Skip to content

Ms. Smith was the sole proprietor of a business that retaile

Do you have a similar question? Our professional writers have done a similar paper in past. Give Us your instructions and wait for a professional assignment!        

Ms. Smith was the sole proprietor of a business that retailed specialty teas. The business has a December 31 year-end. With the advice of her lawyer, Ms. Smith, she proposes to transfer the assets of the business on January 1, 2020 to a newly incorporated company called Smith Family Company Ltd., the common shares of which are owned by her husband. This corporation has a December 31 year-end. Ms. Smith has provided you with the following balance sheet and additional information concerning her proprietorship:Additional Information 1. Incomes for tax and financial accounting purposes have always been the same. 2. The proprietorship has developed goodwill that has a fair market value of $20,000. 3. Liabilities are to be assumed by the corporation. In addition, Ms. Smith wants to take, as consideration for the transfer of assets under subsection 85(1), the maximum (to the nearest multiple of $1,000) in notes payable by the corporation to permit the maximum deferral of taxation on the transfer. She wants the remainder of the maximum fair market value of consideration in voting preferred shares. The shares will be retractable with a legal stated capital equal to their fair market value and sufficient votes to control the corporation. 4. Tea Cart Ltd. is an arm’s length Canadian-controlled private corporation. All of the corporation’s assets are used in an active business carried on in Canada. Ms. Smith owns 5% of the shares of Tea Cart Ltd. Required: Show all calculations whether or not necessary to the final answer. Ms. Smith has come to you, her accountant, for income tax advice on this proposed transaction. (a) With respect to the assets described above consider: (i) Which assets should not be transferred to the corporation at all, with a very brief explanation of why; (3 marks) (ii) Which assets should be transferred to the corporation, but cannot or should not be transferred to the corporation under a subsection 85(1) election, with a very brief explanation and an indication of how these assets should be transferred and what amount of assumed and new (if any) debt consideration should be taken for each such asset; and ( 15 Marks) (b) Which assets should be transferred to the corporation under a subsection 85(1) election and indicate the maximum amount of debt (to the nearest multiple of $1,000) that can be taken. (20 Marks) (c) Also, indicate the amount of the shares that can be taken as consideration to defer all possible capital gains, losses and other income and to avoid other adverse tax consequences. the consideration that should be received for each asset so transferred. (4 marks) (d) Compute the ACB of the consideration and the PUC for tax purposes of the shares received from the corporation on the transfer under a subsection 85(1) election.(8 marks)Image transcription textSmith Teas BALANCE SHEET December 31, 2020 Assets Current assets Cash $ 35,000 Accounts receivable(FMV: $30,000) $45,000 Less: reserve for doubtful debts 13.000 32,000 Inventory (tea), at cost (FMV:$50,000) 37,000 Shares in Tea Cart Ltd., at cost (FMV: $50,000) 40,000 Prepaid rent 4.000 $14… Show more… Show moreAccountingBusinessFinancial AccountingTAX IAF420

Get a plagiarism-free order today   we guarantee confidentiality and a professional paper and we will meet the deadline.    

Leave a Reply

Order a plagiarism free paper today. Get 20% off your first order!

X