chapter 19 other rollovers, business valuation, sale of an incorporated business, and tax shelters
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Chapter 19Chapter 19
Other Rollovers, Other Rollovers, Business Valuation, Business Valuation,
Sale Of An Incorporated Sale Of An Incorporated Business, And Tax SheltersBusiness, And Tax Shelters
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 22
Share For Share Exchange - Share For Share Exchange - ITA 85.1ITA 85.1
ApplicationApplication
– AutomaticAutomatic
– Can Elect Out In Tax Can Elect Out In Tax ReturnReturn
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 33
ITA 85.1 ExampleITA 85.1 Example
May Ltd.
FMV = $700,000 ACB = $100,000 PUC = $100,000
Ms. May (100%)
Acquirer Ltd.(A Large Public
Company)
May C/S100%
AcquirerC/S
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 44
ITA 85.1 ExampleITA 85.1 Example
No Capital Gain For Ms. MayNo Capital Gain For Ms. May– POD = Old ACB = $100,000POD = Old ACB = $100,000
[ITA 85.1(1)(a)(i)] [ITA 85.1(1)(a)(i)]
ACB For Ms. May’s Acquirer SharesACB For Ms. May’s Acquirer Shares– ACB(Old) = ACB(New) = $100,000 ACB(Old) = ACB(New) = $100,000
[ITA 85.1(1)(a)(ii)][ITA 85.1(1)(a)(ii)]
ACB For Acquirer’s May SharesACB For Acquirer’s May Shares– Lesser Of FMV And PUC = $100,000 Lesser Of FMV And PUC = $100,000
[ITA 85.1(1)(b)][ITA 85.1(1)(b)]
PUC Of Acquirer’s New SharesPUC Of Acquirer’s New Shares– Old PUC = $100,000Old PUC = $100,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 55
Conditions For RolloverConditions For Rollover
Transferred Shares: Taxable Canadian PropertyTransferred Shares: Taxable Canadian Property
Purchaser: Taxable Canadian CorporationPurchaser: Taxable Canadian Corporation
Consideration: Shares Of A Single ClassConsideration: Shares Of A Single Class
Relationship: Arm’s LengthRelationship: Arm’s Length
Vendor: Must Not Control PurchaserVendor: Must Not Control Purchaser
No ITA 85(1) ElectionNo ITA 85(1) Election
No Gain Or Loss RecognitionNo Gain Or Loss Recognition
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 66
Reorganization - ITA 86Reorganization - ITA 86
ApplicationApplication
– Financial DistressFinancial Distress
– Estate FreezeEstate Freeze
– Takeover By Key Takeover By Key EmployeeEmployee
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 77
ITA 86 ConditionsITA 86 Conditions
Articles Of IncorporationArticles Of IncorporationMust Provide For All Types Of Shares To Be UsedMust Provide For All Types Of Shares To Be Used
ConsiderationConsiderationCan Include Non-Share Consideration Up To The Can Include Non-Share Consideration Up To The ACB Of Redeemed Shares (Generally Does Not)ACB Of Redeemed Shares (Generally Does Not)
Shares Must Be Capital PropertyShares Must Be Capital Property
Classes And QuantitiesClasses And QuantitiesAll Shares Of A Particular Class Held By All Shares Of A Particular Class Held By ShareholderShareholder
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 88
Tax ConsequencesTax Consequences
Cost Of Boot - ITA 86(1)(a)Cost Of Boot - ITA 86(1)(a)– Equal To FMVEqual To FMV
Cost Of New Shares - ITA 86(1)(b)Cost Of New Shares - ITA 86(1)(b)– Old ACB, Less BootOld ACB, Less Boot
Proceeds Of Redemption Proceeds Of Redemption - ITA 84(5)(d)- ITA 84(5)(d)– Boot, Plus PUC Of New SharesBoot, Plus PUC Of New Shares
Proceeds Of Disposition Proceeds Of Disposition - ITA 86(1)(c)- ITA 86(1)(c)– Boot, Plus ACB Of New SharesBoot, Plus ACB Of New Shares
PUC Reduction - ITA 86(2.1)(a)PUC Reduction - ITA 86(2.1)(a)– New LSC, Less (Old PUC - Boot)New LSC, Less (Old PUC - Boot)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 99
ITA 86(1) - Example OneITA 86(1) - Example One
Shirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC and an ACB equal to $100,000. Their FMV is $1,000,000.
Foley
Inc.
$ 75,000 Note$925,000 P/S (LSC = FMV)
Foley Inc. Shares
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1010
Example One ResultsExample One ResultsACB Of BootACB Of Boot– $75,000$75,000
ACB Of New SharesACB Of New Shares– $100,000 - $75,000 = $25,000$100,000 - $75,000 = $25,000
PUC ReductionPUC Reduction– $925,000 - ($100,000 - $75,000) = $900,000$925,000 - ($100,000 - $75,000) = $900,000– New PUC = $925,000 - $900,000 = $25,000New PUC = $925,000 - $900,000 = $25,000
Proceeds Of RedemptionProceeds Of Redemption– $25,000 + $75,000 = $100,000$25,000 + $75,000 = $100,000
Proceeds Of DispositionProceeds Of Disposition– $25,000 + $75,000 = $100,000$25,000 + $75,000 = $100,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1111
Example One - Tax ImplicationsExample One - Tax Implications
ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil
Capital Gain – ImmediateCapital Gain – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil
Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000ITA 84(3) Dividend = $925,000 - $25,000 = $900,000
Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - $25,000 = $900,000Capital Gain = $925,000 - $25,000 = $900,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1212
ITA 86(1) - Example TwoITA 86(1) - Example TwoShirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC of $100,000 and an ACB equal to $75,000. Their FMV is $1,000,000.
Foley
Inc.
$ 75,000 Note$925,000 P/S (LSC = FMV)
Foley Inc. Shares
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1313
Example Two ResultsExample Two Results
ACB Of BootACB Of Boot– $75,000$75,000
ACB New SharesACB New Shares– $75,000 - $75,000 = $75,000 - $75,000 = NilNil
PUC ReductionPUC Reduction– $925,000 - ($100,000 - $75,000) = $925,000 - ($100,000 - $75,000) = $900,000$900,000– New PUC = $925,000 - $900,000 = New PUC = $925,000 - $900,000 = $25,000$25,000
Proceeds Of RedemptionProceeds Of Redemption– $25,000 + $75,000 = $25,000 + $75,000 = $100,000$100,000
Proceeds Of DispositionProceeds Of Disposition– Nil + $75,000 = Nil + $75,000 = $75,000$75,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1414
Example Two - Tax ImplicationsExample Two - Tax Implications
ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil
Capital Gain – ImmediateCapital Gain – Immediate– $75,000 - $75,000 = Nil$75,000 - $75,000 = Nil
Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000ITA 84(3) Dividend = $925,000 - $25,000 = $900,000– Capital Gain = ($925,000 - $900,000) - Nil = $25,000Capital Gain = ($925,000 - $900,000) - Nil = $25,000
Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - Nil = $925,000Capital Gain = $925,000 - Nil = $925,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1515
ITA 86(1) - Example ThreeITA 86(1) - Example ThreeShirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC of $50,000 and an ACB equal to $100,000. Their FMV is $1,000,000.
Foley
Inc.
$ 75,000 Note$925,000 P/S (LSC = FMV)
Foley Inc. Shares
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1616
Example Three ResultsExample Three ResultsACB Of BootACB Of Boot– $75,000$75,000
ACB Of New SharesACB Of New Shares– $100,000 - $75,000 = $25,000$100,000 - $75,000 = $25,000
PUC ReductionPUC Reduction– $925,000 - ($50,000 - $75,000) = $925,000$925,000 - ($50,000 - $75,000) = $925,000– New PUC = $925,000 - $925,000 = NilNew PUC = $925,000 - $925,000 = Nil
Proceeds Of RedemptionProceeds Of Redemption– Nil + $75,000 = $75,000Nil + $75,000 = $75,000
Proceeds Of DispositionProceeds Of Disposition– $25,000 + $75,000 = $100,000$25,000 + $75,000 = $100,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1717
Example Three Tax ImplicationsExample Three Tax Implications
ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $75,000 - $50,000 = $25,000$75,000 - $50,000 = $25,000
Capital Loss – ImmediateCapital Loss – Immediate– ($100,000 - $25,000) - $100,000 = ($25,000)($100,000 - $25,000) - $100,000 = ($25,000)
Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - Nil = $925,000ITA 84(3) Dividend = $925,000 - Nil = $925,000– Capital Loss = $925,000 - $925,000 - $25,000 = ($25,000)Capital Loss = $925,000 - $925,000 - $25,000 = ($25,000)
Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - $25,000 = $900,000Capital Gain = $925,000 - $25,000 = $900,000
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1818
ITA 86(2) Gifting RuleITA 86(2) Gifting Rule
ConditionsConditions
– FMV of old shares is FMV of old shares is greater than FMV of new greater than FMV of new shares plus bootshares plus boot
– Excess can be regarded as Excess can be regarded as a gift (A related party is a a gift (A related party is a shareholder)shareholder)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 1919
ITA 86(2) – Gifting ResultsITA 86(2) – Gifting Results
POD (Old) - ITA 86(2)(c) - Lesser OfPOD (Old) - ITA 86(2)(c) - Lesser Of– Boot, Plus GiftBoot, Plus Gift– FMV Of Old SharesFMV Of Old Shares
Loss On OldLoss On Old– Deemed Nil Under ITA 86(2)(d)Deemed Nil Under ITA 86(2)(d)– Gain Will Be TaxedGain Will Be Taxed
ACB (New) - ITA 86(2)(e)ACB (New) - ITA 86(2)(e)– ACB (Old), Less (Boot + Gift)ACB (Old), Less (Boot + Gift)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2020
ITA 86(2) ExampleITA 86(2) ExampleMr. Stern owns 80 percent of the outstanding common shares of Stern Ltd. The remaining 20 percent are held by his son. The common shares have a PUC and an ACB of $600,000. Their fair market value is $1,000,000.
Stern
Ltd.
$200,000 Cash$500,000 P/S (LSC = FMV)
80% Of Stern Ltd. C/S
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2121
ITA 86(2) Example OneITA 86(2) Example One
PUC ReductionPUC Reduction– $500,000 - ($480,000 - $200,000) = $220,000$500,000 - ($480,000 - $200,000) = $220,000– New PUC = $500,000 - $220,000 = $280,000New PUC = $500,000 - $220,000 = $280,000
GiftGift– $800,000 - $700,000 = $100,000$800,000 - $700,000 = $100,000
Non-Share ConsiderationNon-Share Consideration– $200,000 Cash$200,000 Cash
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2222
ITA 86(2) ExampleITA 86(2) Example
Cost Of New SharesCost Of New Shares– $480,000 - ($200,000 + $100,000) = $180,000$480,000 - ($200,000 + $100,000) = $180,000
Proceeds Of Redemption - Old SharesProceeds Of Redemption - Old Shares– $200,000 + $280,000 = $480,000$200,000 + $280,000 = $480,000
ITA 84(3) Deemed DividendITA 84(3) Deemed Dividend– Proceeds Of Redemption Equals Old PUC: Proceeds Of Redemption Equals Old PUC:
No ITA 84(3) Deemed DividendNo ITA 84(3) Deemed Dividend
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2323
ITA 86(2) Example OneITA 86(2) Example One
Proceeds Of DispositionProceeds Of Disposition– $200,000 + $100,000 = $300,000$200,000 + $100,000 = $300,000
Capital Gain - A Disallowed LossCapital Gain - A Disallowed Loss– $300,000 - $480,000 = Nil [ITA 86(2)(d)]$300,000 - $480,000 = Nil [ITA 86(2)(d)]
Net Economic EffectNet Economic Effect– No ITA 84(3) Dividend Or Capital GainNo ITA 84(3) Dividend Or Capital Gain– Deferred Gain = $500,000 - $180,000 = $320,000Deferred Gain = $500,000 - $180,000 = $320,000– Son’s Shares Up $100,000 (No Increase In ACB)Son’s Shares Up $100,000 (No Increase In ACB)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2424
Amalgamations - ITA 87Amalgamations - ITA 87
Automatic, No Automatic, No Election RequiredElection Required
A Type Of Business A Type Of Business CombinationCombination
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2525
Basic ProcedureBasic Procedure
A Ltd. & B Ltd. Shareholders
CompanyA
CompanyB
AB Ltd.A And B Ltd. Shares
AB Shares
Assets
Assets
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2626
ConditionsConditions
Predecessor CorporationsPredecessor Corporations– Must Be Taxable And Canadian – ITA 87(1)(a)Must Be Taxable And Canadian – ITA 87(1)(a)
Property To CorporationProperty To Corporation– All Assets And Liabilities Of Both Companies All Assets And Liabilities Of Both Companies
- ITA 87(1)(a) And (b)- ITA 87(1)(a) And (b)
ConsiderationConsideration– All Shareholders Must Receive Shares All Shareholders Must Receive Shares
– ITA 87(1)(c)– ITA 87(1)(c)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2727
Economic OutcomeEconomic Outcome
Assets And Liabilities Assets And Liabilities Carried Over At Old Tax Carried Over At Old Tax ValuesValues
New Shares At ACB Of New Shares At ACB Of Old SharesOld Shares
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2828
Position Of New CorporationPosition Of New Corporation
Asset TransfersAsset Transfers– Inventory At CostInventory At Cost– Depreciable Property At UCCDepreciable Property At UCC
Retain Old Capital Cost For Retain Old Capital Cost For Recapture And Capital GainsRecapture And Capital Gains
– Non-Depreciable Capital Property Non-Depreciable Capital Property At ACBAt ACB
– Eligible Capital Property At 4/3 Eligible Capital Property At 4/3 CECCEC
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 2929
Position Of New CorporationPosition Of New Corporation
Tax AccountsTax Accounts
– Capital Dividend Accounts Capital Dividend Accounts TransferredTransferred
– RDTOH Balances TransferredRDTOH Balances Transferred
– Both Corporations Must Be Both Corporations Must Be PrivatePrivate
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3030
Position Of New CorporationPosition Of New CorporationDeemed Year EndDeemed Year End– Old CorporationsOld Corporations
Likely To Be Short Fiscal Year For CCA And SBDLikely To Be Short Fiscal Year For CCA And SBD
Counts As A Year For Loss Carry Forward PurposesCounts As A Year For Loss Carry Forward Purposes
– New CorporationNew CorporationCan Choose Any New Fiscal YearCan Choose Any New Fiscal Year
May Also Be ShortMay Also Be Short
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3131
Position Of New CorporationPosition Of New Corporation
Loss Carry Forwards - ITA 87(2.1)Loss Carry Forwards - ITA 87(2.1)
– Number Of Available Years Not Number Of Available Years Not ChangedChanged
– Deemed Year End Counts As One Deemed Year End Counts As One YearYear
– There May Or May Not Be An There May Or May Not Be An Acquisition Of Control (Usually Not)Acquisition Of Control (Usually Not)
GRIP carried forwardGRIP carried forward
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3232
Position Of ShareholdersPosition Of Shareholders
Transfer ValuesTransfer Values– POD (Old) = ACB (Old)POD (Old) = ACB (Old)– ACB (New) = POD (Old)ACB (New) = POD (Old)– Therefore: ACB (Old) = ACB Therefore: ACB (Old) = ACB
(New)(New)
ConditionsConditions– Consideration Is Shares Of Successor Consideration Is Shares Of Successor
CorporationCorporation– Original Shares Are Capital PropertyOriginal Shares Are Capital Property– Gift To Related Parties ProhibitedGift To Related Parties Prohibited
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3333
Asset Bump UpAsset Bump Up
A bump up of non-A bump up of non-
depreciable asset values is depreciable asset values is
possible (see discussion possible (see discussion
under ITA 88(1) wind up)under ITA 88(1) wind up)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3434
Tax PlanningTax Planning
Utilization Of LossesUtilization Of Losses
Utilization Of UCC BalancesUtilization Of UCC Balances
Enhanced M&P DeductionEnhanced M&P Deduction
Change In Fiscal YearChange In Fiscal Year
Carry Forward Of Losses, Capital Carry Forward Of Losses, Capital
Dividend, RDTOH, and GRIPDividend, RDTOH, and GRIP
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3535
Winding-Up Of A Subsidiary - Winding-Up Of A Subsidiary - ITA 88(1)ITA 88(1)
Subsidiary
ParentCompany
Assets At Tax Values
Sub shares cancelled
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3636
ConditionsConditions
90 Percent Owned Subsidiary90 Percent Owned Subsidiary
Both Are Taxable Canadian CorporationsBoth Are Taxable Canadian Corporations
Consistent With Relevant LegislationConsistent With Relevant Legislation
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3737
POD To SubsidiaryPOD To Subsidiary
Inventory At CostInventory At CostNon-Depreciable At ACBNon-Depreciable At ACBCEC At 4/3 BalanceCEC At 4/3 BalanceDepreciable At UCC (Capital Cost Depreciable At UCC (Capital Cost Retained)Retained)Reserves - Carried ForwardReserves - Carried Forward
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3838
Cost To ParentCost To Parent
Equal To The POD To The SubsidiaryEqual To The POD To The Subsidiary
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 3939
Bump-Up In Asset ValuesBump-Up In Asset Values
Non-Depreciable Owned Since AcquisitionNon-Depreciable Owned Since AcquisitionBump-Up = Lesser of:Bump-Up = Lesser of:– [FMV (At Acquisition) – Cost][FMV (At Acquisition) – Cost]– ACB Of Shares, LessACB Of Shares, Less
Cost Of Subsidiary’s Net AssetsCost Of Subsidiary’s Net AssetsDividends Paid To The Parent Since AcquisitionDividends Paid To The Parent Since Acquisition
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4040
Subsidiary LossesSubsidiary Losses
Deduct In Parent’s First Year Following Deduct In Parent’s First Year Following Year Of Wind-UpYear Of Wind-Up
Based On Parent’s Year In Which The Based On Parent’s Year In Which The Subsidiary’s Year End FallsSubsidiary’s Year End Falls
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4141
POD Of SharesPOD Of Shares
Greater Of:Greater Of:– Lesser OfLesser Of
PUCPUC
Cost Of Net AssetsCost Of Net Assets
– ACB Of The SharesACB Of The Shares
No Loss Is PossibleNo Loss Is Possible
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4242
Convertible PropertiesConvertible PropertiesITA 51ITA 51
Conversion Of Bond Or P/S Conversion Of Bond Or P/S To C/STo C/S
General RulesGeneral Rules– ACB Of C/S = ACB Of Debt Or ACB Of C/S = ACB Of Debt Or
P/SP/S– No Non-Share ConsiderationNo Non-Share Consideration– PUC - Increase On C/S Equals PUC - Increase On C/S Equals
Carrying Value Of Debt To Avoid Carrying Value Of Debt To Avoid ITA 84(1) DividendITA 84(1) Dividend
Gifting RulesGifting Rules
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4343
Valuation Of A BusinessValuation Of A Business
Asset Based MethodsAsset Based Methods
Income Based Income Based MethodsMethods– Gross RevenuesGross Revenues– EarningsEarnings
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4444
Sale Of An Incorporated Sale Of An Incorporated BusinessBusiness
AlternativesAlternatives– Sale Of Assets Sale Of Assets
With Wind-Up FollowingWith Wind-Up Following
– Sale Of Shares Sale Of Shares (Corporation Continues)(Corporation Continues)
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4545
Restrictive CovenantsRestrictive Covenants(a.k.a. Non-Competition Agreements)(a.k.a. Non-Competition Agreements)
Taxpayer Agrees To Have His Taxpayer Agrees To Have His Ability To Provide Goods Or Ability To Provide Goods Or Services RestrictedServices Restricted
In General, Included In Income In General, Included In Income [ITA 56.4(2)][ITA 56.4(2)]
ExceptionsExceptions– ITA 56.4(3)(a) – Employment IncomeITA 56.4(3)(a) – Employment Income– ITA 56.4(3)(b) – Cumulative Eligible ITA 56.4(3)(b) – Cumulative Eligible
CapitalCapital– ITA 56.4(3)(c) – Sale Of An Eligible ITA 56.4(3)(c) – Sale Of An Eligible
InterestInterest
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4646
Asset DispositionsAsset Dispositions
Accounts Receivable - ITA 22Accounts Receivable - ITA 22
Inventories - ITA 23Inventories - ITA 23
Prepayments - No specific rulesPrepayments - No specific rules
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4747
Asset DispositionsAsset Dispositions
Non-Depreciable AssetsNon-Depreciable Assets– Capital Gain Or Loss With No Capital Gain Or Loss With No
ReservesReserves
Depreciable AssetsDepreciable Assets– Recapture, Terminal Loss, Or Capital Recapture, Terminal Loss, Or Capital
GainGain– General RulesGeneral Rules
GoodwillGoodwill– 3/4 Of Proceeds To Income3/4 Of Proceeds To Income
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4848
Proceeds > PUCProceeds > PUC
ITA 84(2) Deemed DividendITA 84(2) Deemed Dividend– Capital Dividend (If Elected)Capital Dividend (If Elected)
Not TaxedNot Taxed
– Pre-1972 CSOH DistributionPre-1972 CSOH DistributionDeemed Not To Be A Dividend Deemed Not To Be A Dividend ITA 88(b)(ii)ITA 88(b)(ii)
– Taxable DividendTaxable Dividend
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 4949
Wind-Up ProceduresWind-Up Procedures
Liquidate Or Distribute AssetsLiquidate Or Distribute Assets
Pay LiabilitiesPay Liabilities
Determine Pre-1972 CSOH, RDTOH, And Capital Determine Pre-1972 CSOH, RDTOH, And Capital Dividend AccountDividend Account
Distribute Proceeds [Elect Under ITA 83(2)]Distribute Proceeds [Elect Under ITA 83(2)]
Establish Dividend Refund On Taxable DividendsEstablish Dividend Refund On Taxable Dividends
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 5050
Sale Of SharesSale Of Shares
Pay Out Capital Pay Out Capital Dividend And RDTOH Dividend And RDTOH Prior To SalePrior To Sale
POD - ACB = Gain Or POD - ACB = Gain Or Loss On SaleLoss On Sale
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 5151
Advantages - Sale Of SharesAdvantages - Sale Of SharesSingle stage transaction - no Single stage transaction - no corporate taxcorporate tax
All income is capital gainsAll income is capital gains– 1/2 Taxable1/2 Taxable– ITA 110.6 (Lifetime capital gains)ITA 110.6 (Lifetime capital gains)
Loss carry forwards can surviveLoss carry forwards can survive
Payment for restrictive covenant Payment for restrictive covenant can be included in PODcan be included in POD
No real estate transfer taxesNo real estate transfer taxes
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 5252
Advantages - Sale Of AssetsAdvantages - Sale Of Assets
Bump-Up In Asset ValuesBump-Up In Asset Values
Goodwill RecognizedGoodwill Recognized
Redundant Assets Can Be Redundant Assets Can Be Left OutLeft Out
Vendor Can Get Losses Vendor Can Get Losses On Individual AssetsOn Individual Assets
No ReassessmentsNo Reassessments
© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 5353