Unit 6 Flashcards
Acquisition of Control
-Occurs when an individual acquires more than 50% of voting shares necessary to elect the BOD of the corp
-Change in control happens when an acquires control of corp and or when an individual who prev controlled the corp loses control
Deemed yr end
-when a AOC happens the corp is deemed to have a tax yr ending the day before the AOC
-Deemed yr end does not coincide with the fiscal yr end of the acquired corp, there will be 2 taxation yrs in 1 fiscal period:
a) Yr 1: from the beg of the normal fiscal period to the day before the AOC
b) Yr 2: from the day of the AOC to the normal fiscal yr end
Following would apply:
1) Tax return filed for the taxation yr ending at the deemed yr end
2) Upaid amounts (management bonuses and SH) should be reviewed.
3) Review charitable dono with respect to 75% limit
4) CCA claims must be prorated for the # of days in the short taxation yr
Losses and AOC
-Amount of loss that can be used * by the tax rate in effect in the period the loss is expected to be used
-Profitable corps may use loss from acquired corps within certain restrictions
Loss utilization strats on AOC
2 options:
1) Restructure: Section 85 of the ITA may be used to do a tax-free rollover of income-producing assets from the profitable corp to the loss corp–> the assets would generate income in the corp after the AOC
a) acc loss in the loss corp may only be deducted against income from the same or similar busi generated after the AOC
2) Intercompany transactions: produce exp deductions in the profitable corp while generating TI in the loss corp
Accrued losses triggered at deemed yr end by AOC rules
-Upon OAC accrued losses on assets are deemed realized:
a) accrued losses are determined by comparing the FV of the assets to the tax base
b) for dep prop terminal losses are realized non-dep prop capital losses are realized
Elective capital gains and recapture
-Result of a deemed yr end on AOC, corp could elect deemed disposition of any dep/non dep prop which CG or recapture have been accrued
-Elected amount or deemed POD LESSER of:
1) FMV of prop
2) Greater of: a) ACB of prop b) designated amount
-When there’s a deemed disposition of dep prop
a) Capital cost of asset to acquiring company= POD of same assets for acquired company
b) UCC of same asset after election= org cost+50% capital gain
Accumulated losses at deemed yr end
-Noncapital losses-> include busi losses other than ABILs and prop losses:
a) ABILS and prop losses expire on AOC, MUST be removed from noncapital loss balance
b) Only busi losses and farm losses may be CF. ONLY APPLIED TO SIMILAR INCOME
c) Terminal losses are noncapital loses and maybe CF
-Net capital losses and LPP
a) Expire on AOC and may not be CF
AOC PC6 example
Partnerships
-2 or more persons carrying on busi with the intention of making a profit
-General partnerships all partnership general partners is jointly liable for the debts of the partnerships
-Limited partnerships:1 general partner & 1> limited partners-> limited partners exposure to liab limited to their net investment in partnership
General partnership income and losses
- Partnerships income or loss is first determined @ partnership level
-Partnership draws are added back to NI upon reconciliation
Partnership interest
-Investment in a general partnership is considered a non dep capital prop
-Individuals may acquire an interest in partnership by either becoming a founding member or by acquiring an interest in an existing partnership
1) Founding member: initial cost base=FMV of prop contributed to partnership
2) Interest acquisition: initial cost base= amount paid
-ACB of partnership interest at any point in time=
org cost+ income allocation + additional capital cont - partnership draws
Trusts
- A settlor: is an individual who transfers title of prop to a trustee: the individual who holds title to the prop and manages the prop for benefits of the beneficiaries of the trust.
Reasons to establish personal trust
1) Management of assets: trustee have significantly more experience in managing assets when compared to beneficiaries
2) Protecting assets: the settlor of the trust may want to protect assets from creditors
3) Control distributions: prop and income may be distributed over time
4) Privacy: after death a will is probated and becomes a public document–> trust is a priv document
5) Access to multiple exemptions: may provide access to CGE or/and PRE
6) Income splitting: subject to certain limitations, a trust may be used to split income amount fam members by distributing income to the trust to members in lower tax brackets
Types of trusts
1) Testamentary trust: a trust that arises as a result of the death of an individual
a) The trust wither be established under the decreased will or if not specified in the will the estate of the deceased will become a trust for tax purposes
2) Inter vivos trust: trust that’s not a testamentary trust–> established by the settlor during their lifetime
Taxation of trust
- For tax purposes, considered an ind
- General rule: income retained in a trust is taxxed at the highest combined federal and prov tax rates for the province of the resident of the trust (33%)
- Income retained by the trust considered graduated rate estate (GRE) is taxed the same way as TI for individuals
- GRE is an estate that arose as a consequence of an ind death if:
1) No more than 36 months have passed since the date of the taxpayer’s death
2) estate is considered a testamentary trust
3) estate designates itself as the GRE of the ind
4) no other estate is designated as the GRE of the ind
Estate qualifies for GRE only 36 months, after which its taxed at the highest rate
Net and TI of a trust
-Income allocated to beneficiaries is deductible in determining NI for the trust & is taxed at the hand of beneficiaries
Subsequent distributions of after-tax income are tax-free to beneficiaries
-Losses realized in a trust may not be allocated to beneficiaries
-General rule is that income earned by a trust loses is character when distributed to the beneficiaries
-Following designations are available so the character of certain types of income is retained on flow through
Purchaser POV
-Risk management starts with a share purchase:
1) Inc due diligence procedures, including search for unrecorded liab
2) Right to set off contingent or unknown liab from the purchase price
3) Holdbacl of a portion of the purchase price to cover unknown liab
Seller POV
1) Determine ABI, AII, CDA, NERDTOH account
-ABI: includes amounts that are fully deductible or taxable
-AII: includes 50% of CG
-CDA: includes nontaxable half of CG
-NERDTOH: 30.67% of amounts classified as AII added to NERDTOH
2) Determine corp tax payable on income generated from asset sale
3) Determine after-tax cash in corp available to redeem the shrs
-Selling price of assets=total FV
-Deduct all legal liab of the corps (ie AP, bank debt, SH)
4) Determine deemed dividend and capital gain/loss on redemption of shrs
-Deemed div=cash used to redeem shrs-PUC
-PUC amount that can be returned to SH on redemption or cancellation of shrs without tax consequences
a) normally PUC=FMV of prop trf
-PUC is calculated at the corporate level and attaches itself to a particular class or series of shares, not to particular shareholders. Therefore, any increase or decrease in PUC affects all shareholders of a particular class or series equally.
-ACB is calculated at the shareholder level and relates to a particular class of shares or series of shares held by a particular taxpayer and may well be a unique amount for each shareholder
a) Adj cost base is determined for shrs using the average weighted method
5) Determine personal TP on redemption of shrs and any bonus paid to shr prior to windup
-For deemed dividends, need to determine if eligible or non-eligible:
a) First-> designated sufficient dividends as noneligible to obtain full refund on the balance in the NERDTOH account
b) Next–> if deemed div is subject to tax–> non eligible div required to obtain a full refund on NERDTOH account, designate remaining as eligible
