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RSM424H1 Lecture Notes - Lecture 7: Retained EarningsExam


Department
Rotman Commerce
Course Code
RSM424H1
Professor
Matthew Roman
Study Guide
Final

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RSM424 Tutorial 7 Mar. 16/20
1
Ch. 19 Tax-Deferred Sales
[P19-2]
Part 1. Assuming that either an asset sale by Shane Plastics or a share sale by KS Holdings
will be made at fair market values, with deferred payments over 8 years, which method
should Shane prefer? Assume corporate tax rate of 27% on business income.
Option 1: Sell shares of Shane Plastics owned by KS Holdings
Proceeds 1,200,000$ A
Less: ACB (200,000)$
Capital Gain 1,000,000$
TCG (50%) 500,000$
Less: CG Deduction*
-$
Corp tax @ 50 2/3% 253,333$ B
After-tax proceeds 946,667$ A-B
Notes:
Corporations do NOT get the Capital Gain Deduction
o Would need to consider if Karl sold his shares of KS Holding but, in this case, he
is NOT
Capital gain will also increase KS Holdings CDA by $500,000 (other half of CG that is not
taxable)
o This can later by withdrawn by Karl tax-free
NERDTOH will increase by  
  
  
o Recoverable when non-eligible dividends are paid
Option 2: Sell assets of Shane Plastics
Asset FMV ACB UCC ABI AII CDA NERDTOH (30 2/3% of AII)
Opening
Current assets 500,000$ 500,000$
Land 100,000$ 50,000$ 25,000$ 25,000$ 7,667$
Building 720,000$ 600,000$ 490,000$ 110,000$ 60,000$ 60,000$ 18,400$
Equipment 300,000$ 350,000$ 100,000$ 200,000$
Goodwill 400,000$ -$ -$ 200,000$ 200,000$ 61,333$
2,020,000$ 310,000$ 285,000$ 285,000$ 87,400$
Liabilities (700,000)$
Tax on ABI (27%)(83,700)$ =310000*-27% Rec to delay sale to next yr to get SBD (low rate). 27% is high corp rate
Tax on AII (50 2/3%)(144,400)$ =285000*-((50+2/3)/100)
NERDTOH -$ No div paid to Karl now. KS Holding is a connected corp. Would pay same amt in Part IV tax
Add: Bonds 100,000$
After-tax proceeds 1,191,900$
- Purchaser wouldn’t likely buy bonds from company. Not needed to run the business
- If sold, no tax consequences since FMV = ACB
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