Chapter 17
Other Rollovers,
Sale Of An Incorporated Business
Share For Share Exchange ITA 85.1
Application
– Automatic
– Can Elect Out In Tax
Return
© 2010, Clarence Byrd Inc.
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ITA 85.1 Example
May Ltd.
FMV = $700,000
ACB = $100,000
PUC = $100,000
Ms. May (100%)
May C/S
100%
Acquirer
C/S
Acquirer Ltd.
(A Large Public
Company)
© 2010, Clarence Byrd Inc.
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ITA 85.1 Example
No Capital Gain For Ms. May
– POD = Old ACB = $100,000
[ITA 85.1(1)(a)(i)]
ACB For Ms. May’s Acquirer Shares
– ACB(Old) = ACB(New) = $100,000
[ITA 85.1(1)(a)(ii)]
ACB For Acquirer’s May Ltd. Shares
– Lesser Of FMV And PUC = $100,000
[ITA 85.1(1)(b)]
PUC Of Acquirer’s New Shares
– Old PUC = $100,000
© 2010, Clarence Byrd Inc.
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Conditions For Rollover
Transferred Shares: Taxable Canadian
Property
Purchaser: Taxable Canadian Corporation
Consideration: Shares Of A Single Class
Relationship: Arm’s Length
Vendor: Must Not Control Purchaser
No ITA 85(1) Election
No Gain Or Loss Recognition
© 2010, Clarence Byrd Inc.
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Reorganization - ITA 86
Application
– Financial Distress
– Estate Freeze
– Takeover By Key
Employee
© 2010, Clarence Byrd Inc.
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ITA 86 Conditions
Articles Of Incorporation
Must Provide For All Types Of Shares To Be Used
Consideration
Can Include Non-Share Consideration Up To The
ACB Of Redeemed Shares (Generally Does Not)
Shares Must Be Capital Property
Classes And Quantities
All Shares Of A Particular Class Held By
Shareholder
© 2010, Clarence Byrd Inc.
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Tax Consequences
Cost Of Boot - ITA 86(1)(a)
– Equal To FMV
Cost Of New Shares - ITA 86(1)(b)
– Old ACB, Less Boot
Proceeds Of Redemption
- ITA 84(5)(d)
– Boot, Plus PUC Of New Shares
Proceeds Of Disposition
- ITA 86(1)(c)
– Boot, Plus ACB Of New Shares
PUC Reduction - ITA 86(2.1)(a)
– New LSC, Less (Old PUC - Boot)
© 2010, Clarence Byrd Inc.
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ITA 86(1) - Example One
Shirley Foley owns 100 percent of the outstanding common
shares of Foley Inc. The shares have a PUC and an ACB
equal to $100,000. Their FMV is $1,000,000.
$ 75,000 Note
$925,000 P/S (LSC = FMV)
Foley
Inc.
Foley Inc. Shares
© 2010, Clarence Byrd Inc.
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Example One Results
ACB Of Boot
– $75,000
ACB Of New Shares
– $100,000 - $75,000 = $25,000
PUC Reduction
– $925,000 - ($100,000 - $75,000) = $900,000
– New PUC = $925,000 - $900,000 = $25,000
Proceeds Of Redemption
– $25,000 + $75,000 = $100,000
Proceeds Of Disposition
– $25,000 + $75,000 = $100,000
© 2010, Clarence Byrd Inc.
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Example One - Tax Implications
ITA 84(3) Dividend – Immediate
– $100,000 - $100,000 = Nil
Capital Gain – Immediate
– $100,000 - $100,000 = Nil
Subsequent Redemption
– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000
Subsequent Sale
– Capital Gain = $925,000 - $25,000 = $900,000
© 2010, Clarence Byrd Inc.
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ITA 86(1) - Example Two
Shirley Foley owns 100 percent of the outstanding common
shares of Foley Inc. The shares have a PUC of $100,000 and
an ACB equal to $75,000. Their FMV is $1,000,000.
$ 75,000 Note
$925,000 P/S (LSC = FMV)
Foley
Inc.
Foley Inc. Shares
© 2010, Clarence Byrd Inc.
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Example Two Results
ACB Of Boot
– $75,000
ACB New Shares
– $75,000 - $75,000 = Nil
PUC Reduction
– $925,000 - ($100,000 - $75,000) = $900,000
– New PUC = $925,000 - $900,000 = $25,000
Proceeds Of Redemption
– $25,000 + $75,000 = $100,000
Proceeds Of Disposition
– Nil + $75,000 = $75,000
© 2010, Clarence Byrd Inc.
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Example Two - Tax Implications
ITA 84(3) Dividend – Immediate
– $100,000 - $100,000 = Nil
Capital Gain – Immediate
– $75,000 - $75,000 = Nil
Subsequent Redemption
– ITA 84(3) Dividend = $925,000 - $25,000 = $900,000
– Capital Gain = ($925,000 - $900,000) - Nil = $25,000
Subsequent Sale
– Capital Gain = $925,000 - Nil = $925,000
© 2010, Clarence Byrd Inc.
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ITA 86(1) - Example Three
Shirley Foley owns 100 percent of the outstanding common
shares of Foley Inc. The shares have a PUC of $50,000 and
an ACB equal to $100,000. Their FMV is $1,000,000.
$ 75,000 Note
$925,000 P/S (LSC = FMV)
Foley
Inc.
Foley Inc. Shares
© 2010, Clarence Byrd Inc.
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Example Three Results
ACB Of Boot
– $75,000
ACB Of New Shares
– $100,000 - $75,000 = $25,000
PUC Reduction
– $925,000 - ($50,000 - $75,000) = $925,000
– New PUC = $925,000 - $925,000 = Nil
Proceeds Of Redemption
– Nil + $75,000 = $75,000
Proceeds Of Disposition
– $25,000 + $75,000 = $100,000
© 2010, Clarence Byrd Inc.
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Example Three Tax Implications
ITA 84(3) Dividend – Immediate
– $75,000 - $50,000 = $25,000
Capital Loss – Immediate
– ($100,000 - $25,000) - $100,000 = ($25,000)
Subsequent Redemption
– ITA 84(3) Dividend = $925,000 - Nil = $925,000
– Capital Loss = $925,000 - $925,000 - $25,000 = ($25,000)
Subsequent Sale
– Capital Gain = $925,000 - $25,000 = $900,000
© 2010, Clarence Byrd Inc.
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ITA 86(2) Gifting Rule
Conditions
– FMV of old shares is
greater than FMV of new
shares plus boot
– Excess can be regarded as
a gift (A related party is a
shareholder)
© 2010, Clarence Byrd Inc.
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ITA 86(2) – Gifting Results
POD (Old) - ITA 86(2)(c) - Lesser Of:
– Boot, Plus Gift
– FMV Of Old Shares
Loss On Old
– Deemed Nil Under ITA 86(2)(d)
– Gain Will Be Taxed
ACB (New) - ITA 86(2)(e)
– ACB (Old), Less (Boot + Gift)
© 2010, Clarence Byrd Inc.
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ITA 86(2) Example
Mr. Stern owns 80 percent of the outstanding common shares of
Stern Ltd. The remaining 20 percent are held by his son. The
common shares have a PUC and an ACB of $600,000. Their fair
market value is $1,000,000.
$200,000 Cash
$500,000 P/S (LSC = FMV)
Stern
Ltd.
80% Of Stern Ltd. C/S
© 2010, Clarence Byrd Inc.
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ITA 86(2) Example One
PUC Reduction
– $500,000 - ($480,000 - $200,000) = $220,000
– New PUC = $500,000 - $220,000 = $280,000
Gift
– $800,000 - $700,000 = $100,000
Non-Share Consideration
– $200,000 Cash
© 2010, Clarence Byrd Inc.
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ITA 86(2) Example
Cost Of New Shares
– $480,000 - ($200,000 + $100,000) = $180,000
Proceeds Of Redemption - Old Shares
– $200,000 + $280,000 = $480,000
ITA 84(3) Deemed Dividend
– Proceeds Of Redemption Equals Old PUC:
No ITA 84(3) Deemed Dividend
© 2010, Clarence Byrd Inc.
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ITA 86(2) Example One
Proceeds Of Disposition
– $200,000 + $100,000 = $300,000
Capital Loss - Disallowed
– $300,000 - $480,000 = Nil [ITA 86(2)(d)]
Net Economic Effect
– No ITA 84(3) Dividend Or Capital Gain
– Deferred Gain = $500,000 - $180,000 = $320,000
– Son’s Shares Up $100,000 (No Increase In ACB)
© 2010, Clarence Byrd Inc.
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Amalgamations - ITA 87
Automatic, No
Election Required
A Type Of Business
Combination
© 2010, Clarence Byrd Inc.
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Basic Procedure
Company
A
Assets
A And B Ltd. Shares
A Ltd. & B Ltd.
Shareholders
AB Ltd.
AB Shares
Company
B
© 2010, Clarence Byrd Inc.
Assets
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Conditions
Predecessor Corporations
– Must Be Taxable And Canadian – ITA 87(1)(a)
Property To Corporation
– All Assets And Liabilities Of Both Companies
- ITA 87(1)(a) And (b)
Consideration
– All Shareholders Must Receive Shares
– ITA 87(1)(c)
© 2010, Clarence Byrd Inc.
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Economic Outcome
Assets And Liabilities
Carried Over At Old Tax
Values
New Shares At ACB Of
Old Shares
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Position Of New Corporation
Asset Transfers
– Inventory At Cost
– Depreciable Property At UCC
Retain Old Capital Cost For
Recapture And Capital Gains
– Non-Depreciable Capital Property
At ACB
– Eligible Capital Property At 4/3
CEC
© 2010, Clarence Byrd Inc.
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Position Of New Corporation
Tax Accounts
– Capital Dividend Accounts
Transferred
– RDTOH Balances Transferred
– Both Corporations Must Be
Private
© 2010, Clarence Byrd Inc.
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Position Of New Corporation
Deemed Year End
– Old Corporations
Likely To Be Short Fiscal Year For CCA And SBD
Counts As A Year For Loss Carry Forward Purposes
– New Corporation
Can Choose Any New Fiscal Year
May Also Be Short Fiscal Year
© 2010, Clarence Byrd Inc.
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Position Of New Corporation
Loss Carry Forwards - ITA 87(2.1)
– Number Of Available Years Not
Changed
– Deemed Year End Counts As One
Year
– There May Or May Not Be An
Acquisition Of Control
GRIP carried forward
© 2010, Clarence Byrd Inc.
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Position Of Shareholders
Transfer Values
– POD (Old) = ACB (Old)
– ACB (New) = POD (Old)
– Therefore: ACB (Old) = ACB
(New)
Conditions
– Consideration Is Shares Of Successor
Corporation
– Original Shares Are Capital Property
– Gift To Related Parties Prohibited
© 2010, Clarence Byrd Inc.
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Asset Bump Up
A bump up of nondepreciable asset values is
possible (see discussion
under ITA 88(1) wind up)
© 2010, Clarence Byrd Inc.
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Tax Planning
Utilization Of Losses
– If the two companies are related, no
acquisition of control
– Acquisition if one company’s shareholders
have majority of shares in amalgamated
company
Utilization Of UCC Balances
Enhanced M&P Deduction
Change In Fiscal Year
© 2010, Clarence Byrd Inc.
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Winding-Up Of A Subsidiary ITA 88(1)
Subsidiary
Sub shares cancelled
Assets At Tax Values
© 2010, Clarence Byrd Inc.
Parent
Company
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Conditions
90 Percent Or More Owned Subsidiary
Both Are Taxable Canadian Corporations
Consistent With Relevant Legislation
© 2010, Clarence Byrd Inc.
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POD To Subsidiary
Inventory At Cost
Non-Depreciable At ACB
CEC At 4/3 Balance
Depreciable At UCC (Capital Cost
Retained)
Reserves - Carried Forward
© 2010, Clarence Byrd Inc.
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Cost To Parent
Equal To The POD To The Subsidiary
© 2010, Clarence Byrd Inc.
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Bump-Up In Asset Values
Non-depreciable owned since acquisition
Bump-up = lesser of:
– FMV of non-depreciable at acquisition – tax
cost at time of acquisition
– ACB of shares, less:
Tax cost of subsidiary’s net assets at wind up
Dividends paid to the parent since acquisition
© 2010, Clarence Byrd Inc.
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Bump Up Availability
ITA 88(1) wind up – 90 percent or more
subsidiary
ITA 86 – must own 100 percent
© 2010, Clarence Byrd Inc.
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Subsidiary Losses
Deduct In Parent’s First Year Following
Year Of Wind-Up
Based On Parent’s Year In Which The
Subsidiary’s Year End Falls
© 2010, Clarence Byrd Inc.
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POD Of Shares
Greater Of:
– Lesser Of:
PUC
Cost Of Net Assets
– ACB Of The Shares
No Loss Is Possible
© 2010, Clarence Byrd Inc.
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Convertible Properties
ITA 51
Conversion Of Bond Or P/S
To C/S
General Rules
– ACB Of C/S = ACB Of Debt Or
P/S
– No Non-Share Consideration
– PUC - Increase On C/S Equals
Carrying Value Of Debt To Avoid
ITA 84(1) Dividend
Gifting Rules
© 2010, Clarence Byrd Inc.
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Sale Of
An Incorporated Business
Alternatives
– Sale Of Assets
With Wind-Up Following
– Sale Of Shares
(Corporation Continues)
© 2010, Clarence Byrd Inc.
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Restrictive Covenants
(a.k.a. Non-Competition Agreements)
Taxpayer Agrees To Have His
Ability To Provide Goods Or
Services Restricted
In General, Included In Income
[ITA 56.4(2)]
Exceptions
– ITA 56.4(3)(a) – Employment Income
– ITA 56.4(3)(b) – Cumulative Eligible
Capital
– ITA 56.4(3)(c) – Sale Of An Eligible
Interest
© 2010, Clarence Byrd Inc.
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Asset Dispositions
Accounts Receivable - ITA 22
Inventories - ITA 23
Prepayments - No specific rules
© 2010, Clarence Byrd Inc.
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Asset Dispositions
Non-Depreciable Assets
– Capital Gain Or Loss With No
Reserves
Depreciable Assets
– Recapture, Terminal Loss, Or Capital
Gain
– General Rules
Goodwill
– 3/4 Of Proceeds To Income
© 2010, Clarence Byrd Inc.
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Proceeds > PUC
ITA 84(2) Deemed Dividend
– Capital Dividend (If Elected)
Not Taxed
– Pre-1972 CSOH Distribution
Deemed Not To Be A Dividend
ITA 88(b)(ii)
– Taxable Dividend
© 2010, Clarence Byrd Inc.
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Wind-Up Procedures
Liquidate Or Distribute Assets
Pay Liabilities
Determine Pre-1972 CSOH, RDTOH, And Capital
Dividend Account
Distribute Proceeds [Elect Under ITA 83(2)]
Establish Dividend Refund On Taxable Dividends
© 2010, Clarence Byrd Inc.
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Sale Of Shares
Pay Out Capital
Dividend And RDTOH
Prior To Sale
POD - ACB = Gain Or
Loss On Sale
© 2010, Clarence Byrd Inc.
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Advantages - Sale Of Shares
Single stage transaction - no
corporate tax
All income is capital gains
– 1/2 Taxable
– ITA 110.6 (Lifetime capital gains)
Loss carry forwards can survive
Payment for restrictive covenant
can be included in POD
No real estate transfer taxes
© 2010, Clarence Byrd Inc.
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Advantages - Sale Of Assets
Bump-up in asset values
Goodwill recognized
Redundant assets can be
left out
Vendor can get losses on
individual assets
No reassessments
© 2010, Clarence Byrd Inc.
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© 2010, Clarence Byrd Inc.
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