Ten years ago, you decided to quit your corporate accounting job to fulfill your dreams of starting
Question:
Ten years ago, you decided to quit your corporate accounting job to fulfill your dreams of starting an interior design business – Lack-of-Colour Design Inc., a CCPC with an October 31, 2020 year end. You successfully grew your business over the decade and you are now at a point in your life where you want to fully enjoy the fruits of your labour. You have decided to sell your business to a local competitor Soleil Design Limited and wind-up the company. After much negotiations, Soleil Design has agreed to purchase the assets of your business. As a CPA, you are so confident in your knowledge of the Income Tax Act (specifically the tax implications on the sale of the assets of a corporation), that you are not going to waste money hiring another CPA and will calculate the tax implications of the sale all by yourself.
You begin by preparing the following Balance Sheet based on tax values at November 1, 2020.
Lack-of-Colour Design Inc.
Balance Sheet
As at November 1, 2020
Cash $ 15,000
Accounts receivable 90,000
Eligible RDTOH Nil
Non-Eligible RDTOH 202,000
Land - Adjusted Cost Base 835,000
Building - Undepreciated Capital Cost 915,000
Total Assets $2,057,000
Liabilities $ 436,700
Paid Up Capital 940,000
Capital Dividend Account Nil
Other Income Retained 680,300
Total Equities $2,057,000
Other Information:
1. The fair market value of accounts receivable is $86,000.
2. The current fair market value of the Land is $2,100,000.
3. The Building had a capital cost of $787,900. Its fair market value on November 1, 2020 is $1,320,000.
4. The adjusted cost base of the common shares is equal to $940,000, their paid up capital.
5. On November 1, 2020, the Company has a nil balance in its General Rate Income Pool (GRIP) account.
6. All of the assets are disposed of on November 1, 2020 at their fair market values. The corporation's liabilities are also paid on this date. The after-tax proceeds from the sale will be distributed to you on October 31, 2020.
7. The provincial tax rate for the corporation on income that qualifies for the small business deduction is 2.5% percent. On all other income, the provincial rate is 13 percent.
8. No dividends have been paid in the past two years.
9. The provincial dividend tax credit on non-eligible dividends and eligible dividends is 25% and 35%, respectively.
10. The corporation has a net capital loss balance of $250,000.
Required:
Calculate the tax implications of selling the assets. Specifically, calculate the amounts to be included in your taxable income (i.e. amounts available for distribution to you after liquidation, components of the distribution, taxable capital gains, etc?), and the personal tax liability that results from the sale and wind-up of the corporation.
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair