Ms. Brown is the sole proprietor of a business that began in 2005 specializing in retail coffees. The business has a December 31 year-end. With the advice of her lawyer, she proposes to transfer the assets of the business on January 2, 2014 to a newly incorporated company called Brown Coffees Ltd. Ms. Brown will own all of the common shares. This corporation will have a December 31 year-end. Ms. Brown has provided you with the following balance sheet and additional information concerning her proprietorship:
BROWN COFFEES
BALANCE SHEET
December 31, 2013
Assets
Current assets
Cash $15,000
Inventory, at cost (FMV: $43,000) 39,000
54000
Fixed assets
Land, at cost (FMV: $210,000) 60,000
Building, at cost (FMV: $180,000) $160,000
Less: accumulated depreciation 95000 65000
$179,000
Liabilities and Proprietor's Equity
Current liabilities
Accounts payable $20,000
Proprietor's equity 181,000 159000
$179,000
Additional Information:
1. Ignore any goodwill on transfer.
2. The company has always used CCA rates for amortization of capital assets.
3. Liabilities of the proprietorship will be assumed by the corporation.
4. Ms. Brown has a net capital loss of $10,000 that she would like to use if possible.
Required:
1. What transfer price should be elected for Inventory, Land and Building if an election is made under Section
85(1) for each asset? (Don't forget to elect a higher value for one of the appropriate assets to use up the
$10,000 net capital loss.)
2. How much non share consideration or "Boot" should be taken back for each asset?
3. Based on your answer in (2.), what is the paid-up capital ("PUC") of the shares received a
(slide93)
ABI
BC Low rate= 13.5%(Up to $500,000)
BC High rate= 26%.(Above $500,000)
AII= 45&2/3%
Dividends from TCC= 33&1/3%
Exception for connected
problem 2
You own 100% of the shares of CCPC Co and CCPC Co is located in BC. CCPC Co has the following
income sources for 2013:
Active Business income, earned in Canada $502,000
Interest income from Canadian bonds 10,000
Dividends received from the Bank of Montreal (publicly traded) 30,000
Dividends received from 30% owned investment in SmallCo, another CCPC 10,000
SmallCo received a dividend refund of $5,000.
SmallCo does not have a GRIP balance
Capital gains 30,000
Capital losses 20,000
The balance in CCPC Co's RDTOH at December 31, 2011 is $15,000. CCPC Co's active business income has always been taxed at the low rate prior to this year. CCPC Co did not receive dividends from other companies prior to 2013. The 2013 capital gains and losses are the only ones CCPC Co has ever had.
Required:
1. Determine the total taxes payable (Federal and BC) for CCPC Co in 2013. Please use the summarized tax rates for Business Income, AII and Dividends used in class rather than the long drawn out calculation used in the text. Tax rates are those used on slide 93 of the in-class Powerpoint slides(same as those used in class)
2. How large of a dividend would CCPC Co have to pay in 2013 to clear out the RDTOH account? Assume the company pays a dividend equal to this amount.
problem 3
This is a continuation of problem 2. You now (personally) receive the dividend from CCPC Co (part 2. of problem 2 above.)
You want to pay the least amount of tax possible. find out the minimum amount of tax you would pay on this dividend. Assume a personal tax rate of 41% and dividends equal to the dividend tax credit(s). This is just the marginal (additional) tax as you will already have other income so ignore tax credits other than the Dividend Tax Credit. Hint - It might be helpful to take a look at the Section 88(2) problem we did in class.