chapter 19 other rollovers, business valuation, sale of an incorporated business, and tax shelters

Chapter 19Chapter 19

Other Rollovers, Other Rollovers, Business Valuation, Business Valuation,

Sale Of An Incorporated Sale Of An Incorporated Business, And Tax SheltersBusiness, And Tax Shelters

© 2007, Clarence Byrd Inc.© 2007, Clarence Byrd Inc. 22

Share For Share Exchange - Share For Share Exchange - ITA 85.1ITA 85.1

ApplicationApplication

– AutomaticAutomatic

– Can Elect Out In Tax Can Elect Out In Tax ReturnReturn


ITA 85.1 ExampleITA 85.1 Example

May Ltd.

FMV = $700,000 ACB = $100,000 PUC = $100,000

Ms. May (100%)

Acquirer Ltd.(A Large Public

Company)

May C/S100%

AcquirerC/S


ITA 85.1 ExampleITA 85.1 Example

No Capital Gain For Ms. MayNo Capital Gain For Ms. May– POD = Old ACB = $100,000POD = Old ACB = $100,000

[ITA 85.1(1)(a)(i)] [ITA 85.1(1)(a)(i)]

ACB For Ms. May’s Acquirer SharesACB For Ms. May’s Acquirer Shares– ACB(Old) = ACB(New) = $100,000 ACB(Old) = ACB(New) = $100,000

[ITA 85.1(1)(a)(ii)][ITA 85.1(1)(a)(ii)]

ACB For Acquirer’s May SharesACB For Acquirer’s May Shares– Lesser Of FMV And PUC = $100,000 Lesser Of FMV And PUC = $100,000

[ITA 85.1(1)(b)][ITA 85.1(1)(b)]

PUC Of Acquirer’s New SharesPUC Of Acquirer’s New Shares– Old PUC = $100,000Old PUC = $100,000


Conditions For RolloverConditions For Rollover

Transferred Shares: Taxable Canadian PropertyTransferred Shares: Taxable Canadian Property

Purchaser: Taxable Canadian CorporationPurchaser: Taxable Canadian Corporation

Consideration: Shares Of A Single ClassConsideration: Shares Of A Single Class

Relationship: Arm’s LengthRelationship: Arm’s Length

Vendor: Must Not Control PurchaserVendor: Must Not Control Purchaser

No ITA 85(1) ElectionNo ITA 85(1) Election

No Gain Or Loss RecognitionNo Gain Or Loss Recognition


Reorganization - ITA 86Reorganization - ITA 86

ApplicationApplication

– Financial DistressFinancial Distress

– Estate FreezeEstate Freeze

– Takeover By Key Takeover By Key EmployeeEmployee


ITA 86 ConditionsITA 86 Conditions

Articles Of IncorporationArticles Of IncorporationMust Provide For All Types Of Shares To Be UsedMust Provide For All Types Of Shares To Be Used

ConsiderationConsiderationCan Include Non-Share Consideration Up To The Can Include Non-Share Consideration Up To The ACB Of Redeemed Shares (Generally Does Not)ACB Of Redeemed Shares (Generally Does Not)

Shares Must Be Capital PropertyShares Must Be Capital Property

Classes And QuantitiesClasses And QuantitiesAll Shares Of A Particular Class Held By All Shares Of A Particular Class Held By ShareholderShareholder


Tax ConsequencesTax Consequences

Cost Of Boot - ITA 86(1)(a)Cost Of Boot - ITA 86(1)(a)– Equal To FMVEqual To FMV

Cost Of New Shares - ITA 86(1)(b)Cost Of New Shares - ITA 86(1)(b)– Old ACB, Less BootOld ACB, Less Boot

Proceeds Of Redemption Proceeds Of Redemption - ITA 84(5)(d)- ITA 84(5)(d)– Boot, Plus PUC Of New SharesBoot, Plus PUC Of New Shares

Proceeds Of Disposition Proceeds Of Disposition - ITA 86(1)(c)- ITA 86(1)(c)– Boot, Plus ACB Of New SharesBoot, Plus ACB Of New Shares

PUC Reduction - ITA 86(2.1)(a)PUC Reduction - ITA 86(2.1)(a)– New LSC, Less (Old PUC - Boot)New LSC, Less (Old PUC - Boot)


ITA 86(1) - Example OneITA 86(1) - Example One

Shirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC and an ACB equal to $100,000. Their FMV is $1,000,000.

Foley

Inc.

$ 75,000 Note$925,000 P/S (LSC = FMV)

Foley Inc. Shares


Example One ResultsExample One ResultsACB Of BootACB Of Boot– $75,000$75,000

ACB Of New SharesACB Of New Shares– $100,000 - $75,000 = $25,000$100,000 - $75,000 = $25,000

PUC ReductionPUC Reduction– $925,000 - ($100,000 - $75,000) = $900,000$925,000 - ($100,000 - $75,000) = $900,000– New PUC = $925,000 - $900,000 = $25,000New PUC = $925,000 - $900,000 = $25,000

Proceeds Of RedemptionProceeds Of Redemption– $25,000 + $75,000 = $100,000$25,000 + $75,000 = $100,000

Proceeds Of DispositionProceeds Of Disposition– $25,000 + $75,000 = $100,000$25,000 + $75,000 = $100,000


Example One - Tax ImplicationsExample One - Tax Implications

ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil

Capital Gain – ImmediateCapital Gain – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil

Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000ITA 84(3) Dividend = $925,000 - $25,000 = $900,000

Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - $25,000 = $900,000Capital Gain = $925,000 - $25,000 = $900,000


ITA 86(1) - Example TwoITA 86(1) - Example TwoShirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC of $100,000 and an ACB equal to $75,000. Their FMV is $1,000,000.

Foley

Inc.

$ 75,000 Note$925,000 P/S (LSC = FMV)

Foley Inc. Shares


Example Two ResultsExample Two Results

ACB Of BootACB Of Boot– $75,000$75,000

ACB New SharesACB New Shares– $75,000 - $75,000 = $75,000 - $75,000 = NilNil

PUC ReductionPUC Reduction– $925,000 - ($100,000 - $75,000) = $925,000 - ($100,000 - $75,000) = $900,000$900,000– New PUC = $925,000 - $900,000 = New PUC = $925,000 - $900,000 = $25,000$25,000

Proceeds Of RedemptionProceeds Of Redemption– $25,000 + $75,000 = $25,000 + $75,000 = $100,000$100,000

Proceeds Of DispositionProceeds Of Disposition– Nil + $75,000 = Nil + $75,000 = $75,000$75,000


Example Two - Tax ImplicationsExample Two - Tax Implications

ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $100,000 - $100,000 = Nil$100,000 - $100,000 = Nil

Capital Gain – ImmediateCapital Gain – Immediate– $75,000 - $75,000 = Nil$75,000 - $75,000 = Nil

Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000ITA 84(3) Dividend = $925,000 - $25,000 = $900,000– Capital Gain = ($925,000 - $900,000) - Nil = $25,000Capital Gain = ($925,000 - $900,000) - Nil = $25,000

Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - Nil = $925,000Capital Gain = $925,000 - Nil = $925,000


ITA 86(1) - Example ThreeITA 86(1) - Example ThreeShirley Foley owns 100 percent of the outstanding common shares of Foley Inc. The shares have a PUC of $50,000 and an ACB equal to $100,000. Their FMV is $1,000,000.

Foley

Inc.

$ 75,000 Note$925,000 P/S (LSC = FMV)

Foley Inc. Shares


Example Three ResultsExample Three ResultsACB Of BootACB Of Boot– $75,000$75,000

ACB Of New SharesACB Of New Shares– $100,000 - $75,000 = $25,000$100,000 - $75,000 = $25,000

PUC ReductionPUC Reduction– $925,000 - ($50,000 - $75,000) = $925,000$925,000 - ($50,000 - $75,000) = $925,000– New PUC = $925,000 - $925,000 = NilNew PUC = $925,000 - $925,000 = Nil

Proceeds Of RedemptionProceeds Of Redemption– Nil + $75,000 = $75,000Nil + $75,000 = $75,000



Example Three Tax ImplicationsExample Three Tax Implications

ITA 84(3) Dividend – ImmediateITA 84(3) Dividend – Immediate– $75,000 - $50,000 = $25,000$75,000 - $50,000 = $25,000

Capital Loss – ImmediateCapital Loss – Immediate– ($100,000 - $25,000) - $100,000 = ($25,000)($100,000 - $25,000) - $100,000 = ($25,000)

Subsequent RedemptionSubsequent Redemption– ITA 84(3) Dividend = $925,000 - Nil = $925,000ITA 84(3) Dividend = $925,000 - Nil = $925,000– Capital Loss = $925,000 - $925,000 - $25,000 = ($25,000)Capital Loss = $925,000 - $925,000 - $25,000 = ($25,000)

Subsequent SaleSubsequent Sale– Capital Gain = $925,000 - $25,000 = $900,000Capital Gain = $925,000 - $25,000 = $900,000


ITA 86(2) Gifting RuleITA 86(2) Gifting Rule

ConditionsConditions

– FMV of old shares is FMV of old shares is greater than FMV of new greater than FMV of new shares plus bootshares plus boot

– Excess can be regarded as Excess can be regarded as a gift (A related party is a a gift (A related party is a shareholder)shareholder)


ITA 86(2) – Gifting ResultsITA 86(2) – Gifting Results

POD (Old) - ITA 86(2)(c) - Lesser OfPOD (Old) - ITA 86(2)(c) - Lesser Of– Boot, Plus GiftBoot, Plus Gift– FMV Of Old SharesFMV Of Old Shares

Loss On OldLoss On Old– Deemed Nil Under ITA 86(2)(d)Deemed Nil Under ITA 86(2)(d)– Gain Will Be TaxedGain Will Be Taxed

ACB (New) - ITA 86(2)(e)ACB (New) - ITA 86(2)(e)– ACB (Old), Less (Boot + Gift)ACB (Old), Less (Boot + Gift)


ITA 86(2) ExampleITA 86(2) ExampleMr. Stern owns 80 percent of the outstanding common shares of Stern Ltd. The remaining 20 percent are held by his son. The common shares have a PUC and an ACB of $600,000. Their fair market value is $1,000,000.

Stern

Ltd.

$200,000 Cash$500,000 P/S (LSC = FMV)

80% Of Stern Ltd. C/S


ITA 86(2) Example OneITA 86(2) Example One

PUC ReductionPUC Reduction– $500,000 - ($480,000 - $200,000) = $220,000$500,000 - ($480,000 - $200,000) = $220,000– New PUC = $500,000 - $220,000 = $280,000New PUC = $500,000 - $220,000 = $280,000

GiftGift– $800,000 - $700,000 = $100,000$800,000 - $700,000 = $100,000

Non-Share ConsiderationNon-Share Consideration– $200,000 Cash$200,000 Cash


ITA 86(2) ExampleITA 86(2) Example

Cost Of New SharesCost Of New Shares– $480,000 - ($200,000 + $100,000) = $180,000$480,000 - ($200,000 + $100,000) = $180,000

Proceeds Of Redemption - Old SharesProceeds Of Redemption - Old Shares– $200,000 + $280,000 = $480,000$200,000 + $280,000 = $480,000

ITA 84(3) Deemed DividendITA 84(3) Deemed Dividend– Proceeds Of Redemption Equals Old PUC: Proceeds Of Redemption Equals Old PUC:

No ITA 84(3) Deemed DividendNo ITA 84(3) Deemed Dividend


ITA 86(2) Example OneITA 86(2) Example One


Capital Gain - A Disallowed LossCapital Gain - A Disallowed Loss– $300,000 - $480,000 = Nil [ITA 86(2)(d)]$300,000 - $480,000 = Nil [ITA 86(2)(d)]

Net Economic EffectNet Economic Effect– No ITA 84(3) Dividend Or Capital GainNo ITA 84(3) Dividend Or Capital Gain– Deferred Gain = $500,000 - $180,000 = $320,000Deferred Gain = $500,000 - $180,000 = $320,000– Son’s Shares Up $100,000 (No Increase In ACB)Son’s Shares Up $100,000 (No Increase In ACB)


Amalgamations - ITA 87Amalgamations - ITA 87

Automatic, No Automatic, No Election RequiredElection Required

A Type Of Business A Type Of Business CombinationCombination


Basic ProcedureBasic Procedure

A Ltd. & B Ltd. Shareholders

CompanyA

CompanyB

AB Ltd.A And B Ltd. Shares

AB Shares

Assets

Assets



Predecessor CorporationsPredecessor Corporations– Must Be Taxable And Canadian – ITA 87(1)(a)Must Be Taxable And Canadian – ITA 87(1)(a)

Property To CorporationProperty To Corporation– All Assets And Liabilities Of Both Companies All Assets And Liabilities Of Both Companies

- ITA 87(1)(a) And (b)- ITA 87(1)(a) And (b)

ConsiderationConsideration– All Shareholders Must Receive Shares All Shareholders Must Receive Shares

– ITA 87(1)(c)– ITA 87(1)(c)


Economic OutcomeEconomic Outcome

Assets And Liabilities Assets And Liabilities Carried Over At Old Tax Carried Over At Old Tax ValuesValues

New Shares At ACB Of New Shares At ACB Of Old SharesOld Shares


Position Of New CorporationPosition Of New Corporation

Asset TransfersAsset Transfers– Inventory At CostInventory At Cost– Depreciable Property At UCCDepreciable Property At UCC

Retain Old Capital Cost For Retain Old Capital Cost For Recapture And Capital GainsRecapture And Capital Gains

– Non-Depreciable Capital Property Non-Depreciable Capital Property At ACBAt ACB

– Eligible Capital Property At 4/3 Eligible Capital Property At 4/3 CECCEC



Tax AccountsTax Accounts

– Capital Dividend Accounts Capital Dividend Accounts TransferredTransferred

– RDTOH Balances TransferredRDTOH Balances Transferred

– Both Corporations Must Be Both Corporations Must Be PrivatePrivate


Position Of New CorporationPosition Of New CorporationDeemed Year EndDeemed Year End– Old CorporationsOld Corporations

Likely To Be Short Fiscal Year For CCA And SBDLikely To Be Short Fiscal Year For CCA And SBD

Counts As A Year For Loss Carry Forward PurposesCounts As A Year For Loss Carry Forward Purposes

– New CorporationNew CorporationCan Choose Any New Fiscal YearCan Choose Any New Fiscal Year

May Also Be ShortMay Also Be Short



Loss Carry Forwards - ITA 87(2.1)Loss Carry Forwards - ITA 87(2.1)

– Number Of Available Years Not Number Of Available Years Not ChangedChanged

– Deemed Year End Counts As One Deemed Year End Counts As One YearYear

– There May Or May Not Be An There May Or May Not Be An Acquisition Of Control (Usually Not)Acquisition Of Control (Usually Not)

GRIP carried forwardGRIP carried forward


Position Of ShareholdersPosition Of Shareholders

Transfer ValuesTransfer Values– POD (Old) = ACB (Old)POD (Old) = ACB (Old)– ACB (New) = POD (Old)ACB (New) = POD (Old)– Therefore: ACB (Old) = ACB Therefore: ACB (Old) = ACB

(New)(New)

ConditionsConditions– Consideration Is Shares Of Successor Consideration Is Shares Of Successor

CorporationCorporation– Original Shares Are Capital PropertyOriginal Shares Are Capital Property– Gift To Related Parties ProhibitedGift To Related Parties Prohibited


Asset Bump UpAsset Bump Up

A bump up of non-A bump up of non-

depreciable asset values is depreciable asset values is

possible (see discussion possible (see discussion

under ITA 88(1) wind up)under ITA 88(1) wind up)


Tax PlanningTax Planning

Utilization Of LossesUtilization Of Losses

Utilization Of UCC BalancesUtilization Of UCC Balances

Enhanced M&P DeductionEnhanced M&P Deduction

Change In Fiscal YearChange In Fiscal Year

Carry Forward Of Losses, Capital Carry Forward Of Losses, Capital

Dividend, RDTOH, and GRIPDividend, RDTOH, and GRIP


Winding-Up Of A Subsidiary - Winding-Up Of A Subsidiary - ITA 88(1)ITA 88(1)

Subsidiary

ParentCompany

Assets At Tax Values

Sub shares cancelled



90 Percent Owned Subsidiary90 Percent Owned Subsidiary

Both Are Taxable Canadian CorporationsBoth Are Taxable Canadian Corporations

Consistent With Relevant LegislationConsistent With Relevant Legislation


POD To SubsidiaryPOD To Subsidiary

Inventory At CostInventory At CostNon-Depreciable At ACBNon-Depreciable At ACBCEC At 4/3 BalanceCEC At 4/3 BalanceDepreciable At UCC (Capital Cost Depreciable At UCC (Capital Cost Retained)Retained)Reserves - Carried ForwardReserves - Carried Forward


Cost To ParentCost To Parent

Equal To The POD To The SubsidiaryEqual To The POD To The Subsidiary


Bump-Up In Asset ValuesBump-Up In Asset Values

Non-Depreciable Owned Since AcquisitionNon-Depreciable Owned Since AcquisitionBump-Up = Lesser of:Bump-Up = Lesser of:– [FMV (At Acquisition) – Cost][FMV (At Acquisition) – Cost]– ACB Of Shares, LessACB Of Shares, Less

Cost Of Subsidiary’s Net AssetsCost Of Subsidiary’s Net AssetsDividends Paid To The Parent Since AcquisitionDividends Paid To The Parent Since Acquisition


Subsidiary LossesSubsidiary Losses

Deduct In Parent’s First Year Following Deduct In Parent’s First Year Following Year Of Wind-UpYear Of Wind-Up

Based On Parent’s Year In Which The Based On Parent’s Year In Which The Subsidiary’s Year End FallsSubsidiary’s Year End Falls


POD Of SharesPOD Of Shares

Greater Of:Greater Of:– Lesser OfLesser Of

PUCPUC

Cost Of Net AssetsCost Of Net Assets

– ACB Of The SharesACB Of The Shares

No Loss Is PossibleNo Loss Is Possible


Convertible PropertiesConvertible PropertiesITA 51ITA 51

Conversion Of Bond Or P/S Conversion Of Bond Or P/S To C/STo C/S

General RulesGeneral Rules– ACB Of C/S = ACB Of Debt Or ACB Of C/S = ACB Of Debt Or

P/SP/S– No Non-Share ConsiderationNo Non-Share Consideration– PUC - Increase On C/S Equals PUC - Increase On C/S Equals

Carrying Value Of Debt To Avoid Carrying Value Of Debt To Avoid ITA 84(1) DividendITA 84(1) Dividend

Gifting RulesGifting Rules


Valuation Of A BusinessValuation Of A Business

Asset Based MethodsAsset Based Methods

Income Based Income Based MethodsMethods– Gross RevenuesGross Revenues– EarningsEarnings


Sale Of An Incorporated Sale Of An Incorporated BusinessBusiness

AlternativesAlternatives– Sale Of Assets Sale Of Assets

With Wind-Up FollowingWith Wind-Up Following

– Sale Of Shares Sale Of Shares (Corporation Continues)(Corporation Continues)


Restrictive CovenantsRestrictive Covenants(a.k.a. Non-Competition Agreements)(a.k.a. Non-Competition Agreements)

Taxpayer Agrees To Have His Taxpayer Agrees To Have His Ability To Provide Goods Or Ability To Provide Goods Or Services RestrictedServices Restricted

In General, Included In Income In General, Included In Income [ITA 56.4(2)][ITA 56.4(2)]

ExceptionsExceptions– ITA 56.4(3)(a) – Employment IncomeITA 56.4(3)(a) – Employment Income– ITA 56.4(3)(b) – Cumulative Eligible ITA 56.4(3)(b) – Cumulative Eligible

CapitalCapital– ITA 56.4(3)(c) – Sale Of An Eligible ITA 56.4(3)(c) – Sale Of An Eligible

InterestInterest


Asset DispositionsAsset Dispositions

Accounts Receivable - ITA 22Accounts Receivable - ITA 22

Inventories - ITA 23Inventories - ITA 23

Prepayments - No specific rulesPrepayments - No specific rules


Asset DispositionsAsset Dispositions

Non-Depreciable AssetsNon-Depreciable Assets– Capital Gain Or Loss With No Capital Gain Or Loss With No

ReservesReserves

Depreciable AssetsDepreciable Assets– Recapture, Terminal Loss, Or Capital Recapture, Terminal Loss, Or Capital

GainGain– General RulesGeneral Rules

GoodwillGoodwill– 3/4 Of Proceeds To Income3/4 Of Proceeds To Income


Proceeds > PUCProceeds > PUC

ITA 84(2) Deemed DividendITA 84(2) Deemed Dividend– Capital Dividend (If Elected)Capital Dividend (If Elected)

Not TaxedNot Taxed

– Pre-1972 CSOH DistributionPre-1972 CSOH DistributionDeemed Not To Be A Dividend Deemed Not To Be A Dividend ITA 88(b)(ii)ITA 88(b)(ii)

– Taxable DividendTaxable Dividend


Wind-Up ProceduresWind-Up Procedures

Liquidate Or Distribute AssetsLiquidate Or Distribute Assets

Pay LiabilitiesPay Liabilities

Determine Pre-1972 CSOH, RDTOH, And Capital Determine Pre-1972 CSOH, RDTOH, And Capital Dividend AccountDividend Account

Distribute Proceeds [Elect Under ITA 83(2)]Distribute Proceeds [Elect Under ITA 83(2)]

Establish Dividend Refund On Taxable DividendsEstablish Dividend Refund On Taxable Dividends


Sale Of SharesSale Of Shares

Pay Out Capital Pay Out Capital Dividend And RDTOH Dividend And RDTOH Prior To SalePrior To Sale

POD - ACB = Gain Or POD - ACB = Gain Or Loss On SaleLoss On Sale


Advantages - Sale Of SharesAdvantages - Sale Of SharesSingle stage transaction - no Single stage transaction - no corporate taxcorporate tax

All income is capital gainsAll income is capital gains– 1/2 Taxable1/2 Taxable– ITA 110.6 (Lifetime capital gains)ITA 110.6 (Lifetime capital gains)

Loss carry forwards can surviveLoss carry forwards can survive

Payment for restrictive covenant Payment for restrictive covenant can be included in PODcan be included in POD

No real estate transfer taxesNo real estate transfer taxes


Advantages - Sale Of AssetsAdvantages - Sale Of Assets

Bump-Up In Asset ValuesBump-Up In Asset Values

Goodwill RecognizedGoodwill Recognized

Redundant Assets Can Be Redundant Assets Can Be Left OutLeft Out

Vendor Can Get Losses Vendor Can Get Losses On Individual AssetsOn Individual Assets

No ReassessmentsNo Reassessments

chapter 19 other rollovers, business valuation, sale of an incorporated business, and tax shelters

Documents

shares slide

acb new shares

clarence byrd

acb of redeemed shares

fmv cost of new shares

types of shares

reorganization ita

old puc boot slide