Assignment Problem 1:
You are a successful CPA with your own public accounting practice. One fine morning (December 31, 2019) your long-time client Myrtle Tebbits, age 92, peels into the parking lot in her red Camaro, tires smoking. She slams the door, then bounds up the steps to your office like a gazelle. "It is so wonderful to see you," chirps Myrtle. "I really need some tax advice." Myrtle is the sole shareholder of Myrtle's Maple Madness Ltd. (MMML), a purveyor of organic maple confectionary delights. Myrtle started the company in 1982, and has overseen its meteoric growth. She owns 1,000 common shares of MMML. The shares have an ACB and PUC of $50,000.
"I do have a pretty sweet job, but since I am fabulously wealthy, it is time for me to retire, and I'm thinking about winding-up MMML. I own one Camaro and six BMWs, and drive one car each day of the week. I have a huge house with a seven-car garage. Anyways, yesterday, I was approached by a venture capital firm and offered $1.3 million for my MMML shares. Would I be better off selling the shares or should I just wind up the company?"
"Assume my combined personal marginal tax rate in 2019 will be 53.53% for all income except Canadian dividends. For eligible Canadian dividends, please use a combined marginal tax rate of 39.34%. For non-eligible Canadian dividends, please use a combined marginal tax rate of 46.65%. These two tax rates on dividends include the gross-up and combined dividend tax credit."
"Also, please use the following combined corporate tax rates: 13.5% on active business income eligible for the small business deduction, 26.5% on additional business income, and 40% on all other income, plus the 10?% additional refundable tax on investment income. MMML has a GRIP balance of $13,400 as of December 31, 2018."
"Please show me all your calculations, and explain carefully. Just so I am being clear, I would like to know whether I should wind-up MMML (today), or sell my shares to the venture capital firm. I have never before claimed a Division C deduction or sold capital property. I would like to know which option will give me the most after-tax cash."
MMML IINFORMATION AS OF DECEMBER 31, 2019
|
Assets
|
Tax Value
|
FMV
|
|
Cash (used in active business)
|
31,855
|
31,855
|
|
Investments in public company shares
|
$27,550
|
26,420
|
|
Investment in CCPC shares
|
$5,000
|
$120,000
|
|
(supplier of maple syrup)
|
|
Inventory
|
67,000
|
65,000
|
|
Land
|
313,330
|
592,000
|
|
Warehouse
|
c/c 388,000
|
386,200
|
|
UCC 317,175
|
|
Equipment
|
c/c 192,774
|
120,000
|
|
UCC 128,707
|
|
Goodwill
|
0
|
19,000
|
|
Liabilities
|
|
|
|
A/P
|
43,200
|
43,200
|
Other information re: MMML
- MMML has a December 31st year-end and operates exclusively within Canada
- MMML earned active business income during fiscal 2019 of $644,127
- In fiscal 2019, MMML received a $3,000 non-eligible dividend from the maple syrup producer and $5,906 in eligible dividends from Canadian public companies
- The opening capital dividend account balance was $24,700
- The opening RDTOH balance was $11,137. All of it was eligible RDTOH. There was no prior year dividend refund.
- MMML owns 12% of the shares in the maple syrup supplier, which is a small business corporation. The maple syrup supplier had a current-year dividend refund of $4,000.
Assignment Problem 2:
Until she was 60, Shaniqua Jones, PhD, was a chemistry professor at Wilfrid Laurier University (She specialized in Bismuth-mediated thioglycoside activations and Brønsted acid catalysis). She retired with a pension. She then started her own company, SJ Chemicals Ltd., a CCPC, which produced anti-rust environmentally friendly chemicals for the mining industry, and worked hard to grow the business. In 2018, when she was 80, she decided to retire again.
In March 2018, she did an estate freeze using s.86. The FMV of her 100 common shares at the time of the freeze was $4.5 million; the PUC was $1,000; and the ACB $50,000. New common shares were issued to her son, who was also a chemistry whiz. Her son took over the business. Shaniqua was issued 100 redeemable preferred shares in SJ Chemicals Ltd., and no boot. Her plan was to redeem 10 shares a year, which would take her through her 90th year.
In each of May 2018 and May 2019, she redeemed 10 shares. Unfortunately, in November 2019, she died. Shaniqua had no spouse at the time of her death.
Required: what are the tax consequences to Shaniqua in 2018 and 2019 relating to her preferred shares? Explain and show all calculations (but do not do federal tax calculations) (hint: don't forget s.70(5)(a)).
Assignment Problem 3:
It is late December of 2019 and you are discussing tax and life with Blair Snodgrass, who is about to retire after a successful career operating a graphic design business, Blair Snodgrass Inc. (BSI). He was the sole shareholder, and owned 100 common shares with a FMV of $1.4 million, ACB of $60,000, and PUC of $45,000. The shares are QSBC shares.
You ask Blair about his past tax history. "There's nothing too exciting to report. I had a taxable capital gain of $100,000 on the sale of other QSBC shares in 2017, which I offset with a capital gains deduction. I loaned $76,000 to a small business corporation (PRF Inc.) in 2018, which went bankrupt in 2019. PRF Inc. made loans to both minority shareholders (who each owned 15% of the company) so that they could buy motor vehicles for employment. This company was willing to do that sort of thing for all employees. Anyways, I bought a rental property in 2016, and have reported rental losses of $2,000 each year since then (2016 to 2019 inclusive). I have received a total of taxable dividends of $7,000 in my lifetime. Otherwise, I have earned employment income only for the entire 65 years I've been on this planet."
You ask Blair to tell you about his retirement. "Well, it is time for me to retire and enjoy things like eating, sleeping, climbing Mount Everest, eating, and sleeping. My plan is for my adult daughter Ethel to take over my business. I would like the future growth in the company to benefit Ethel."
Blair continues. "I've read something about tax-deferred transactions in the newspaper, and it gave me an idea. I know I need to use up my capital gains exemption, so I think I will do a reorganization. My corporation will give me cash of $566,000, a note payable of $114,000, and newly issued preferred shares with a fair market value of $720,000. That way, the fair market value of my current common shares equals the consideration I will receive. Isn't that considerate of me?" He laughs. "I'd like the most boot I can get. I was hoping to buy a condo in Arizona for $520,000 (Canadian $), and pay cash for it. My plan will allow me to buy my condo and still give me some spending money."
Required: Comment on the feasibility of the above plan and whether it will meet Blair's objectives. Explain the tax consequences of the above plan as of December 31, 2019. Then, recommend another solution that will result in the best tax consequences (as of December 31, 2019), explain why it will be better, and show all calculations (including the ACB and PUC of any newly issued shares). Finally, assuming the new solution is implemented, briefly comment on the applicability of s.74.4 of the ITA.
Assignment Problem 4:
Determine which corporations, if any, in the following independent situations are associated. Explain your answer by referring to s.256 of the ITA.
a) Vibuson, Bud, and Clarissa are strangers. They each own ? of the shares of Abba Ltd. Bud owns 40% of the shares of Bex Ltd. The remaining 60% are owned by Clarissa. Clarissa also owns 100% of the shares of Cube Ltd.
b) Raquel and Monisha are friends. They each own 50% of the shares of Buppledorm Ltd. In addition, Raquel owns 81% and Monisha owns 19% of the shares of Grebenc Ltd.
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