Unit 5 Flashcards
Incorp of a sole proprietorship
-Advantages of incorp
1) Limited liability of shrs
2) Tax def or earnings
3) Potential SBD deduction
4)Greater potential of income spliting
5) Greater flex in comp (sal vs div)
6) select fiscal yr end
7) Access of LCGE
-Dis of incorp
1) Initial incorp costs, ongoing tasks (FS, annual filings)
2) Inability to use loss on personal income
3) Dep on the province may result in small amount of double taxation
Tax consequences without Section 85 rollover
-Transfer of prop assets to corp results in a disposition at FMV at the time of the transfer
-Significant tax consequences on accrued gain and recap
Section 85 rollover
-Used to trf assets of a proprietorship or transfer shrs of an operating company to holding company (T2057)
-Transfer most assets with CG to a Canadian corp on a tax def basis
cg are def until the transferor sells the shares of the corp or has the corporation redeem the taxpayer shares
-Req a join t ele ction between the transferor and the corp the assets are trf to –> election must be filed at the earlier of the 2 deadlines
1)Prop: June 15. 2) Corp: 6 months AYE
-Req
1)The assets must be transferred to a taxable Canadian Corp
2) Asset trf must be eligible prop
3) transferor must take back a share(s) of the corporation as part of the consideration for the trf of the prop
4) transferor must take back nonshare consideration (NSC) or “boot”–> normally made up of promissory note or debt
5) Consideration for the trf must be = to FMV of the prop trf and may include both shrs and NSC
Eligible prop
-Most common
1) Inventories: raw material, WIP, finished goods (no land)
2) Non dep capital prop: marketable securities, land
3) Dep capital prop: equip, building (including internally generated goodwill)
-Dep assets with accrued TL cannot be trf under section 85. Instead it must be sold at FMV
-Cash and prepaid cant be trf.
Assets are sold at FMV
Account receivable
-Without section 22, AR is considered a capital prop
tax value is the amount owned by customers (costs) and the FMV is the amount expected to be collected
tax basis of corp= FMV
-Jointly election between the purchaser and seller
-When made any realized loss by the seller may be fully deducted as busi loss
purchaser must include amount = to loss in BI, but will qualify for deduction of bad debt or ADA
-Assume Section 22 election will be made on incorp of prop since the proprietor normally owns all of the shrs
Elected amount
-Elected amount (or transfer price) is established 3 key values:
1) POD to the transferor which is used to determine the tax consequences of the transfer–> Capital gain=POD - ACB
ACB= tax cost
2) Cost consideration (shrs or NSC) taken by the transferor from the corp in return for the prop transfered
3) Transferee corp, the cost of the prop
Limited for elected amounts
-Tax value (#2) is the amount the asset may be trf without tax consequences
Goodwill
-When proprietorship is incorporated, any internal generated goodwill is transferred to the corp
-tax value of internally goodwill is $NIL–> to make the election valid an elected amount cant be $NIL so $1 is chosen
-Note: the $1 approach can apply to other assets that have a $NIL tax value (dep assets with 0 UCC)
Non share consideration (boot)
-NSC noramlly taken as it can be easily paid out to the transferor on a tax-free basis when cash is available
- NSC should be = to tax basis, since the maximum amount of NSC that may be taken without tax consequences is tax value of the asset being trf
Terminal loss
-Cant be transferred to an affiliated corp
-TRF will be denied the terminal loss on sale but its permitted to hold it in a separate CCA class and will be allowed to claim CCA
Section 85 Summary
-PUC of shr consideration must be = tax value of the asset if there is no NSC
-Taxpayer may take back both shrs and NSC
-Elected price > tax cost if the transferor wishes to trigger a capital gain or income to use up existing noncapital losses
-FMV consideration received must = the FMV of the prop transferred to avoid adverse tax consequences
a)corp will assume all debt of the proprietorship as NSC, afterward it will issue promissory notes = to the elected amount (tax cost)–> total NSC=elected amount
b) shr consideration= FMV- NSC
Section 85 consideration example
Determination of ACB
-Assumption is that only one type of shr (either common or pref) is issues in the rollover
-ACB rep the amount of the org cost of the asset trf that has not been recovered through NSC
Determination of PUC
-Legal stated capital= FMV of asset trf under S.85 - NSC of those assets
-PUC amount for tax purposes rep the amount of the tax basis of the assets trf that has not been recovered through NSC
if PUC is $NIL all of the tax basis of the asset has been recovered by the transferor by way of NSC
-Generally, the ACB of the shrs received as consideration in S.85 trf will = the PUC.
if NSC is elected as the trf price and is equal to the tax value of shrs both ACB and PUC will be $NIL
-If shrs are redeemed the taxpayer will be taxed on a deemed dividend = to the dif between the redemption price and the PUC of shrs
PUC/ACB example
S.85 Holdco freeze
-Sole shr of an Opco wishes future inc in value to be passed to children. So they incorp a Holdco and issue 100% CS to their adult children for a nominal amount
at the time of incorp, Holdco has no value since there are no assets
-Opco does a S.85 rollover of their common shrs to Holco in exchange for a promissory note and pref shrs of Holdco
elected amount would depend on whether the Shr of Opco have remaining CGE room–> if so the elected amount may exceed the cost basis of the shrs transferred to be able to use remaining CGE
maximum amount of NSC that may be taken without tax consequences is the PUC of Opco shrs
-Tax consequences;
a) POD of Opco shrs= elected value-> if elected value> ACB of Opco. there will be CG
b) no tax will be paid on CG if Opco trf the common shrs at an elected value sufficient to use up remaining CGE–> may trigger S.84.1 if NSC taken back> org PIC on shrs transfer
c) both ACB and PUC of Holdco pref shrs will be reduced if the shr takes back NSC equal to PUC of Opco CS trf
S.86 Exchange or shrs in a reorg
-Alternative to S.85 estate freeze
-Here a shr of a corp exchanges existing shrs of the corp for another type of shrs of the same corp
basically SH owns dif class of shrs
-Used in the estate freeze when
a)family busi is passed down to children
b) parents have sufficient wealth and want to trf future growth to their children
Req conditions:
a) Org owner shr must be capital prop to the shareholder
b) Org owner must exchange ALL shrs owned for a particular class–> other shr owning that class of shrs are not required to exchange their shrs
-NSC can be taken up to the PUC of the shrs exchanged–> excess is a deemed div –> CANT USE CGE
-May be accomplished as follows:
1) Exsistings shrs exchange their CS for pref shrs with fixed redemption value = to FV of CS
2) The children subscribe for a newly issue CS at a nominal value, since the full value of the corp is in the pref shrs–> PS act like a liab because they are redeemable or retractable for a fixed value at the option of the holder
-ACB and PUC of new shrs= same ACB and PUC of old shrs less any NSC:
if there is no NSC the taxpayer will be in the same position after the trf as they were before the trf with respect to the ACB and PUC of shrs owned
Tax dif between contractor vs employee
