Exam 19: Business Acquisitions and Divestitures-Tax-Deferred Sales

Brian Snow owns all of the common shares of Treeline Boots Ltd., a Canadian-controlled private corporation. The shares have a fair market value of $150,000, an ACB of $30,000, and a PUC of $5,000. Brian would like to retire soon, so he has offered the company to his son, Walter. Walter is young and does not have a lot of disposable income, and as such, a Section 86(1) reorganization of share capital has been recommended to Brian. Brian's common shares will be converted to preferred shares, redeemable for $150,000. Walter will then purchase a new class of common shares at a nominal value. Required: Discuss the immediate tax consequences of the reorganization of share capital for Brian, indicating the ACB and the PUC of the new preferred shares.

Mr. and Mrs. Green would like to transfer their family business to their son. However, their son does not have the required funds to purchase the company at this time. Which of the following might Mr. and Mrs. Green consider in order to make the transfer possible without any immediate tax consequences?

Which of the following statements most accurately describes an aspect of a tax-deferred sale of a business to a group of employees, through share reorganization?

Corporation A is selling a depreciable asset to Corporation B. The asset has a fair market value of $200,000. The original cost of the asset was $175,000 and the undepreciated capital cost is $160,000. The two corporations wish to structure the sale in a manner that will defer all taxes at this time. Corporation A has no unused losses. Which of the following is FALSE?

The following scenarios represent aspects within various tax planning tools, (each dependent on specific conditions being met). 1. A corporation purchases the shares of another corporation in exchange for shares issued by the purchaser, and the vendors may report the sale at their tax costs. This is a useful method for public corporations with many shareholders. 2. Shares of two or more corporations are exchanged for shares of a new entity, and all of the assets of the corporations are transferred to the new entity. 3. In a tax-deferred sale of a business, a shareholder's common shares are converted to fixed-value preferred shares, and new common shares are then issued to the purchaser, often at a nominal value. 4. Assets are sold from a vendor corporation to a buyer corporation at an elected value ranging from the tax cost (i.e. UCC or ACB) to FMV, in exchange for shares and a non-share payment not exceeding the elected value. Tax-planning tools: _______ Section 85 rollover _______ Section 85.1 share-for-share exchange _______ Section 86 share reorganization _______ Section 87 amalgamation Required: Match each of the four scenarios with the appropriate tax-planning tool from the list. Use each answer only once.

Samantha is an architect, and she is also the sole shareholder of Sam's Gifts Inc. She wants to semi-retire from the gift business soon and her three employees have all expressed great interest in taking over the company, although they do not have the financial resources necessary to make the purchase at this point in time. However, Samantha is not in a hurry to receive the proceeds from the business as she will continue with her architectural work for another five years. Samantha has heard about something called a 'share reorganization' and she has asked you to explain what it means and if it would apply to her situation. Required: A) Explain what a share reorganization is, and if it would be useful for Samantha in her plans to semi-retire from her gift store. B) What is a significant risk factor that might be involved with a share reorganization?