Pat is a shareholder in Muddled Thinking Limited (MTL) and owns 10 percent of the company's shares.
Question:
Pat is a shareholder in Muddled Thinking Limited (MTL) and owns 10 percent of the company's shares. She has received an offer from MTL to repurchase some of her shares as part of a non pro rata cancellation of 16% of MTL's shares. Pat comes to you with several questions concerning this share cancellation. In the repurchase offer, MTL has advised that it has not made any prior share repurchases, and that an independent valuation of the shares places them at $1.50 per share.
Required:
(a) In the offer documentation Pat reads about certain "brightline tests"? In draft letter format, provide Pat with a brief summary of these brightline tests. Explain your answer with reference to the Income Tax Act 2007.
(b) Also in your draft letter, advise Pat whether the proceeds she receives in return for the cancellation of her shares will be assessable income to her? Explain your answer with reference to the Income Tax Act 2007.
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart