Finance Taxation Solved Homework Solution Sample

QUESTION

 

Sophie, Michel and Arthur, who are siblings, were the founding shareholders of the Somiar Ltd. advertising agency at the time of the incorporation of the company in 1986. At the time, they had acquired 100 common shares each at the price of $ 100 to start the business. Somiar Ltd.’s fiscal year ends March 31st.

In 2016, Arthur sold his shares in equal shares to Sophie and Michel for $ 50,000 ($ 25,000 each). He claimed the capital gains deduction on the entire taxable capital gain.

Business has worked well over the years, and Somiar Ltd. has acquired stakes in two other companies: Ultra Ltd. and Audio Ltd. The organizational chart of the Somiar group is currently:

Despite the significant increase in sales, business operations required a lot of reinvestment. Audio Ltd. and Somiar Ltd. have suffered losses in recent years, while Ultra Ltd. has made good profits.

According to a recent market study conducted for the Somiar group, the latter can regain a place in the market. He just has to deal with the liquidity issues, and that’s it. The total fair market value of the shares of Somiar Ltd., which are qualified small business corporation shares, is $ 1,200,000. Sophie and Michel have sought a solution each from their side to solve the liquidity problems of Somiar group, and are left with the following two proposals, between which there is no connection:

i. Roseau Ltd., a wholly-owned corporation owned by Sophie’s husband, is ready to acquire Michel’s shares for $ 800,000 in cash. In addition, it would make a loan of $ 1,000,000 to Somiar Ltd., at a commercial interest rate, provided that the Somiar group offers guarantees. This last condition does not seem to be a problem.

ii. Marco ltée, a company wholly owned by Mr. Giroux, whom Sophie met recently, is very interested in the projects of the Somiar group. Marco ltée thinks that Sophie and Michel are a good team and want them to remain shareholders and employees of the Somiar group. Marco ltée therefore offered to acquire 70% of the outstanding common shares of Somiar Ltd., for $ 840,000, leaving Sophie and Michel a 15% interest each in Somiar ltée. Marco ltée would lend, without interest, the sums needed by the Somiar group for its working capital.

Additional Information

1. Sophie and Michel have never made any investments other than the amounts invested in the shares of Somiar Ltd. The balance of their cumulative net loss account on investments is null.

2. They made no election for capital gains in their tax returns for the 2017 taxation year.

Work to do:

a) Explain all the tax consequences of both proposals. Do not consider interest charges and interest income on the $ 1,000,000 loan.

b) Now assume that Marco Ltd. offers to exchange shares. For each of the 210 common shares of Somiar Ltd. (which represent 70% of the shares issued by the Company), Marco Ltd. would issue 50 Class B Non-Voting Shares, redeemable for an amount equal to the consideration received by the Company at the time. of the show.

i) What would be the tax consequences for Sophie and Michel?

ii) Determine, for Marco Ltd., the cost of the shares she has acquired from Sophie and Michel.

 

ANSWER

 

1. Explain all the tax consequences of both proposals. Do not consider interest charges and interest income on the $ 1,000,000 loan.

Ans-a)

Price offered by Roseu ltd for acquisition = $ 800,000

Fair Market value of Somiar ltd= $ 1,200,000

$ 400000 will be deemed income in the hands of Roseu Ltd,

Further Sophie and Michel will attract capital gains.

	sophie	micheal
Purchase Price of shares	10000	10000
Cost of acquisition from Arthur	25000	25000
Sales Consideration	400000	400000
Capital Gain	365000	365000

 

In the second mode, Macro ltd will not face any deemed income, as it is acquiring Somiar ltd at its fair value i.e. 70% of $ 1,200,000.

However there will be tax consequences in the hands of Sophie and Micheal

 

	sophie	micheal
Purchase Price of shares	10000	10000
Cost of acquisition from Arthur	25000	25000
Total cost of share	35000	35000
Cost of 70% of shares	24500	24500
Sales Consideration	440000	440000
Capital Gain	405000	405000

 

b) Now assume that Marco Ltd. offers to exchange shares. For each of the 210 common shares of Somiar Ltd. (which represent 70% of the shares issued by the Company), Marco Ltd. would issue 50 Class B Non-Voting Shares, redeemable for an amount equal to the consideration received by the Company at the time. of the show.

i) What would be the tax consequences for Sophie and Michel?

There will not be any capital gains at the time of issue, at the time of redemption the capital gains will arise and will be equal to the amount computed in above answer.

ii) Determine, for Marco Ltd., the cost of the shares she has acquired from Sophie and Michel.

Since no amount is to be paid to sophie and Michel for the shares, there is no cost for the company, however at the time of redemption company has to pay $ 840,000 for the shares acquired.

Thus each non-voting Class B shares will be of $840000/210×50 =$ 80 Each.