Instructions

- Submit your answer using an Excel file through Blackboard.

- Show all calculations

Question 2 15 marks

GH Editing Ltd. (GHE) operates a film and videotape editing business. The corporation commenced operations in 2004 with a December 31 year-end. Ms. Roman owns 50% of the common shares and all of the non-voting preferred shares of the corporation. The other 50% of the common shares are owned by Richard Clark Drama Productions Inc. (RCDPI), which is involved in the production of television programming. RCDPI, also, has a December 31 year-end.

During the last two years, Ms. Roman has been in ill health and has not been able to do the promotional work necessary to maintain the growth of the business. As a result of this reduced marketing effort, financing of new projects has become more difficult. Her physician has ordered her to reduce considerably her commitment to the business. RCDPI has agreed to purchase all of her shares, effective April 1, 2019.

During the past taxation years, GHE has accumulated the following loss balances:

non-capital losses net capital losses

December 31, 2015 NIL 120000

2015 December 31, 2017 90000 21000

2017 December 31, 2018 70000 NIL

RCDPI intends to inject additional capital and replace Ms. Roman. RCDPI is confident that, with a new manager and better capitalization, it will be able to turn GHEs business around and make it profitable within two years.

A financial statement was prepared for GHE for the three months ended March 31, 2019. From this statement, it was determined that GHE had incurred a business operating loss for tax purposes of $78,000 and a property loss of $7,000 for the period.

The financial statement and tax records also revealed the following values of the assets owned by GHE on March 31, 2019:

Cost UCC FMV

Marketable securities 60000 N/A 40000

Land 260000 N/A 390000

Building 310000 200000 510000

General equipment 130000 95000 70000

Computers 50000 35000 20000

Vehicles 40000 10000 10000

Assume no CCA is claimed in the short taxation year.

On August 15, 2019, RCDPI transferred its post-production services division to GHE, which continued to carry on its business of film and videotape editing.

At its year ended December 31, 2019, GHE had net income of $230,000, all of which was earned in the period after March 31, 2019. The income was derived from the following sources:

film and videotape editing $ (100,000) post-production operations 320,000 taxable capital gains on marketable securities 10,000

$ 230000

In the 2020 taxation year, it is expected that GHE will earn $450,000 of which $80,000 will be from film and videotape editing.

Required: Compute taxable income for the deemed year-end and the non-capital loss balance carried forward immediately after the deemed year-end assuming that a minimum amount is elected under paragraph 111(4)(e) to utilize the maximum of expiring losses, while at the same time preserving the maximum amount of non-capital losses carried forward. (Hint: Recapture reduces current losses that would otherwise be carried forward as non-capital loss.)