Concrete Ltd. is a Canadian-controlled private corporation that manufactures concrete blocks in its Regina plant and also operates a general contracting business. In 20X1, Concrete acquired 100% of the shares of Little Ltd., which owns a concrete plant in Saskatoon. At the time of acquisition, Little had non-capital losses carried forward in the amount of $175,000 and net capital losses carried forward of $10,000.These losses related to the 20X0 fiscal period.

Both Concrete and Little have a December 31 year end. The common shares of Concrete are owned 60% by A Ltd., 35% by B Ltd., and 5% by C Ltd. A Ltd., B Ltd., and C Ltd. are owned by Mr. A, Mr. B, and Mr. C, respectively. They are all employed by Concrete and are not related to each other.

The three shareholders intend to meet to review the current year’s financial results (20X2) and to discuss several other matters. The financial results and other issues that will be discussed are outlined below.

1. After it was acquired, Little continued to lose money. For the year ended December 31, 20X2, it suffered a loss of $60,000. At the time of acquisition, the owners planned to make major changes to Little’s operations, but they have not been able to complete these on schedule.

2. Concrete had a pre-tax profit of $190,000 for 20X2. Of this amount, $120,000 related to the general contracting business. The contracting business subcontracted all of its work and maintained only a small staff of estimators and administrators.

3. Concrete has accumulated cash reserves that will not be needed for business expansion. The owners are considering paying a $100,000 dividend out of Concrete to the three corporate shareholders. Each holding company will use its share of the dividend for investment purposes.

4. During the year, an agreement was made among A Ltd., B Ltd., and C. Ltd. stating that in the event of the death of A, B or C, Concrete must buy back the shares owned by the deceased’s holding corporation. At the time of the agreement, Concrete purchased a life insurance policy on each individual that would provide it with funds to buy back the shares.

5. Several months earlier, A had suggested that Concrete acquire a profitable swimming pool installation business. B and C had vetoed the idea. A intends to inform B and C that he will make the acquisition on his own and intends to acquire the business through A Ltd.

Required:

1. Diagram the financial structure of the shareholders and the corporations described above.

2. What tax advice would you provide with respect to the operations of the subsidiary, Little, considering its poor financial results?

3. Discuss the implications of declaring a dividend of $100,000 from Concrete.

4. If one of the individuals died, what tax implications would arise from the realization of life insurance proceeds?

5. How might the proposed business acquisition by A Ltd. affect B and C? What addition to the shareholder’s agreement should B and C propose?