair market value of $3,840,000. What is the adjusted cost base of the preferred shares?

A)$460,000.
B)$3,840,000.
C)Nil.
D)$960,000.

Question 56

Which of the following is NOT one of the conditions necessary for the ITA 87(1)(amalgamation)rollover to apply?

A)All the predecessor corporations must be Canadian controlled private corporations.
B)All shareholders of the predecessor corporations must receive shares of the amalgamated corporation as a result of the amalgamation.
C)All of the assets and liabilities of the predecessor corporations, other than intercompany balances, must be transferred to the amalgamated corporation in the amalgamation.
D)The transfer must be supported by corporate legislation that identifies the transaction as an amalgamation.

Question 57

With respect to an exchange of shares in an ITA 86 reorganization, which of the following statements is NOT correct?

A)The cost of the new shares will be equal to the cost of the old shares, reduced by the non-share consideration received.
B)The PUC of the new shares will be equal to their legal stated capital.
C)The proceeds of redemption will be equal to the PUC of the new shares, plus any non-share consideration received.
D)The proceeds of disposition will be equal to the cost of the new shares, plus any non-share consideration received.

Question 58

Several conditions are required in order that the provisions of ITA 86 (Exchange Of Shares In A Reorganization)apply. Which one of the following conditions is NOT required?

A)All of the outstanding shares of the particular class must be exchanged.
B)The transferor of the original shares must receive shares of the reorganized corporation as consideration for his shares.
C)The new shares that will be issued must be authorized by the corporation's articles of incorporation (currently, or through an amendment prior to the reorganization).
D)The original shares must be held by the owner as capital property.

Question 59

Mamma Mia is the sole shareholder of iPasta. She would like her son to eventually takeover the company so she can retire. If she chooses to use ITA 86, "Exchange Of Shares In A Reorganization", which of the following statements is correct?

A)Mamma Mia could restructure the ownership of her company, which would result in no immediate tax consequence for herself, with future growth accruing to her son.
B)Mamma Mia could restructure the ownership of her company, which would result in an immediate tax consequence for herself, with future growth accruing to her son.
C)Mamma Mia could restructure the ownership of her company, which would result in an immediate tax consequence for her son, with future growth accruing to her son.
D)Mamma Mia could restructure the ownership of her company, but her son must purchase her common shares at their fair market value to have future growth accruing to him.

Question 60

Ms. Takase is the sole shareholder of Takase Ltd. She owns 2,500 shares with a PUC and adjusted cost base of $400,000, and a fair market value of $1,000,000. Giant Holdings Ltd. acquires these shares in return for 10,000 of its common shares, which are currently trading for $100 per share. The rollover is completed using ITA 85.1. The results of the transaction will be:

A)Ms. Takase will report a capital gain of $600,000 as a result of her deemed disposition. The adjusted cost base of her new shares in Giant Holdings Ltd. will be nil.
B)Ms. Takase will be deemed to have disposed of her Takase Ltd. shares for an amount equal to their adjusted cost base. There will not be a capital gain to report on this disposition.
C)The shares of Giant Holdings Ltd. that Ms. Takase acquires will have a deemed adjusted cost base of $1,000,000, the greater of the fair market value and the PUC of the Takase Ltd. shares. There will not be a capital gain to report on this disposition.
D)The shares of Giant Holdings Ltd. that Ms. Takase acquires will have a deemed PUC of $1,000,000. She will report a capital gain on the disposition of $600,000.

Question 61

Indicate which of the following features would be considered an advantage of acquiring assets rather than shares in the purchase of an incorporated business.

A)The availability of the lifetime capital gains deduction.
B)The ability to carry forward non-capital losses after the acquisition.
C)The ability to recognize the acquired company's goodwill.
D)The ability to avoid land transfer tax.

Question 62

Ku Jung owns all of the shares of Jay Ltd. His adjusted cost base for these shares is $5,000. He has decided to retire, and has wound up the Company under the provisions of ITA 88(2). After the assets have been sold and all corporate taxes paid, there is $700,000 available for distribution. The balances in the tax accounts of Jay Ltd. are as follows: If Mr. Jung properly files all elections that would minimize the tax effect of the distribution, what is the maximum amount he could receive tax free?

A)$1,000
B)$5,000
C)$100,000
D)$101,000

Question 63

Jasmine Lee owns all of the shares of Tee Ltd. Her adjusted cost base for these shares is $50,000. Because of declining sales, she has decided to wind up the Company under the provisions of ITA 88(2)and, after the assets have been sold and all corporate taxes paid, there is $2,000,000 available for distribution. The balances in the tax accounts of Tee Ltd. are as follows: If Jasmine properly files all elections that would minimize the tax effect of the distribution, of the following statements, which one is correct?

A)Jasmine will receive dividends subject to tax of $1,500,000 (before any gross up), as well as a taxable capital gain of $25,000, when she receives the $2,000,000 distribution.
B)Jasmine will have a taxable capital gain of $975,000 when she receives the $2,000,000 distribution.
C)As a rollover provision is being used, there will be no current tax consequences when she receives the $2,000,000 distribution.
D)Jasmine will receive dividends subject to tax of $1,500,000 (before any gross up), as well as a taxable capital gain of $225,000, when she receives the $2,000,000 distribution.

Question 64

With respect to the application of ITA 88(1), winding up of a 90 percent owned subsidiary, which of the following statements is NOT correct?

A)The GRIP balance will flow through to the parent company if both the subsidiary and the parent were CCPC's before the windup.
B)LRIP balances will only flow through to the parent if the subsidiary was a CCPC.
C)The subsidiary is deemed to have disposed of its assets at their cost amount, which is an amount that is defined differently for different asset types.
D)The subsidiary will not claim CCA on its assets in the year of the windup, but the parent is able to claim CCA on subsidiary assets in the windup year.

Question 65

Which of the following conditions is NOT necessary for an amalgamation to result in a tax-free combination?

A)It must be supported by corporate legislation which identifies the transaction as an amalgamation.
B)All of the predecessor corporations must be Canadian controlled private corporations.
C)All of the assets and liabilities of the predecessor corporations, other than intercompany balances, must be transferred to the amalgamated corporation in the amalgamation.
D)All shareholders of the predecessor corporations must receive shares of the amalgamated corporation due to the amalgamation.

Question 66

During the current year, all of the assets of Linden Enterprises, a Canadian controlled private corporation, were sold. Among the assets was goodwill with a fair market value of $425,000. As the goodwill was internally generated, its capital cost was nil. Which of the following statements is correct?

A)Linden will report active business income of $318,750, with no addition to the capital dividend account.
B)Linden will report a taxable capital gain of $212,500, and there will be a $212,500 addition to the capital dividend account.
C)Linden will report active business income of $212,500, and there will be a $212,500 addition to the capital dividend account.
D)Linden will report active business income of $318,750, and there will be a $106,250 addition to the capital dividend account.

Question 67

Ariella Buxo owns convertible bonds of Lion Holdings Inc. Ariella acquired these bonds at their par value of $100,000. The bonds are convertible into 1,000 shares of the common stock of Lion Holdings Inc. At the time of her purchase of the bonds, the common shares were trading at $95 per share. The bonds are converted when the common shares are trading at a price of $125 per share. The conversion of the bond takes place under the provisions of ITA 51 and will result in:

A)a capital gain of $25,000.
B)no capital gain.
C)a deemed dividend of $25,000.
D)a capital gain of $30,000.

Question 68

Okanagan Limited has a November 30 year end, while its 95 percent owned subsidiary Valley Limited has a March 31 year end. Valley Limited is wound up using the rollover provisions of ITA 88(1)on September 15, 2020. At the time, Valley Limited has a non-capital loss of $150,000 for the period from April 1 to September 15, 2020. The earliest taxation year in which Okanagan Limited can make use of the $150,000 loss is the taxation year ending:

A)September 15, 2021.
B)November 30, 2021.
C)November 30, 2022.
D)March 31, 2021.

Question 69

With respect to the application of ITA 88(1), winding up of a 90 percent owned subsidiary, which of the following statements is NOT correct?

A)A write up of non-depreciable capital property may be available.
B)Both the subsidiary and the parent will have a deemed year end.
C)Subsidiary losses will become available to the parent company in its first taxation year which begins after the windup.
D)The tax values of the subsidiary assets will be carried forward to tax records of the parent company.

Question 70

Ms. Laura Cooper is the sole shareholder of Cooper Inc. It is a Canadian controlled private corporation and its common shares have a fair market value of $2,950,000, an adjusted cost base (ACB)of $1,375,000, and a paid up capital (PUC)of $1,375,000. At this time, Cooper Inc. has no balance in its GRIP account. Ms. Cooper exchanges all of her Cooper Inc. shares for cash of $1,375,000 and preferred shares that are redeemable for $1,575,000.
Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations.

Question 71

What is the purpose of the bump up in the tax values of the assets of a subsidiary that is sometimes available in a vertical amalgamation or wind up of a 90% owned subsidiary?

A)The bump up gives full recognition to the fact that the cost of acquiring a subsidiary usually exceeds both the total carrying values and total fair values of the subsidiary's net assets.
B)The bump up gives partial recognition to the fact that the cost of acquiring a subsidiary usually exceeds both the total carrying values and total fair values of the subsidiary's net assets.
C)The bump up gives partial recognition to the fact that the cost of acquiring a subsidiary always exceeds the total carrying values and total fair values of the subsidiary's net assets.
D)The bump up gives full recognition to the fact that the cost of acquiring a subsidiary exceeds the total carrying values and total fair values of the subsidiary's net assets.

Question 72

Yamaguchi Inc purchases all the assets of Ito Inc. after months of negotiation. All of the assets acquired have fair market values in excess of their related tax values. Which of the following will NOT be a result of this transaction?

A)Yamaguchi will obtain a higher tax value for the assets transferred resulting in higher future CCA deductions.
B)Goodwill can be recognized and as a result, Yamaguchi will be able to take CEC deductions in the future.
C)Yamaguchi will be held liable for future tax reassessments of Ito Inc.
D)The non-capital loss carry forward of Ito Inc. will be lost and cannot be utilized by Yamaguchi Inc.

Question 73

Nancy recently received an offer for the shares of her corporation, Eager Beaver Consultants Ltd. Nancy's shares have an adjusted cost base of $600,000. The Company is not a qualified small business corporation for purposes of the lifetime capital gains deduction. Although Nancy would like to sell her shares and retire, she will only sell her shares if her after tax retention from the sale totals at least $2 million. Assuming that Nancy's combined federal and provincial marginal tax rate is 50 percent, what is the minimum price Nancy should accept for her shares?

A)$2,466,667.
B)$4,600,000.
C)$2,840,000.
D)$3,400,000.

Question 74

Danton is the only shareholder of a corporation that has liquidated all of its assets. After paying all of its liabilities, there is $450,000 in cash available for distribution on the winding up. The common shares have a PUC of $45,000, Danton's adjusted cost base is $80,000 and there is a balance in the company's capital dividend account of $51,000. There is no balance in the company's GRIP account. The distribution to Danton is:

A)a capital dividend of $51,000, along with a taxable non-eligible dividend of $354,000.
B)a capital dividend of $51,000, along with a taxable eligible dividend of $354,000.
C)return of capital of $45,000, along with a taxable non-eligible dividend of $405,000.
D)a capital dividend of $51,000, along with a taxable non-eligible dividend of $405,000.

Question 75

Sundance Ltd. is Canadian controlled private corporation. All of its shares have always been owned by Rob Red. The shares have a fair market value $900,000, a PUC of $200,000, and an adjusted cost base of $200,000. The Company has no balance in its GRIP account. At this time, Mr. Red exchanges all of his Sundance shares for cash of $200,000 and preferred shares that are redeemable for $700,000.
Determine the ACB and the PUC of the redeemable preferred shares. Indicate the amount, and type, of any income that will result from this transaction. Show your calculations.

Question 76

Which of the following is one of the conditions required for ITA 51 (Convertible Properties)to apply?

A)The exchange must be part of a reorganization of capital or a rollover of property by shareholders to a corporation.
B)The exchange must involve non-share consideration.
C)The exchange must involve an exchange of convertible debt for common or preferred shares.
D)The exchange must not involve any consideration other than the securities being exchanged.

Question 77

Two unrelated companies, one of which has both non-capital and net capital losses to carry forward, are amalgamated on January 1, 2020. The resulting new company is Parent Inc. All three companies have a December 31 year end. After amalgamation, the shareholders of the company with losses own 10% of Parent Inc. and the shareholders of the other company own 90%. During the year ended December 31, 2020, Parent Inc. has Net Income for Tax Purposes which includes a taxable capital gain. Parent Inc. continues to carry on the businesses of both amalgamated corporations. Which of the following statements best describes the situation of Parent Inc. with respect to the deduction of the losses incurred prior to amalgamation?

A)All losses carried forward from the predecessor companies will be deductible to Parent Inc. as soon as the amalgamation is completed.
B)Parent Inc. will not be able to carry any of the losses forward and use them against income of the amalgamated company.
C)Parent Inc. will be able to utilize the non-capital loss against profits from the same business in which the loss was incurred beginning in the 2020 taxation year. The net capital losses cannot be utilized by Parent Inc.
D)Parent Inc. will be able to utilize the non-capital loss against profits from the same business in which the loss was incurred beginning in the 2021 taxation year. The net capital losses cannot be utilized by Parent Inc.

Question 78

Mr. Germotte has two offers to purchase his solely owned corporation, one for the assets, one for the shares. In considering the asset offer, which of the following statements is correct?

A)The sale of assets will avoid having to take the corporation through a winding-up procedure.
B)Mr. Germotte can take advantage of the lifetime capital gains deduction if the corporation is a qualified small business corporation.
C)Mr. Germotte may be subject to taxes on business income and capital gains.
D)The corporation may be subject to taxes on business income and capital gains.

Question 79

Farnum Ltd. is a Canadian controlled private corporation that was established by Freddy Farnum with an original investment of $400,000. Farnum Ltd. is not a qualified small business corporation. In 2019, Freddy sold all of the shares to John Gage for $700,000. In early, 2020, John is approached by a large public company, Gross Enterprises, that offers him 200,000 of their shares in return for all of John's shares. The offer is accepted by John and, at this time, the shares of Gross Enterprises are trading at $6 per share. Indicate the tax consequences of this transaction to both John and Gross Enterprises.

Question 80

Mr. Morgan Forbes is the sole shareholder of Forbes Ltd., a Canadian controlled private corporation that is not a qualified small business corporation. The corporation was established several years ago by Mr. Forbes with an investment of $540,000. It has identifiable net assets with a fair market value of $2,640,000. The shares of his Company are acquired by a large publicly traded company, Megopolis Ltd., through the issuance of 75,000 new Megopolis shares. At the time of this business combination, the Megopolis Ltd. shares are trading at $36 per share. Indicate the tax consequences of this transaction to both Mr. Forbes and Megopolis Ltd.