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Final

Chapter 16 summary notes Summary of chapter 16. Useful to look over before exam or doing homework.


Department
Accounting & Financial Management
Course Code
AFM 461
Professor
Stanley Laiken
Study Guide
Final

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Chapter 16
-when transferring assets to a corporation, the corporation can elect it to be a tax free
transfer using 85(1)
elected price
Upper limit =FMV of property transferred
Lower limit =FMV of boot transferred
The corporation’s position (page 947)
Elected transfer price = corporation’s cost of property 85(1)(a)
For depreciable property:
o Capital cost to the corporation = capital cost of the property to the transferor
o Deemed to have CCA = capital cost transfer price
½ year rule does not apply in the election if:
o tranferor was not dealing at arm’s length with the corporation at the time of
the transfer
o the property was owned by the tranferor for the period from at least 365
days before the end of the taxation year in which the asset was acquired to
the date of the election
shareholder’s position
elected transfer price is allocated to the cost of property received (boot or shares)
allocation order:
o boot (up to fmv as long as the fmv is not more than the fmv of the assets
transferred) 85(1)(f)
o preferred shares up to fmv as long as it is not more than fmv of assets
transferred fmv of boot 85(1)(g)
o common shares 85(1)(h)
puc of shares received
puc of shares received is dependent on the tax value and the boot received
we want to make the puc to make the transferor in the exact same position if she
had kept the asset and sold it at fmv
ex) if she gave an asset with tax value of 10 and fmv of 15 and got 9 boot and 6
shares, then the shares will have puc of 1
o when she sells it, she’ll only have to pay tax on 6-1 =5 of the shares. This is
the same situation she was in if she sold the asset for 15
recall: proceeds of redemption PUC = deemed dividend
thus if we have 0 puc, then all of the proceeds of redeeming a share will be a dividend (not
capital gain which could have used QSBC deduction)

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Ordering of dispositions within a class
if there are two assets in the same UCC class that are transferred, you must
designated the order of disposition
o by doing so, the first asset transferred will have a elected price of the UCC
balance, and the second asset will have an elected price of UCC balance
price of first asset
IF you do not designate an order, it is considered that BOTH assets have a transfer
price of the UCC, and you will be left with a CREDIT balance in your ucc account
Terminal losses on depreciable capital property
If you transfer property with terminal loss, the loss stays with the transferor until
the corporation sells the property 13(21.2)
Therefore, there is no benefit to transfer using section 85, should just sell to
corporation at FMV
Limitations on transferee’s cost basis for CCA
The rule tries to prevent a shareholder from transferring property to a company at
FMV, so that they get a higher UCC for CCA (at fmv) and the shareholder will only
need to pay tax on 50% of the capital gain
The limitation is that the step up cannot exceed the taxable capital gain realized
So deemed capital cost = transfereor’s original capital cost + ½ capital gain
Limitatinos on transferee’s cost base for CECA
Similar to CCA, non-arm’s length purchaser can only claim CECA on the amount that
vendor has not claimed. So ¾ cost of asset 1/2 of the gain
it’s good will, we usually have a nominal amount of 1
So income inclusion to vendor is 0.5, and purchaser will only be able to claim ceca
on $0.5
Affiliated persons: 251.1
Corporation is affiliated to 3 types of persons:
o A person by whom the corporation is controlled
o Each member of an affiliated group by which the corporation is controlled
If A and B own 33% each of the corporation, they are the affiliated
group and hence A and B are affiliated to the corporation
o The spouse of a person in either of the first two categories
Essentially: you are affiliated to yourself, your spouse, and a corporation in which
you have control in (or if your spouse does)
Stop loss rules
Recognition of a capital loss when property is transfer to an affiliated person is
always DENIED (superficial loss 40(2)(g), sec 55)
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Transferor is a corporation
trust or partnership
Transferor is an individual
Capital loss
-capital loss is DENIED
-capital loss is kept with the
TRANSFEROR until the
transferee sells the asset to
non-affiliated person
-is deemed a superficial loss
-denied loss is added to the
cost of the asset to the
TRANSFEREE
Terminal losses
-terminal loss is denied
-TL is kept with the TRANSFEROR until the transferee sells
asset to a non-affiliated person
-transferee records the asset with a cost = cost of the
transferor and UCC = FMV at time of transfer(13(7)(e))
Capital losses on redemption
-occurs if affiliated immediately after the redemption
Capital loss
If transferor is individual : loss is added to ACB of the transferee
If transferor is corporation : loss is kept with the transferor until transferee sells to
armslength
TL
Loss is kept with the transferor until sold to armslength
Transferee records an ACB = ACB of the transferor, and a UCC = FMV
Consequences for not adhering to the FMV in = FMV out rules
Preferred shares
Not the same as common shares
We need to look at retraction and redemption value as an indicator of FMV
Consider the example where land transferred: ACB = 30, FMV = 150,
and the proceeds received are 10 promisary note and a preferred share with value of 10:
Mr Philip has given away 150 of land for 20 compensation, so this 120 difference is
the accumulated growth (or contributed surplus) that mr Philip is giving to the
company
Elected amount: which is usually the tax cost will not be bumped by amount of gift:
30 + 120 = 150
o Mr Philip will not have a capital gain because his POD is now 150, and his
cost is 30
ACB of the land to the company: is the elected amount of 150
ACB of preferred shares to Philip: 20, this is using the original amounts, where ACB
boot = PUC of shares
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