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Crib Sheet Final ch.15-19

3 pages67 viewsWinter 2011

Financial Accounting
Course Code
Prof.Frank Giordano+ Vivian Chen
Study Guide

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Ch. 15 Corp. Dist, Wind-ups, Sales
PUC based on capital contributed to corp
-Averaged among all shareholders of same class
-Withdrawn free of deemed dividend
-Amt returned to S/H excess of PUC result in deemed dividend
-If redemption > ACB, cap gain result
ACB amt paid for shares
-Unique to shareholder
-Calculated on disposition of shares
Capital Dividend Account untaxed portion of half of taxable cap. gains
For ECE, addition to cap div acct occurs at y/e, not at time of transaction
Joint election
Applies to private corps
Untaxed portion of net cap gains + cap divs rcvd from other corps + untaxed portion
of net gain on CEC acct + net life insurance proceeds at death - capital divs paid
Treatment of Taxable Dividends
- Gross up “eligible dividend: 44% GRIP
- non-eligible dividend: 25% LRIP
Pay Dividends: cash, stock, kind
Stock Dividends taxed same as cash
-Amt of dividend equal to increase in corps PUC
-Same amount consider the S/Hs ACB
Div in Kind corp paid and S/H rcve div equal to FMC of dist assets
- any dist made by corp in excess of PUC and not elected as capital dividend deemed taxable div
Deemed Dividend Calculations
Redemption amt less PUC = Deemed Dividend
P of D less deemed div = adj proceeds less ACB = capital gain/(loss)
Corporate Wind-ups
-Assets liquidated, liabs paid off, cash distributed to shareholders
-OR assets & liabs distributed directly to shareholders
-Deemed dividends on wind-up and cap gains/losses on disposition of assets
Steps Required on Wind-up
1.Dispose assets at FMV
2.Calculate taxable income from disposition (ABI vs AII)
3.Determine funds avail after pmt of tax & liabs
4.Distribution of funds
5.Determine shareholder tax liability
Chart: B/S given, FMV vs Cost
Columns: Open bal, cash, mkt sec, inv, land, bdlg, goodwill, (bonus), (liabs), (inc tax), RDTOH,
Fds avail for Distn
Rows: Act/Deemed Proceeds, Inc Generated (ABI, AII), CDA, RDTOH
RDTOH: 26.67%*total AII
Income Tax: (total ABI*20%) + ( total AII*46.67%)
Goodwill: open balance affects ABI
-CEC bal less (3/4*Proceeds) less recap = grossup
-Recap = ¾ * ACB CEC bal
-Income inclusion recap = ABI
-Income inclusion = gross up * 4/3 * ½ = CDA
Components of Distribution
Fds Avail for Distn (Proceeds/Redemption) PUC = Deemed Dividend Cap Div = Deemed
Taxable Div
-Deemed Tax Dividend must be at least (3*RDTOH) to clear
Taxable Cap Gains
Proceeds (Fds Avail) Deemed Div = Deemed P of D ACB = CG, TCG
Net Cash Retained from Sale of Assets + Wind-up
Fds Avail for Distn + Bonus Net Tax = Net Cash Retained
Tax = Deemed Taxable Div + Gross Up (25/44%) + Bonus + TCG = Taxable Income,
Tax @ 46% less Div Tax Credit (equal to grossup) = Net Tax
*Cap Gains Exemption = ½ * $750,000 (QSBC)
Sale of Shares: Proceeds ACB = Cap Gain
TCG CGE = Taxable Inc, Tax
Net Proceeds = Proceeds - Tax
Section 22 Election
-Purchaser include in income difference b/w face amt and amt paid
-Purchaser records at face value
-Allow purchaser to deduct reasonable reserve for doubtful debts on A/R purchased ,
deduct bad debts that occur
-Vendor regardless must add reserve back to income, s.22 turns it to bus loss instead
of capital loss
-Joint election, must dispose “substantially ALL of business assets (>90%) to a
single purchaser
-No S.22 if A/R sold to factoring company
Sale of Business
-Buyers prefer to buy assets (increase tax basis UCC) & sellers prefer to sell shares
(50% cap gains rate)
Ch. 16 s.85 Rollovers
- transfer property at original tax value and defer cap gains
- choose P of D to trigger income if want
- FMV prop tfrd in = FMV prop tfrd out
- must take back shares as part of transfer
- transferor same econ position & shareholder of company
- joint election b/w transferor and transferee (T2057)
Capital cost: (of asset to corporation)
- non-arms length (related), dep property capital cost = transferor cost + TCG
- note = EA = cost of asset to corporation
Cost of shares: EA Boot
Eligible Property:
-cap property (dep and non-dep) other than real prop owned by non-res
-Cdn or foreign resource property
-Eligible capital property
Elected Amount transfer property at tax cost (ACB/UCC)
-Trigger income by elect b/w tax cost and FMV
BOOT non-share consideration
-Take boot up to tax cost
-CANNOT exceed elected amount
-Take maximum amount tax-free
-Half-yr rule does not apply
-Assets same CCA class
-Elected transfer price allocated to property rcvd in order: boot, P/S, C/S
ACB of shares taken back = Elected transfer price BOOT = ACB of new shares
Cost of consideration rcvd from corp: (1)Boot (2) P/S (3) C/S
Proceeds ACB new shares = CG, TCG
Tax Implications
PUC of new shares:
Legal stated capital total PUC reduction = Tax PUC
PUC reduction:
Increase in LSC minus excess (elected amts less boot) = total PUC reduction
*Allocation of PUC reduction among diff classes
- if more than one class of shares, PUC allocated based on relative increase in LSC of one class
out of total LSC of all classes
- PUC is original cost of transferred asset not recovered through boot
- tax cost recovered through boot, PUC = NIL
Other rules to remember:
- taxpayer can realize terminal loss but no benefit using S.85 so just sell @FMV & take cash or
- if transfer prop under s.85 to affiliated corp, terminal loss denied
- loss kept in class and continue to take CCA until asset sold to third party to trigger
Affiliated b/w corp and indiv transferor if controlled by indiv or by spouse
- cap loss denied when affiliated
Transferor indiv -> denied loss added to ACB of prop held by transferee
Corp -> denied loss retained by transferor, recog when asset sold to non-affiliated
Things not transferred under s.85
Prepaids: non-cap property, not eligible
Shares of another corp: take QSBC deduction
Land held as inventory: not eligible
Items with terminal/capital loss: no benefit
A/R: use s.22 election to avoid loss being capital loss
Chart: FMV vs B/S vs UCC
Columns: Inventory, Land, Bdlg, Car, Goodwill
Rows: Tax, FMV, EA, Assumed Debt, New Debt, FMV shares, Income
*usually EA = Tax (min elected amt not taxable)
UNLESS want to trigger CG to cover CL from prev years
*assumed debt limited to total liabilities transferring, then becomes new debt
*goodwill EA = 1, FMV shares = FMV , TCG = $0.50
Tax consequences:
ACB shares rcvd:
EA less [Debt assumed + new debt] = ACB of P/S
PUC (ch 16 formula)
LSC total PUC reduction [inc in LSC excess(EA boot)] = Tax PUC
Sell P/S to third party for FMV
P of D less ACB = Cap Gain, TCG
Corporation redeems shares for FMV
P of redemption PUC = Deemed Div s.84(3)
P of D Deemed Div = Adj P of D ACB = Cap Gain (loss)
Section 22 election:
-A/R considered capital property
-Capital loss denied if sold to affiliated corp
-Purchaser collects than what paid for will have cap loss
-Purchaser not eligible for bad debt reserve or AFDA since not included prev amt
into income
Tax consequences:
1. FMV in (transfer to) < FMV out (rcvd back)
- income inclusion to transferor
- boot exceed FMV, elected transfer price = FMV
- cost of property tfrd in cant exceed FMV of asset
- amount of benefit: boot FMV transferred in = income inclusion
2. FMV in > FMV out
- FMV tfrd in exceeds elected transfer price AND excess amt considered benefit on person related
to transferor
- elected amount increased by benefit, causing income (cap gain) on bump up
- cost of property increased by benefit
- cost of shares rcvd as consideration NOT increased
Section 84.1 four criteria (freeze growth of shares)
1. disposition by anybody other than a corp
2. dispose shares of taxable Cdn corporation
3. disposal to corp which taxpayer does not deal @ arms length
4. subject corp must be connected with purchaser after disposition
- recharacterize capital gain into deemed dividend, taxed diff
- when transferor rcvs boot in excess of greater of PUC/ACB, deemed dividend on the excess; as
long as FMV boot not greater then 84.1 will not apply
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