Problem
Several years ago, Ms. Katherine French acquired a business location that included land and a building for a total of $950,000. At the time, it was estimated that the value of the land was $220,000 and the value of the building was $730,000.
Ms. French operated the business for several years as a sole proprietorship and, during this period, she took CCA on the building. As there were years in which she experienced losses, she did not always take the maximum amount of CCA.
Ms. French has finally agreed to take your advice and incorporate the business. She will use ITA 85(1) to transfer the land and building to the new corporation, in January of 2021. At the time of the transfer, the building had a UCC of $625,000. Other relevant values were as follows:
Appraised Elected
Asset Tax Cost Value Amount
Land $220,000 $510,000 $220,000
Building 625,000 980,000 730,000
Total $845,000 $1,490,000 $950,000
There is a $400,000 mortgage on the land and building that will be assumed by the new corporation. In addition, the new corporation will issue $500,000 in new debt to Ms. French. In total, the non-share consideration to be provided by the new corporation will be equal to $900,000 (i.e. the assumption of the $400,000 mortgage plus the issue of the $500,000 of new debt). The remaining consideration will be in the form of common shares with a fair market value of $590,000. The new corporation does not have a balance in its General Rate Income Pool (GRIP) account in any of the years under consideration.
Task: Your answers need to be properly labeled.
1. What are the tax consequences of making this transfer at the elected value of $950,000? Your answer should include amounts to be included in Ms. French's income as a result of the transfer, as well as the corporation's tax values for the assets received by the corporation.
2. Compute the adjusted cost base of each component of the consideration that Ms. French has received from the corporation.
3. Compute the PUC of the corporation's newly issued common shares.
4. What amounts would be included in Ms. French's Net Income For Tax Purposes if, during 2021, she sells her common shares for $650,000?
5. What amounts would be included in Ms. French's Net Income For Tax Purposes if, during 2021, the corporation redeems her common shares for $650,000?