Subpump Limited is an active business corporation owned 100% by George Simpson, who has been attempting to sell the company for several years and have recently received an offer from a serious buyer.

As of December 31, 2022, the company’s financial position was as follows:

Assets
Accounts receivable					$	2,000,000
Inventory (at cost)						700,000
Land						1,000,000
Building (at cost)	$	1,500,000
Accumulated capital cost allowance		(600,000	)			900,000
Equipment (at undepreciated capital cost)						400,000
Goodwill (at cost)	$	300,000
Accumulated capital cost allowance		(120,000	)			180,000
					$	5,180,000
Liabilities and Shareholders’ Equity
Current liabilities					$	2,380,000
Shareholders’ equity:
Common shares	$	10,000
Retained earnings		2,790,000				2,800,000
					$	5,180,000

Additional information

Relevant asset values are as follows:

	Fair market value		UCC
Accounts Receivable	2,000,000		N/A
Inventory	750,000		N/A
Land	1,200,000		N/A
Building	1,700,000		900,000
Equipment	350,000		400,000
Goodwill	500,000		180,000

On December 31, 2022, the company had a balance of $9,000 in its capital dividend account. The balances in the NERDTOH, ERDTOH and GRIP accounts were $0.

Simpson acquired his shares of Subpump 10 years ago for $500,000.

Simpson’s shares of Subpump are qualifying small business corporation shares. Simpson has never used his capital gains exemption.

The purchaser has stated two alternatives in his purchase offer:

A purchase of all assets at fair market value and an assumption of all liabilities. The balance will be paid in cash immediately.

A purchase of the shares for $3,100,000 in cash. A condition of sale is that no capital dividend shall be paid prior to the sale.

Under the terms of the asset sale, a section 22 election will not be made.

Simpson is in a 50% marginal tax bracket. The combined (federal and provincial) marginal tax rate is 35% on eligible dividends and 43% on non-eligible dividends received (net of the dividend tax credit) and 50% on other income. Subpump’s tax rate is 27% on business income not subject to the small-business deduction and 13% on earnings subject to the small-business deduction. Investment income is subject to a 50 2/3% tax rate, including a 10 2⁄3% refundable tax.

Required:
1. Determine the after-tax proceeds that Simpson will retain after the share sale. Enter numbers as positive amounts unless otherwise noted.

Proceeds =	$ 3,100,000
Less: ACB =?
Capital gain
Taxable gain, net of any applicable gains deduction = ?
Less: Personal tax payable = ?
After tax proceeds = ?

2. You will now calculate the corporate tax implications of selling the assets. Start by completing the chart below. If a column is not impacted by the sale of a particular asset, enter “0” in that cell. Enter negative amounts with a minus sign (–).

When computing NERDTOH, use 0.3067 when multiplying to represent 30⅔% and do not use more than 4 decimal places when multiplying. Round all numbers to the nearest dollar.

Asset description	Proceeds	Active Business Income	Aggregate Investment Income	Capital Dividend account (CDA)	Non-eligible refundable dividend tax on hand (NERDTOCH)
Opening balance
Account receivable	2,000,000
Inventory	750,000
Land	1,200,000
Building	1,700,000
Equipment	350,000
Goodwill	500,000
	6,500,000

3. Simpson informs you that there has been some changes to the tax values of the various assets. You update your previous calculations.

The revised total active business income is	806,400
The revised total aggregate investment income is	270,000
The balance in the capital dividend account is now	279,000
The balance in the non-eligible refundable dividend tax on hand is now	82,809

The next step is to determine the amount of proceeds that will be available inside the company to redeem the shares.
In the drop down-menu selections, select the appropriate description. Items may be used more than once or not at all.
Next to the description, enter the appropriate number. Enter negative amounts with a minus sign (–). If the amount is zero, enter “0”. Round each entry to the nearest dollar.

Total proceeds from asset sale	6,500,000
Less: Liabilities	= ?
Less: tax on active business	= ?
Less: Tax on aggregate investment income	= ?
Balance in non-eligible refundable dividend on hand (NERDTOH)	= ?
Cash available to redeem shares	= ?

4. Ignore the amount calculated in Required 3 for the cash available to redeem the shares and assume that the amount was actually 4,000,000
Determine the deemed dividend that would result if the shares of Subpump are redeemed.

In the drop down-menu selections, select the appropriate description. Items may be used more than once or not at all.
Next to the description, enter the appropriate number. Enter negative amounts with a minus sign (–). If the amount is zero, enter “0”. Round each entry to the nearest dollar.

Cash available	$ 4,000,000
Paid-up capital	= ?
Deemed dividend	= ?

Taxable capital gain (or allowable capital loss) on redemption of shares

= ?

5. Ignore the amount calculated in Required 4 for the deemed dividend and assume the deemed dividend was actually 3,970,000
The amounts from Required 3 for active business income, aggregate investment income, CDA and NERDTOH are unchanged.

What would be the optimal mix of dividends to minimize Simpson's personal tax payable?
Enter positive numbers only. If the amount should be zero, enter “0”. Round each entry to the nearest dollar.
The mix of dividends should add up to 3,970,000

Eligible dividends	= ?
Non-eligible dividends	= ?
Capital dividends	= ?
Total deemed dividends	= ?

6. Ignore the dividend mix you determined in Required 5 and assume that the actual dividends ended up being:

Eligible dividends	200,000
Non-eligible dividends	3,520,000
Capital dividends	250,000
Total dividends paid	3,970,000

Assume the capital gain or loss calculated on the redemption of shares in Required 4 is zero.

Determine the after-tax proceeds kept by Simpson.

In the drop down-menu selections, select the appropriate description. Items may be used more than once or not at all.
Next to the description, enter the appropriate number. Enter negative amounts with a minus sign (–). If the amount is zero, enter “0”. Round each entry to the nearest dollar.

Total dividends paid	3,970,000
Less: tax on eligible dividends	= ?
Less: tax on non-eligible dividends	= ?
Paid-up capital	= ?
Total after tax proceeds	= ?

Answer rating: 100% (QA)

1 Determine the aftertax proceeds that Simpson will retain after the share sale Enter numbers as positive amounts unless otherwise noted Proceeds 12 of 3100000 1550000 ACB 500000 Capital gain 1050000 ... View the full answer