Today is May 17, 2023, and you, CPA, are a Senior Tax Associate at Borden & Laurier LLP. Sylvie Condurache, Tax Manager, has called you into her office to discuss a long-time client:
 
"I just got out of a meeting with Val and Rino Moretti, the owner-managers of Moretti Auto Group Ltd. (MAG). Val and Rino are married and are equal shareholders in MAG, which has a December 31 year-end. The couple wants our firm's advice on some transactions that MAG is undertaking in 2023. I would like you to draft a memorandum to Val and Rino on the issues they raised.
"MAG operates a series of automotive dealerships in Ontario. It is being forced to sell its dealership in Guelph to the Ontario government (Appendix I). MAG is also planning to sell its dealership in Brantford to finance the acquisition of a new luxury dealership in Brantford (Appendix II).
"To the extent possible, Val and Rino wish to minimize the tax impact of the disposal of each of the dealerships. I would like you to analyze the dispositions and provide advice on the tax consequences. Specifically, I would like you to address whether the disposals qualify for the replacement property rules and to calculate the effect of the dispositions on MAG's 2023 taxable income. Be sure to include an analysis on the adjusted cost base / capital cost and undepreciated capital cost (considering the replacement property rules, if applicable).
"To fund the new luxury dealership in Brantford, MAG will need to raise approximately $4 million of additional financing to complete the transaction and purchase the initial inventory of automobiles. Val and Rino have put together a list of potential financing sources (Appendix III) and would like us to perform a qualitative analysis on the options and make a recommendation."
You ask Sylvie about a list labelled "redundant assets" that Val and Rino have provided (Appendix II). Sylvie explains:
"There are various assets of the Brantford dealership that the purchaser is not interested in acquiring. Therefore, MAG is planning to sell these assets at fair market value to Moretti Auto Consulting Services Inc. (MACS), a corporation owned solely by Val. I would like you to outline the tax implications to MAG of this transaction separately from the sale of the Guelph and Brantford dealerships. Do not worry about the tax consequences to MACS as we will deal with them later in the year when we prepare MACS' 2023 tax return. MAG is hoping to use any losses that arise from the sale of these assets to reduce its income."
Appendix I
Ontario is in the process of constructing a high-speed railway that will run through the property currently housing MAG's Guelph dealership. The railway has the potential to attract new visitors and businesses to the province, as well as reduce greenhouse gas emissions. The government will purchase the land as of October 31, 2023. MAG will be compensated $2.8 million for the land and $1.6 million for the building.
 
Val and Rino would like to use the proceeds to purchase a similar, but slightly smaller, dealership in the same area. They estimate that it will take 15 to 18 months from October 31, 2023, to locate and close on a purchase of a suitable dealership. The estimated costs for the acquisition are expected to be $2 million for the new land and $1.2 million for the new building.
The existing property was purchased in 2007 for $1 million for the land and $0.8 million for the building. The undepreciated capital cost (UCC) balance for the building at the beginning of 2023 was $307,000.

 

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Val and Rino plan to sell the assets of the Brantford dealership to finance the purchase of a new luxury dealership. A third-party purchaser has expressed interest in acquiring the major assets of the existing MAG Brantford dealership for $8.0 million. The table below summarizes the assets being sold: Land Building Car lot Accounts receivable (auto parts and various services) Inventory Class 1 Class 17 Proceeds $ Redundant assets 4,000,000 2,000,000 300,000 Marketable securities Computers - Class 50 100,000 1,600,000 Consideration will consist of $8 million cash. The deal will close on June 30, 2023. The proceeds for the land and building will be put toward the acquisition of a new property. Val and Rino have already looked at potential locations and expect to acquire the new property by December 31, 2023. The estimated costs for the acquisition are expected to be $6.5 million for land and $4 million for the building. Proceeds $ Adjusted cost Undepreciated base capital cost The purchaser of the MAG Brantford dealership will not purchase the following redundant assets. As such, they will be sold to MACS, the corporation owned solely by Val: 6,000 5,500 9,000 75,000 1,800,000 1,750,000 250,000 Salesperson vehicle-Class 10.1 Equipment-Class 8 The proceeds are equal to fair market value. 120,000 1,200,000 Adjusted cost base $ 1,135,000 174,630 10,000 8,000 33,000 200,000 Undepreciated capital cost 1,000 12,000 100,000 Val and Rino plan to sell the assets of the Brantford dealership to finance the purchase of a new luxury dealership. A third-party purchaser has expressed interest in acquiring the major assets of the existing MAG Brantford dealership for $8.0 million. The table below summarizes the assets being sold: Land Building Car lot Accounts receivable (auto parts and various services) Inventory Class 1 Class 17 Proceeds $ Redundant assets 4,000,000 2,000,000 300,000 Marketable securities Computers - Class 50 100,000 1,600,000 Consideration will consist of $8 million cash. The deal will close on June 30, 2023. The proceeds for the land and building will be put toward the acquisition of a new property. Val and Rino have already looked at potential locations and expect to acquire the new property by December 31, 2023. The estimated costs for the acquisition are expected to be $6.5 million for land and $4 million for the building. Proceeds $ Adjusted cost Undepreciated base capital cost The purchaser of the MAG Brantford dealership will not purchase the following redundant assets. As such, they will be sold to MACS, the corporation owned solely by Val: 6,000 5,500 9,000 75,000 1,800,000 1,750,000 250,000 Salesperson vehicle-Class 10.1 Equipment-Class 8 The proceeds are equal to fair market value. 120,000 1,200,000 Adjusted cost base $ 1,135,000 174,630 10,000 8,000 33,000 200,000 Undepreciated capital cost 1,000 12,000 100,000

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To provide Val and Rino Moretti the owners of Moretti Auto Group Ltd MAG with a memorandum outlining the tax implications of the dispositions they are planning for 2023 youll need to address the sale ... View the full answer