accounting
necolas00073
CH15AP1.xlsxAssess the situation
| Chapter 15- Problem 1 "Karen, a resident of White Rock.." | |||||||||
| *Read through the study guide page xxv - Problem-Solving Process for Tax - A case analysis Framework | |||||||||
| *Note: 2019 Capital Gains Deduction limit is $866,912 we will use this number in the course. 2020 Capital Gains Deduction limit is $883,384 indexed each year. | |||||||||
| Assess the situation | |||||||||
| STEP 1: Draw a diagram identyfing all stakeholders eg. Corporate organization charts | |||||||||
| Karen | (Cdn resident/CGE available) | ||||||||
| FMV | $1.8 MIL | related, affiliated | |||||||
| 100% | ACB/PUC | $1,000 | |||||||
| Distribution business | |||||||||
| CYBER | |||||||||
| CORP | |||||||||
| CCPC | |||||||||
| 25% | connected | ||||||||
| Others | Distribution business 100% ABA's | after business assests | |||||||
| CYBER | |||||||||
| 75% | SUB | ||||||||
| CCPC | |||||||||
| Dec 31 year end | |||||||||
| STEP 2: | Identify the relationships amoung the stakeholders, e.g, related, affiliated, associated, connected | ||||||||
| * review chapter 12 paragraphs 12,170 - 12,200, these paragraphs review the Associated Corporation rules, Relationships Involving Corporations and the concept of control) | |||||||||
| karen controls cyber Corp so she is related and affiliated | |||||||||
| Cyber corp is connect to cyber sub ( 25% ownership ) | |||||||||
| STEP 3: | Identify the profile of each stakeholder e.g. tax features, risk profile | ||||||||
| Karen | |||||||||
| 1. Karen is individual , has LCGE (Lifetime capital Gain excemption) available | |||||||||
| 2.She is Candian residence through our this year | |||||||||
| Cyber Corp | |||||||||
| FMV is 1.8 mil. | |||||||||
| Paid Up Capital PUC $1000 | |||||||||
| Vaule of the assest have reamined stable over the past three years | |||||||||
| Marketable securities not part of active business. | |||||||||
| Own 25% of Sub. | |||||||||
| Cyber Sub | |||||||||
| Uses all of its assests in active business | |||||||||
| STEP 4: | Understand the decision maker and their objectives | ||||||||
| Karen is the decision maker | |||||||||
| detemine is she can use LCGE | |||||||||
| Potentially sell the shares of cyber Corp | |||||||||
| what action can be taken to rectify the problem that the share do not qualify as QSBC shares | |||||||||
| STEP 5: | Identify the relevant past transaction/events or planned future transactions/events and create a timeline | ||||||||
| 2003 incorporated | |||||||||
| Past three years - Vaules have been stable | |||||||||
| Potentially goting to sell shares of Cyber Corp that she owned for more than 24 months |
Identify the Issues
| Identify the Issues | |
| 1. Identify all of the major tax issues and any non-tax issues | |
| Is She elligble to use the LCGE? | |
| Are the shares is QSBC | |
| Is Cyber Corp a SBC | |
| Has the holding period met ? | |
| Does Cyber Corp meet the basic asses test | |
| 2. Identify missing information or assumptions made | |
| assumed that she has not used any of her LCGE in the past | |
Analyze the Major Issues
| Analyze the Major Issues | ||
| 1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act | ||
| Does Karen qualify to claim the CGE? | ||
| YES she qualifies , she is candiain resident and it is assumed she has not use her LCGE in the past | ||
| Are the shares of Cyber Corp QSBC shares? | ||
| These three test have to be met | ||
| 1. SBC Test | ||
| 2.Holding Period Test | ||
| 3.The basic assest of modified assest test ( if (BAT) basic assest test is not met | ||
| (1) SBC Test | ||
| AT THE time of sale it must be SBC | ||
| Cyber Corp is a ccpc and shares owned by canadian resident | ||
| Cyber corp is a SBC AS all assests used in AB (active Business ) | ||
| Is Cyber Corp a small business corporation? | ||
| SBC is defined as a CCPC Having 90% or more of the FMV of its assests either used principally in active business on 50% or more of the time in Canada, or share of a connected SBC , OR Comination | ||
| Cyber Corp does not meet the definition as it does not meet the 90% test , since the marketable securities are not active business assests | ||
| SO Cyber Corp is not an SBC | ||
| (2) Holding Period Test | ||
| This test is met because she has owend the share since 2003 which is grater than 24 months | ||
| (3) Basic Asset Test | ||
| in order to meet this test , Cyber corp has to have more than 50% of the FMV Of the assests used in active business that is carried on primarly in canada 24 months preceding the sale | ||
| This test is met | ||
| 2. Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format | ||
| Do the shares of Cyber Corp meet the 90% and 50% tests? | ||
| Small Business Corporation Test | ||
| FMV | ||
| cash | 4,500 | |
| Markeable Securities (passive) | 700,000 | 24.5% |
| Account Receivable | 780,000 | |
| Inventory | 920,000 | |
| Prepaid Expenses | 1,000 | |
| Investment in Cyber Sub | 100,000 | 3.5% |
| Fixed Assests | 150,000 | |
| GoodWill | 200,000 | |
| 2,855,500 | 100% | |
| Active Business Assets | 72.0% | |
| Shares of Connected SBC | 3.5% | |
| 75.5% | ||
| 3. Identify risks including missing information, assumptions and uncertain research positions | ||
| The active business assests in Cyber corp are below the 90% level required | ||
| assume Karen has not used the CGE | ||
| Assume that karen has not claimed on ABIL ( ACTIVE BUSINESS INVESTMENT LOSSES ) | ||
| 4. Reach a conclusion on each issue | ||
| See test abobe for conculsion on each test | ||
| 5. Evaluate the strengths/weaknesses/risks of your conclusions | ||
| No strenght or weakness in my opion somehow white and black whether or not the test is met. | ||
Analyze the Major Issues con't
| If the shares of Cyber Corp are not QSBC shares then determine if there are steps that could be taken to have them qualify | ||||||||
| 1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the applicable provisions of the Act | ||||||||
| Cyber Corp has to meet the 90% threshold of active business assets | ||||||||
| to active this they need to sell appox. $ 460 k of investments | ||||||||
| or they could set up a holding co and transfer the investments to avoid CG on the sale of securities | ||||||||
| 2. Identify and complete the supporting quantitative analysis of the transactions and plans using an appropriate analysis format | ||||||||
| How much in marketable securities need to be sold to purify Cyber Corp? | ||||||||
| total assests including 2,155,500 of active business assest and Cyber sub shares and divide that by the 90% ( 2,155,000/90%) | 2,395,000 | |||||||
| less: Active business assets and the subs shares | 2,155,500 | |||||||
| Maximum value | 239,500 | |||||||
| currrent Marketable securities | 700,000 | |||||||
| maximum value of the securites | - 239,500 | |||||||
| Sell marketable securities | 460,500 | |||||||
| Results from Purification | ||||||||
| POD ( Process of disposition) on sale | 1,800,000 | |||||||
| ACB Of shares | 1,000 | |||||||
| Capital Gain ( CG ) | 1,799,000 | |||||||
| TCG ( Taxable capital Gain) | 899,500 | |||||||
| Life time capital gain exemption (LCGE) | 441,692 | Value of the exmption in 2020 is 883384 | multipy by inclusion rate | |||||
| Net TCG | 457,808 | |||||||
| Tax at 50% ( assumed) | 228,904 | |||||||
| Tax savings from purification | 220,846 | |||||||
| 3. Identify risks including missing information, assumptions and uncertain research positions | ||||||||
| Be cautious of the calcutation of securities to dispose of due to fluctuation vaules of the other assets , ie Goodwill | the fair market of the share can be falcuate | |||||||
| 4. Reach a conclusion based on your analysis of each major issue | ||||||||
| it is also possible to use cash to paydwon debt or sell securities and use that cash to pay down debts. | ||||||||
| if capital losses are availabe in the corp , it may be benificial to sell securities to shelter the CG on sale. | ||||||||
| 5. Evaluate the strengths/weaknesses/risks of your conclusions | ||||||||
| No risk in the proposed solution |
Advise&Recommend
| Advise the decision maker, integrating your conclusions on each of the issues with their objectives, giving priority to the most important issues | |
| we would advis them to sell that amount of securities , pay the debts down and they will meet all pre test and can use her CGE Which was her objective | |
