Shelby owns 100% of "Fit R Us" (Fit) Ltd. The paid-up capital andACB of the shares are $5,000. The company is a wholesaler of home exercise equipment. After running this business for 20 years, Shelby is looking forward to her next adventure. She would like to either sell the business or sell the assets in the business and use the funds towards her new coaching business. Fit's sales were $2,500,000 on average for the past three years. Income before tax was on average $500,000. Normally active business income is bonused down to the business limit.
 
At the beginning of the year Shelby built a second warehouse next door to the building currently being used by Fit in its operations. The warehouse was rented to a painting company who used the warehouse to store some hazardous materials. After getting the word out in the industry that she was on the market to sell she has received two interesting but different offers.
 
The first buyer, Emilie, I willing to pay fair market value for the assets but will not assume any of the liabilities. The FMV will be determined based on an independent valuation of the assets.
 
The second buyer, Ronaldo, is looking to purchase 100% of Fit's shares. He will pay an upfront amount equal to 95% of the value of the business. Any liabilities discovered after the purchase (that were not originally accrued for) will be the responsibility of Shelby. If Fit earns more than $500,000 in income before tax for the two years after the acquisition, Ronaldo will be 20% of the amount above $500,000.
 
Shelby has provided you with the following information about the assets and liabilities of Fit:
 
Note 1 - the balance is net of an allowance of $18,000; no section 22 election was made on the receivables.
 
The goodwill is in class 14.1.
 
Shelby has also provided you with some of Fit's relevant tax balances and carryforward items from its 2019 notice of assessment:
 
·      NERDTOH & ERDTOH = nil
·      CDA = nil
·      GRIP = nil


 
Fit's corporate tax rates are as follows:
·      The combined federal and provincial tax rate on active business income = 13% (income up to the available business limit)
·      The combined federal and provincial tax rate on active business income = 27% (income above the available business limit)
·      Aggregate investment income = 50 2/3%
 
You have collected some information on Shelby's tax situation.
·      Marginal tax rate = 45%
·      Federal dividend tax credit = 9/13 of the gross up
·      Provincial dividend tax credit = 3% of the actual amount of the dividend
·      Shelby has never used her lifetime capital gains exemption
 
 REQUIRED:
 
1)      Discuss the tax and other consequences for the vendor (Shelby) and for each buyer (Emilie and Ronaldo).
2)     Calculate the after-tax cash kept by Shelby if Emilie purchases the assets and the after-tax cash would be used by Shelby to wind-up Fit.
3)     Calculate the after-tax cash kept by Shelby if Ronaldo purchases the shares from Shelby for $1,000,0000. This should include a discussion of whether the shares qualify for the capital gains exemption.

Answer rating: 100% (QA)

1 If Emilie purchases the assets Shelby will report a capital gain on the sale of the assets The cap... View the full answer