ADMS 4562
Winter 2016
Assignment 2
Worth: 10%
Due: by Monday, April 4, 2016 at 5:00pm
Hand in to Atkinson room 282
Please use this coversheet. The assignment question is after the coversheet.
Section (M,N,O)
Last Name
First Name
Student #
not exceed 6 pages (maximum). Note: the coversheet does not count in the
page limit but all other pages do count. You should number your pages;
be double spaced;
be Times New Roman (or an equivalent sized) font;
have 12 point font (minimum);
have normal margins (i.e., margins of at least one inch on the top, bottom and
each side); and
have Portrait as the page layout (and not Landscape).
Marks will be deducted if any of the above instructions are not followed
It is now March 2016 and you, CPA, work at an accounting firm in Canada.
You and your partner, Saul, have just finished a meeting with your client,
Mrs. Gail.
Mrs. Gail is a 52 year-old resident of Canada who plans to sell her Gail Inc.
(GI) shares that she inherited several years ago from her father. Mrs. Gail is
hoping to minimize income tax on this sale. Additional information about Mrs.
Gail and her GI shares is provided in the Exhibit.
Saul wants you to describe and calculate the federal income tax
consequences to Mrs. Gail and to the purchaser from the proposed sale of GI
shares. Show all your calculations. You should give Income Tax Act (ITA)
section, subsection and paragraph (where applicable) references in order to
support your answer. Do not list multiple ITA references. Saul says you do not
have to discuss the acquisition of control rules.
As part of your analysis of the proposed share sale Saul wants you to explain
in detail why section 84.1 will, or will not, apply to the share sale. Saul wants
you to discuss all of the conditions of section 84.1 in your answer. Also, even
though Mrs. Gail does not want to use subsection 85(1), Saul wants you to
state how s. 85(1) would be better for Mrs. Gail and the purchaser in this
situation. [Note: s. 85(1) is not being used. Saul just wants to know how s.
85(1) would be better, in this case, if it were used. Also, give ITA references,
if applicable, to support your answer.]
After selling all of her GI shares, Mrs. Gail will consider starting up a new
Canadian business. Mrs. Gail will own 100% of this new business. This new
business will operate separately from GI and this new business is expected to
earn $100,000 of Canadian active business income each year. Mrs. Gail
wants to know if there will be any income tax savings or cost in 2017 from
Exhibit
Additional Information
Mrs. Gail
Mrs. Gail already earns more than $250,000 per year in income before
considering the $100,000 of additional business income that she may
also earn. Mrs. Gail is married and has two adult children
Mrs. Gail currently owns 10,000 common shares of GI1. Mrs. Gails
father, Paul, originally incorporated GI in Ontario in 1978. GI has a
December 31st year-end. In 1978 Paul subscribed for 10,000 common
shares of GI for $8,000 (in aggregate)
o In 1994 Paul elected to trigger a capital gain of $100,000 on his
GI shares in order to increase the adjusted cost base (ACB) of his
shares by $100,000, in aggregate. This election did not affect the
paid-up capital (PUC) of Pauls shares
o In 2010, when the fair market value (FMV) of GI was $1,300,000,
Paul passed away and left all of his GI shares to Mrs. Gail. (Pauls
terminal tax return did not utilize Pauls QSBC capital gains
exemption, with respect to his GI shares, on his death.)
GI currently has 10,000 common shares issued and outstanding. GI has not issued any
other shares.
VPI will purchase all of Mrs. Gails shares in 2016 and it will pay by
issuing 4,750,000 non-voting preferred shares of VPI to Mrs. Gail each
redeemable and retractable for $1
After the 2016 sale of Mrs. Gails GI shares, the only shares that Mrs.
Gail will own are
o the non-voting preferred shares of VPI and
o if she incorporates a new company in 2017 (called Operating
Company) she will also own the Operating Company shares
Mrs. Gail has already used up all of her QSBC capital gains exemption
room on a past sale of XYZ Inc. shares (a QSBC)
Mrs. Gail lives in a province with the following provincial tax rates
effective for 2016 and 2017:
o Personal tax rate on income over $100,000
21%
o Personal tax rate on income equal to and below $100,000
11%
o Dividend tax credit on taxable amount of eligible dividends
10%
o Dividend tax credit on taxable amount of non-eligible dividends
4.3%
o The dividend gross-up equals the federal dividend gross-up
Mrs. Gail is not an active trader of securities and she does not have
any specialized knowledge about stocks or bonds