Chapter 16 Sol 2020 WK

CHAPTER 16
Corporate Distributions, Asset Sales and Winding-

Up, and Sales
Solution 1: Capital Dividend Account

Effect on Income
Investments: ACL 1/2  ($22,000 – ($60,000 + $500))........................................................................ $ (19,250)
Land: TCG 1/2  ($200,000 – ($40,000 + $10,000))............................................................................ 75,000
Building: TCG 1/2  ($125,000 – ($70,000 + $6,000))........................................................................ 24,500
Building: recapture ($45,000 – $70,000)............................................................................................ 25,000
Equipment: recapture (($8,000 – $400) – nil)..................................................................................... 7,600
Class 14.1: goodwill and customer lists:
Proceeds.............................................................................................................. $ 95,000
Less: Cost............................................................................................................ 40,000
Capital gain......................................................................................................... $ 55,000
Taxable capital gain............................................................................................. $27,500
UCC balance....................................................................................................... $16,000

Lower of cost and proceeds (LOCP).................................................................... (40,000)
(24,000)
Adjustment (25% x LOCP) (for eligible capital property purchased before Jan 10,000
1, 2017)............................................................................................................... $14,000
Recapture............................................................................................................
Capital Dividend Account

Balance: January 1, 2020.................................................................................................................... Nil
Investments: 1/2  ($22,000 – ($60,000 + $500))................................................................................. $ (19,250)
Land: 1/2  ($200,000 – ($40,000 + $10,000))..................................................................................... 75,000
Building: 1/2  ($125,000 – ($70,000 + $6,000))................................................................................. 24,500
Goodwill and customer lists: 27,500
Balance: December 31, 2020.............................................................................................................. $ 107,750
The above can be summarized in tabular form as follows:
Capital
Dividend
Account
Untaxed
Income effect fraction of Capital Untaxed Capital
net cap. dividend life ins. dividend
Asset ABI AII gains received proceeds paid Balance
Investments..... $ (19,250) $ (19,250) $ (19,250)
Land................ 75,000 75,000 75,000
Building........... $ 25,000 24,500 24,500 24,500
Equipment....... 7,600
Class 14.1........ 14,000 27,500 27,500 27,500
405
406 Introduction to Federal Income Taxation in Canada
$ 46,600 $ 107,750 $ 107,750 Nil Nil Nil $ 107,750
Solutions to Chapter 16 Assignment Problems 407
Solution 2: Capital Dividend Account
Assess the Situation

1. Draw a diagram identifying all stakeholders, e.g., corporate org charts
Bob
100%
Stein Ltd. CCPC incorporated in 2004
2. Identify the relationships among the stakeholders, e.g., related, affiliated, associated, connected
 Bob is related to and affiliated with Stein Ltd.
3. Identify the profile of each stakeholder, e.g., tax features, risk profile
 Bob is an individual
 Bob lives in Vancouver and is a Canadian resident
 Stein Ltd is a CCPC
4. Fully understand the decision maker and their objectives
 Bob wants to understand what a capital dividend account is
 He wants to know if Stein Ltd qualifies to have one
 He wants you to do the calculations to see if he has a balance in Stein’s CDA
5. Identify the relevant past transaction/events or planned future transactions/events and create a
timeline
 Historical – Information is provided on transactions from 2004 to 2020. These events have already
taken place
 Future – Should Stein Ltd pay out a capital dividend?
Identify the Issues
1. Identify all of the major tax issues and any non-tax issues
 What is a CDA and how can it be used in a tax effective manner.
 Determine if Stein Ltd. qualifies to have a CDA and determine the CDA balance.
 Quantitative: Calculation of the CDA balance for all the transactions
2. Identify missing information or assumptions made
 None
Analyze the Issues

1. Identify and perform the qualitative analysis of the transactions and plans including an analysis of the
applicable provisions of the Act
Issue 1 Brief explanation of the CDA [s. 89(1)]
 The CDA is a component of integration for private corporations. It allows tax-free receipts
received by the corporation to be passed tax free to the shareholders
 Represents the tax free portion of transactions that give rise to:
o Capital gain
o Life insurance proceeds net of cost basis
o Capital dividends received
 What can you do with a CDA?
o You can pay it out as a tax-free dividend to shareholders [s. 83(2)]
Issue 2 Does Stein Ltd qualify to have a CDA?
 Applies to private corporations [s. 83(2)]
 Stein Ltd is a CCPC therefore it qualifies to have a CDA
Issue 3 What are the components of a CDA?
 Untaxed portion of a CG or CL
 Life insurance proceeds
 Capital dividends received
 Capital dividends paid
2. Identify and complete the supporting quantitative analysis of the transactions and plans using an
appropriate analysis format
Capital Dividend Account
Untaxed Capital Life Capital
Date Transaction CG/CL Dividend Insurance Dividend Balance
2006 Bond Disposition 5,000 5,000
2007 Capital Dividend 5,000 5,000
2008 Share Disposition (2,000) (2,000)
2011 Equipment Disposition 3,000 3,000
2013 Sale Vacant Land - -
2015 Share Disposition 10,000 10,000
2016 Life Insurance Proceeds 80,000 80,000
2017 Capital Dividend Paid (50,000) (50,000)
2020 Customer List Sale 30,000 30,000
2020 Share Disposition 18,750 18,750
64,750 5,000 80,000 (50,000) 99,750
The following amounts are not included in the capital dividend account:
(1) Recapture is not included in the capital dividend account.

(2) Since the 2013 gain on the vacant land was reassessed as income, it is not included in the capital
dividend account.
(3) Sale of customer list

Proceeds $100,000
Cost (40,000)
Capital gain $60,000
Taxable capital gain $30,000
Capital dividend account $30,000
[Note: The recapture on the sale of the customer list would have been included in business income.
UCC $25,000
Lower of cost and proceeds (40,000)
Negative balance (15,000)
Adjustment – 25% of lower of cost and proceeds
(for customer list purchased before January 1, 2017) 10,000
Recapture (5,000)
3. Identify risks including missing information, assumptions and uncertain research position
There is a risk of a reassessment that would change a capital gain to an income gain. Given the assets
disposed of this is unlikely.
A future transaction may reduce the balance in the CDA.
4. Reach a conclusion on each issue

 Reach a conclusion based on your analysis of each major issue.
 Stein Ltd does qualify to have a CDA balance since it is a private corporation.
 The balance in the CDA is $99,750.
5. Evaluate the strengths/weaknesses/risks of your conclusions

 None noted
Advise/Recommend
Advise the decision maker, integrating your conclusions on each of the issues with their objectives, giving
priority to the most important issues
 Stein Ltd should pay, and elect on, a capital dividend as soon as possible to prevent any negative
adjustment from reducing the balance in the CDA that can be paid out.
Solution 3: Deemed Dividends
Explanation of paid-up capital and how it is calculated

 Calculated at the corporate level, not at the shareholder level
 Averaged over all shares issued
 No identification with the shareholder who contributed the share capital
 Not impacted by transactions among shareholders
Calculation of tax consequences
(a) SH
135 P/S
Capital $11,050 cash

Inc. 2,800 assets
$13,850
PUC $14,850
PUC ACB
Corporation Gave
PUC (135 sh x $110) $14,850
Corporation Received
Cash $11,050
Assets 2,800
Total assets $13,850 $13,850
Deemed dividend $1,000 1,000

$14,850
The transaction results in an immediate deemed dividend of $1,000 since the PUC of the preferred shares
increased by $14,850, but the increase in the FMV of the assets was only $13,850 [ssec. 84(1)]. Also, the
ACB of the shares increases by $1,000 to $14,850.
(b) Shareholders
ACB $16,000 PUC reduction: $4,000 or $8,000
Plastics Ltd.
FMV $35,000
PUC $5,500
PUC ACB
$4,000
Opening balance $ 5,500 $ 16,000
PUC reduction (4,000) (4,000)
$ 1,500 $ 12,000
No deemed dividend
$8,000
Opening balance $ 5,500 $ 16,000
PUC reduction (8,000) (5,500)
(2,500) $ 10,500
Deemed dividend $ 2,500
(i) The payment of $4,000 will not result in an immediate deemed dividend, as the payment is less than the
PUC of the shares ($5,500) [ssec. 84(4)]. This payment would be considered to be return of the original
capital injected by the shareholders.
This payment will, however, reduce the adjusted cost base to $12,000 ($16,000 – $4,000) [spar. 53(2)
(a)(ii)]. This reduction would result in a higher capital gain upon ultimate disposition of the shares
because $4,000 of the cost in the shares has been recovered tax-free by this payment.
(ii) The payment of $8,000 will result in an immediate deemed dividend of $2,500 because the payment of
$8,000 is in excess of the PUC of $5,500. The ACB of the shares will be reduced by the non-taxed
portion of the payment of $5,500 ($8,000 – $2,500).
(c) Shareholders
4,500 c/s 15% stock dividend – PUC 3,375
Festivals Ltd.
PUC $22,500
# PUC ACB DD 82(1)
Opening balance 4,500 22,500

Stock dividend of 15% 675 3,375 3,375 3,375
Ending balance 5,175 25,875
The payment of the stock dividend of $3,375 increased the PUC by $3,375 but it does not result in a deemed
dividend, because paragraph 84(1)(a) excludes a stock dividend from deemed dividend treatment under
section 84.
However, subsection 82(1) and the definition of an “amount” [ssec. 248(1)] require that a dividend equal to
the increase in PUC be included in income.
In addition, the ACB increases by $3,375.
(d) Shareholder Cash $15,400

100% Common shares
Common shares repurchased one year later
Baker Corp Ltd. Assets $38,400
Issuance
Assets 38,400
Cash -15400
Net assets contributed 23,000
PUC/ACB Common shares 23,000
Redemption
Repurchase price $30,000

PUC -23,000
Deemed dividend 7,000
Proceeds of disposition $30,000

Deemed dividend -7,000
Adjusted Proceeds of Disposition 23,000
ACB 23,000
0
(i) The contribution of the assets will not result in a deemed dividend as long as the increase in the PUC of the
shares of $23,000 does not exceed the increase in net assets of $23,000 ($38,400 – $15,400).
(ii) The shareholder of Baker Corp. Ltd. will receive a $7,000 deemed dividend, the repurchase value exceeds
PUC [ssec. 84(3)]. Since the ACB of the shares is $23,000 (i.e., $38,400 − $15,400), there will also be no
capital gain or loss on the redemption (i.e., proceeds ($23,000) – ssec. 84(3) dividend (nil) – ACB
($23,000)).
Solution 4: Redeem vs. Sell Shares

Ms. Chiu
1,000 Cl A 1,000 Cl B 1,000 Cl C 1,000 Cl D

FMV $50,000 $50,000 $50,000 $50,000
ACB 20,000 40,000 20,000 80,000
PUC 20,000 20,000 40,000 100,000
Co A Co B Co C Co D
2. Identify the relationships among the stakeholders e.g., related, affiliated, associated, connected
 Ms. Chiu is not related to any other shareholders
3. Identify the profile of each stakeholder e.g., tax features, risk profile
 Ms. Chiu is an individual presumably resident in Canada (since the companies are CCPCs)
 She is in the top tax bracket
 The shares are not QSBC shares
 None of the companies have a GRIP balance
 Identify the tax consequences of the redemption or sale of each set of shares
timeline
 Future: She is considering the redemption or sale of her shares in the future
Identify the Issues

 Discuss the tax treatment of a share redemption
 Quantitative: Calculate the deemed dividend then capital gain or loss on the redemption
of the shares
Discuss the tax treatment of a share sale
 Quantitative: Calculate the capital gain or loss on the sale of the shares
 None identified
Analyze the Major Issues

1. Identify and complete an appropriate qualitative analysis of the transactions and plans including an
analysis of the applicable provisions of the Act
Tax consequences of a redemption of CCPC shares
 S. 84(3) applies to any corporate redemption and results in the calculation of a deemed dividend. A
non-eligible dividend is grossed up at 15% and a dividend tax credit equal to the gross up is
available in computing tax. In the top marginal tax bracket, an effective tax rate of 42.5% will
apply to the dividend.
 Since the redemption is also a disposition there is also a potential capital gain/capital loss on
redemption. To avoid double taxation the redemption dividend is deducted from the proceeds to
arrive at adjusted proceeds for purposes of determining the capital gain or loss on disposition.
Tax consequences of a sale of CCPC shares
 The disposition of shares will result in a capital gain or loss. Only half of the gain is subject to tax
at the taxpayer’s graduated tax rate. In the top marginal tax bracket, an effective tax rate of 25%
will apply to the gain which is lower than the tax rate applicable to dividends. If the shares are
QSBC shares, the capital gains deduction could be used to shelter the taxable capital gain from tax.
2. Identify and complete the supporting quantitative analysis using an appropriate analysis
format
Corp A Corp B Corp C Corp D
Redemption Redemption Redemption Redemption
Redemption proceeds 50,000 50,000 50,000 50,000
Less: PUC (20,000) (20,000) (40,000) (100,000)
Deemed dividend 30,000 30,000 10,000 -
Tax @ 42.5% 12,750 12,750 4,250 -
Redemption proceeds 50,000 50,000 50,000 50,000

Deemed dividend (30,000) (30,000) (10,000) -
Proceeds of disposition 20,000 20,000 40,000 50,000
Less: ACB (20,000) (40,000) (20,000) (80,000)
Capital gain (loss) - (20,000) 20,000 (30,000)
Tax @ 25% - (5,000) 5,000 (7,500)
After- tax Cash 37,250 42,250 40,750 57,500
Corp A Corp B Corp C Corp D

Sale Sale Sale Sale
Proceeds of disposition 50,000 50,000 50,000 50,000
ACB (20,000) (40,000) - (80,000)
Capital gain (loss) 30,000 10,000 50,000 (30,000)
Tax @ 25% 7,500 2,500 12,500 (7,500)
After- Tax Cash 42,500 47,500 37,500 57,500
Note that in all cases, the economic gain is equal to the capital gain.
Corp A: The redemption results in a higher tax since dividends are taxed at a higher rate than capital gains
Corp B: The redemption results in significantly more tax since the PUC is lower than the ACB. And, if the
capital loss cannot be used the tax differential will be even more
Corp C: The redemption results in a higher tax since some of the gain is taxed as a dividend, which is taxed
at a higher rate than capital gains
Corp D: Both are taxed the same since there isn’t any dividend to be taxed at a different rate
Tax is saved due to an allowable capital loss only where Ms. Chui has taxable capital gains available to use the
loss.
Solution 5: Withdrawing funds from investment corporation

1. Draw a diagram identifying all stakeholders, e.g., corporate org chart
Mark Hilary
50 c/s 50 c/s
ACB $50,000 ACB $50,000
HII
PUC $100,000
 Mark and Hilary are related to and affiliated with each other
 Mark and Hilary are each related to and affiliated with HII
i. Mark and Hilary
1. Individuals resident in Canada
2. Bought their 50 shares from HII for $50,000 each so ACB is $50,000 each
3. Both plan to retire in five years
ii. HII
1. CCPC since it is a private corporation controlled by two Canadian residents
2. PUC is $100,000
3. Non-eligible RDTOH of $25,000
4. Eligible RDTOH of $23,000
5. CDA of $30,000
6. GRIP of $60,000
7. Net capital loss of $10,000
i. Both Hilary and Mark want to minimize any risk of reassessment.
ii. Mark and Hilary would like your advice on the following:
1. How much money they can take out of the corporation without paying any corporate or personal
tax?
2. Does it make sense for them to take more money out of the corporation as salary or dividend?
3. Any advice on the $40,000 Hilary borrowed from HII given she will repay it in October?
timeline.
 The only transaction that has taken place is the loan from HII to Hilary.
2019 2020 2021
Aug 31 Dec 31 Aug 31 Dec 31 Aug 31

July 1 Oct (today)
Loan received Plan to repay loan
Identify the Issues

1. Identify all of the major tax issues and any non-tax issues.
 Possible ways of getting money out tax free:
o PUC reduction - $100,000
o CDA - $30,000
 Possible ways of getting money out with tax
o Dividend to obtain a dividend refund
o Salary
 What is reasonable?
o Is salary or dividend better?
 Shareholder loan
o Does she have to take the loan principal into income?
o Is there a deemed interest benefit?
 Assume there are less than five full-time employees in HII
 Investment income in this corporation in excess of $50,000 would impact of the small business
deduction limit of any associated corporations. Adjusted aggregate investment income includes
dividends from non-connected corporations.
Analyze the Issues

Issue 1 Possible ways of getting money out tax free:
PUC Reduction and CDA
PUC reduction - $100,000
 Paid up capital [s. 89(1)] is averaged over the 100 common shares of the company and is therefore,
$1,000 per common share.
 Paid up capital can be distributed tax free to shareholders through a paid up capital reduction resolution.
 As long as the funds or property distributed from the corporation do not exceed PUC a deemed
dividend will not result.
 The PUC reduction will also reduce the ACB of the shares held by Mark and Hilary
CDA - $30,000
 It is possible to elect [s. 83(2)] to treat a dividend as having been distributed from a private
corporation’s capital dividend account.
 Such a dividend is received tax free by the shareholder.
 HII’s capital dividend balance of $30,000 is a cumulative balance.
 This balance relates to the untaxed portion of capital gains in excess of the amount by which capital
losses exceed allowable capital losses.
 The calculation of the CDA balance requires that any capital losses be reflected in this account even if
the allowable capital loss is not yet deducted for tax purposes, i.e., it is a net capital loss.
 A PUC reduction of $99,998 will reduce PUC to $2 and reduce the ACB of the shares to Mark and
Hilary from $50,000 to $1 each
 We should review the components of the capital dividend account to confirm that the $10,000 net
capital loss has already been reflected in the $30,000 CDA balance and will not impact the potential
$180K addition to the capital dividend account upon the sale of investments in the future.
3. Identify risks including missing information, assumptions and uncertain research positions
 If we pay out a capital dividend that is higher than the balance in the capital dividend account there are
penalties.
 Make sure the balance is correct.
 It is possible to distribute $50,000 of PUC to each shareholder without either a deemed dividend or
capital gain/loss
 To maintain some PUC, the reduction should be $49,999 each or $99,998 in total
 Subject to a confirmation of the balance in the CDA, a tax-free capital dividend of $15,000 dividend
can be declared to each shareholder with the appropriate election.
 None identified
Issue 2 Possible ways of getting money out with tax
a. Pay Dividends to Generate a Dividend Refund
 Hilmar Investments Inc. is earning aggregate investment income [interest, dividends and taxable capital
gains].
 Interest and taxable capital gains (net of taxes) can be distributed as non-eligible dividends to
shareholders.
 Dividends received from Canadian public companies are “eligible dividends” and go into HII’s GRIP
balance
 The current GRIP balance is $60,000
 Dividends can be designated to be paid from HII’s GRIP balance as eligible dividends. The gross up
for GRIP dividends in 2020 is calculated at 38% with a dividend tax credit equal to the gross up.
 All other dividends paid from HII are non-eligible dividends. The gross up for these dividends in 2020
is calculated at 15% with a dividend tax credit equal to the gross up.
 The company can choose whether a dividend paid is an eligible (up to available GRIP) or is a non-
eligible dividend
 Dividends paid by the corporation will result in a refund of RDTOH equal to the lesser of:
1. 38⅓ % of taxable dividends paid in the year and
2. The corporation’s relevant RDTOH balance at the end of the year.
Part IV tax on eligible portfolio dividends are included in eligible RDTOH. A refund of eligible RDTOH (using
the above calculation) can be received on the payment of eligible or non-eligible dividends (once the non-eligible
RDTOH pool is fully refunded).
Refundable Part I tax is included in the non-eligible RDTOH pool. Non-eligible RDTOH can only be refunded
through the payment of non-eligible dividends. Non-eligible dividends must be used to provide a refund from
the non-eligible RDTOH pool before any refund of the eligible RDTOH account can be accessed. As a result,
the company in the above situation will be able to pay an eligible dividend of $60,000 to obtain a $23K refund of
eligible RDTOH and a non-eligible dividend of $65,217 to obtain a $25K refund of non-eligible RDTOH.
 A dividend of $65,217 ($25,000/38⅓%) would need to be paid to result in a refund of $25,000 of non-
eligible RDTOH.
 The personal tax on an eligible (GRIP) dividend of $60,000 (equal to GRIP) at the highest tax bracket
personal tax rate would be 31% [50% x 1.38 – .38] or $18,600. There is a dividend refund of $23,000
of eligible RDTOH resulting from this dividend payment.
o Therefore, pay an eligible dividend to generate net cash of $4,400
 The personal tax on a non-eligible dividend of $65,217 at the highest tax bracket personal tax rate
would be 42.5% [50% x 1.15 – .15] or $27,717 of personal tax. There is a dividend refund of $25,000
resulting from this dividend payment. There is a tax cost of $2,717.
o Since the personal tax at 42.5% is greater than the dividend refund at 38.33% an option is to
leave this non-eligible dividend in the corporation
o Wait until retirement in five years when the personal tax rates on non-eligible dividends are
lower, e.g., non-eligible dividends in a year in which they each earn $130,000 would be taxed
at a rate of 32.2%.
 None identified
 Dividends are not deductible to the corporation but can be paid to generate a $48,000 dividend refund.
 Dividends eligible for a dividend refund are a tax efficient way to get cash out of the company,
especially if they are eligible dividends.
 Eligible dividends of $60,000 should be paid first to generate a dividend refund of $23,000 with
personal tax of $18,600.
 Non-eligible dividends of $65,217 can then be paid to generate the dividend refund of $25,000 with
personal tax of $27,717. Mark and Hilary must decide whether they want to pay this dividend now or
when they retire and their personal tax rate is lower.
 No weaknesses identified
Identify and perform the qualitative analysis of the transactions and plans including an analysis of the
b. Pay Salary
1.
 Salaries are deductible to the corporation and taxable to the individual. If the individual is in the highest
tax bracket, only 50% of the salary will be available after tax.
 An amount that is reasonable in the circumstances is deductible for tax purposes under section 67.
CRA’s administrative position is that they will not challenge the reasonableness of salaries or bonuses
to shareholder-managers if profits are usually distributed by way of bonus or the company’s policy is to
pay bonuses to compensate for special knowledge or skills. As this company is not active in nature, it is
not clear that CRA’s administrative position would apply to salaries paid from investment income. It
may be necessary to support the reasonableness of the deduction by documenting the activities
performed by the shareholders for the salaries received.
 While the payment of a salary provides RRSP room, Hilary and Mark are already receiving
employment income from their technology sector jobs that provide them with maximum RRSP room.
 If they leave the money in the corporation they will be able to pay it out as a dividend when they retire
and their income is in a lower tax bracket.
 A $10,000 salary will provide $5,000 after-tax for either of Hilary or Mark as they are in the highest tax
bracket. The corporation will save $2,000 of tax because of the deduction for the salary paid [$10,000
x 50.67% or $5,067 less lost non-eligible RDTOH of $3,067 ($10,000 x 30.67%)].
 A $10,000 non-eligible dividend will provide $5,750 [$10,000 – [$10,000 x 1.15 x 50% – $10,000 x.15]]
after-tax for Hilary or Mark as they are in the highest tax bracket. Dividends are not deductible and
therefore no Part 1 tax savings to the corporation result.
 If sufficient dividends have already been paid to refund the RDTOH then there is no dividend refund
related to the dividend payment.
 Salary expenses can be challenged by the CRA as being unreasonable
 Do not pay salary due to the risk of challenge from the CRA
 Do not pay dividends at this time unless they are eligible dividends and there is a balance in eligible
RDTOH
 In the future pay capital dividends as the investments are sold and capital gains are realized
 Pay non-eligible dividends to Mark and Hilary when they retire and are in a lower tax bracket
Issue 3 Shareholder loan
 The July 1, 2019 $40,000 loan to Hilary is a shareholder loan subject to subsection 15(2) and would be
required to be included in her 2019 income since the exceptions are not met.
o The loan was not repaid by August 31, 2020, i.e., one year from the end of the taxation year
end in which the loan was made.
o The loan could not be argued to have been received by virtue of employment. Other
employees of the company (confirm this) do not receive loans of a similar nature and it is
clearly a loan that she is receiving as a shareholder of the corporation.
o The loan is for a vehicle but not a vehicle to be used in the performance of employment
duties.
 Where there is an income inclusion of the principal there is no interest benefit.
 None needed
 None identified
 The $40,000 shareholder loan to Hilary is taxable and her 2019 tax return should be amended to include
it in her Division B income in 2019 and remove any interest benefit included on the 2019 return.
 The repayment of $40,000 in October of 2020 (after the August 31, 2020 year end) will be deductible in
Hilary’s 2020 personal tax return .
 There is no interest benefit to Hilary in relation to the loan.
Advise/Recommend
Tax Free
 Funds removed from the corporation should be distributed as tax free paid-up capital distributions.
$99,998 should be removed in this manner.
 Also, $30,000 of capital dividends should be paid out.
 The components of the capital dividend account should be reviewed to confirm the balance in this
account.
 An election should be filed to treat the dividend as a tax free capital dividend to the shareholders.
 In the future pay capital dividends as the investments are sold and capital gains are realized.
Taxable
 Salaries should not be paid due to the risk of challenge from the CRA.
 Do not pay dividends at this time unless they are eligible dividends and there is a balance in the eligible
RDTOH.
 Pay non-eligible dividends to Mark and Hilary when they retire and are in a lower tax bracket.
 If further funds are to be removed from Hilmar, eligible dividends out of GRIP of $60,000 should be
paid out first to receive a dividend refund of $23,000 with personal tax of $18,600.
 If they decide they want to, an additional non-eligible dividend of $65,217 can then be paid to generate
the dividend refund of non-eligible RDTOH of $25,000 with personal tax of $27,717.
 Dividend payments could be deferred until they retire and are in a lower tax bracket.
 In the future, as the GRIP balance builds up, pay a eligible dividend to Mark and Hilary.
Shareholder Loan
 Hilary’s 2019 personal tax return should be amended to include the $40,000 shareholder loan in income
and remove any interest benefit. When she files her 2020 return, the $40,000 repayment can be
deducted when computing her income.
 A letter should be written to the CRA requesting the amendment and the related 2019 tax payment
should be made as soon as possible to stop interest accruing on the balance owing.
Solution 6: Wind-Up of a Corporation

1. Draw a diagram identifying all stakeholders and their relationships, e.g., corporate org charts
Mr. Prasad Cdn resident

Top tax rate
related 100% ACB/PUC 18K Purchaser

affiliated unrelated
J. Tilkenhurst Ltd CCPC
 Mr. Prasad owns 100% of the company so they are related and affiliated
 Purchaser is not related
 Mr. Prasad
 An individual resident in Canada (since JTL is a CCPC)
 Planning to sell the assets of JTL in January 2021 and wind up the company
 He is in the top tax bracket in 2020 and 2021
 In 2022 and later years he expects his income to be approximately $100,000
 J. Tilkenhurst Ltd.
 CCPC (given) – controlled by a Canadian resident
 PUC of shares is $18K, ERDTOH $6K, CDA $12K, no GRIP
 Purchaser
 A corporation
4. Understand the decision maker and their objectives
 Mr. Prasad wants to retire
 He wants the company to sell its assets and wind up JTL
 Wants to determine how much capital he has to invest if he winds up JTL
 He wants to know whether he should wind up JTL or keep it
timeline
 Mr. Prasad purchased the shares 10 years ago
 He wants the company to sell its assets and wind up in January 2021
 Planning transaction
Identify the Issues
Issue 1 Tax treatment of an asset sale
Quantitative: After-tax cash in JTL after selling the assets?
Issue 2 Tax treatment of a wind up of JTL
Quantitative: After-tax cash with Mr. Prasad on winding up the company?
Issue 3 Pro and cons of retaining the corporation
Should he wind up JTL or keep it?
 Assume that JTL and the purchaser are neither related not affiliated
Analyze the Issues
- Issue 1 Tax treatment of asset sale
 The sale of assets will result in:
o Disposition of the properties sold for tax purposes.
o Taxable income in JTL
o Possible additions to the CDA and non-eligible RDTOH
o Liabilities, including income tax to be paid
o After-tax cash in the corporation available for distribution to Mr. Prasad
- Issue 2 Tax treatment of a wind up of JTL
 If JTL is to be “wound up” so s. 84(2) applies
o While s. 88(2) does apply, the assets have already been sold so there are no assets
remaining to be deemed to be disposed of; the only asset is cash. 88(2) applies to a
Canadian corporation where all or substantially of the property owned is distributed to
the shareholders on wind up.
o Consequences of wind up – The shares will disappear along with the company. As a
result, the wind up is treated like a redemption since the funds are coming from the
company to Mr. Prasad. Therefore, calculate
 Deemed dividend [84(2)]
 Capital gain or loss [84(9)]
- Issue 3 Pros and cons of retaining JTL
 If JTL is NOT wound up
o The PUC and CDA can still be paid out tax free
o The dividend refund is not received but future dividends can be paid to generate a
dividend refund.
o More flexibility; Dividends can be paid out over time at lower tax rates.
o Investment income earned in a corporation is taxed at the highest tax rate and there is a
tax cost to earning investment income in a corporation.
o Avoids immediate tax on the deemed dividend on wind up under 84(2)
o More difficult to access funds held in a corporation.
 If JTL is wound up
o Mr Prasad no longer has ongoing filing and administrative costs associated with having a
corporation.
o Funds from the corporation can be invested personally and taxed at lower marginal tax
rates or could be invested in an RRSP or TFSA where investment income is not taxed.
o Significant deemed dividend on wind up will be taxed at highest marginal tax rate of
42.5%.
Sale of Assets
Calculate the tax cost of selling all the assets of the company and the after-tax corporate cash available for
distribution if the JTL is wound up.
Non-Eligible
Proceeds ABI AII CDA RDTOH
Cash 15,000
Accounts receivable 52,000 5,000 (4,000) (4,000) 1
Inventory 127,000 17,000 2
Land 150,000 32,500 32,500 3
Building 97,000 43,000 15,500 15,500 4
Equipment 6,000 (4,000) 5
Marketable securities 26,000 - 6
Class 14.1 Assets 130,000 11,239 43,774 43,774 7
Liabilities (45,000) 72,239 87,774

13% 50.67% 8
Income taxes (53,863) 9,391 44,472

504,137
Dividend Refund 32,917 26,917 9
537,054 99,774 32,917

/ 38.33%
85,871
Wind up the Company
Calculate the components of the distribution

Deemed Dividend
Funds available for distribution 537,054
Less: paid-up capital (18,000)
Deemed dividend on winding up 519,054
Less: capital dividend elected (99,774)
Deemed taxable dividend (sufficient to clear RDTOH) 419,280
Taxable capital gain to shareholder:
Proceeds on winding-up 537,054
Less: Deemed dividend (519,054)
Proceeds of disposition 18,000
Cost (18,000)
Capital gain -
Taxable capital gain -
Calculate the tax cost and after-tax cash to Mr. Prasad personally
Cash distribution 537,054
Tax on non-eligible dividend 419,280 42.5% (178,194)
After-tax cash 358,860
* (1 + .15) x 50% - .15 = 42.5%
Compare the after-tax cash available to invest if JTL is wound up (Option A) to the after-tax cash available
if the company is retained (Options B & C). If the company is retained the PUC and CDA can be
distributed tax free to provide some personal funds for Mr. Prasad to invest (Option B). If the company is
retained, it would also be possible to pay a non-eligible dividend of $85,871 to receive a refund of the
company’s non-eligible RDTOH balance of $32,917 at a low tax cost of $3,578.
Option A Option B Option C

Asset Sale Asset Sale Asset Sale
Wind Up No Wind Up No Wind Up
Corporation JTL JTL JTL

After- tax Cash 504,137 504,137
PUC Distribution (18,000) (18,000)
Capital Dividend (99,774) (99,774)
Taxable Dividend Paid - (85,871)
Dividend Refund - 32,917
Available to Invest - 386,363 333,409
Individual Mr P Mr P Mr P
Cash Received on Wind up 537,054
PUC Distribution Rec'd 18,000 18,000
Capital Dividend Rec'd 99,774 99,774
Taxable Dividend Rec'd - 85,871
Tax on Dividend (178,194) (36,495)
Available to Invest 358,860 117,774 167,150
Total Available to Invest 358,860 504,137 500,559

3. Identify any risks including missing information, assumptions and uncertain research positions
 None identified
a. If Mr. Prasad sells the assets for the amounts specified and subsequently winds up the company he
will have personal after-tax cash of $358,860 to invest personally.
b. If he does not wind up the company, JTL will have $504,137 (before the dividend refund)
available to invest in the company, pay out as taxable dividends, or pay out as capital dividends
($99,774) or to make a paid up capital distribution ($18,000).
c. If he does not wind up the company
 He will be able to withdraw the PUC ($18,000) and CDA ($99,774) tax free.
 Between the corporation and Mr. Prasad they will have a total of $504,137 available to invest.
 He will also be able to access the $32,917 of non-eligible RDTOH on the payment of a
dividend of $85,871. Since his personal tax rate on this non eligible dividend of 42.5% is
greater than the dividend refund rate of 38 ⅓% he should wait until he is in a lower personal
tax bracket before paying this dividend
 He will be able to defer the personal tax of $178,194 on the winding-up dividend.
Advise/Recommend
 Do not wind up
 Pay out the PUC and CDA and invest in a TFSA or RRSP
 Pay a dividend to generate the dividend refund when he is in a lower tax bracket
—NOTES TO SOLUTION
(1) Accounts receivable:
Inclusion of last year’s reserve (active business income)............................................................ $ 5,000
Proceeds of disposition*.............................................................................................................. 52,000
Cost.............................................................................................................................................. (60,000)
Capital loss................................................................................................................................... (8,000)
Allowable capital loss (1/2  $8,000)............................................................................................ (4,000)
Capital dividend account ( /2  $8,000).......................................................................................
1
$ (4,000)
* The disposition does not qualify for the section 22 election, since the accounts receivable were sold to a
factoring company and, hence, the disposition does not meet the “all or substantially all” and “carrying on the
business” tests.
(2) Inventory:
Proceeds....................................................................................................................................... $ 127,000
Cost.............................................................................................................................................. (110,000)
$ 17,000
(3) Land:
Proceeds of disposition................................................................................................................ $ 150,000
Cost.............................................................................................................................................. (85,000)
Capital gain.................................................................................................................................. $ 65,000
Taxable capital gain..................................................................................................................... $ 32,500
Capital dividend account (1/2  $65,000)...................................................................................... $ 32,500
(4) Building:
UCC............................................................................................................................................. $ 23,000
LCP.............................................................................................................................................. (66,000)
Recapture..................................................................................................................................... $ 43,000
Proceeds of disposition........................................................................................................................ $ 97,000

Less: capital cost................................................................................................................................. (66,000)
Capital gain......................................................................................................................................... $ 31,000
Taxable capital gain ( /2  $31,000).............................................................................................
1
$ 15,500
Capital dividend account ( /2  $31,000)......................................................................................
1
$ 15,500
(5) Equipment:
UCC............................................................................................................................................. $ 10,000
LCP.............................................................................................................................................. 6,000
Terminal loss............................................................................................................................... $ (4,000)
(6) Marketable securities:

Proceeds....................................................................................................................................... $ 26,000
Adjusted cost base....................................................................................................................... (26,000)
Increase in value.......................................................................................................................... Nil
Taxable capital gain..................................................................................................................... Nil
Capital dividend account.............................................................................................................. Nil
(7) Sale of intangibles

Proceeds $130,000
Cost 42,453
UCC opening balance $20,600

LCP (42,453)
Adjustment:
25% x LCP for customer list purchased before January 1, 2017 10,613
Recapture $11,240
(8) Tax @ 13% on active business income (13% of $72,239)........................................................... $ 9,391

Tax @ 502/3% on investment income (502/3% of $87,774).......................................................... 44,472
Total tax....................................................................................................................................... $ 53,863
2
(9) Refundable Part I Tax(30 /3% of $87,774)................................................................................... $ 26,917
Solution 7: Sale of Assets With Wind-Up
Non-Eligible
(A) Proceeds ABI AII CDA RDTOH
Opening balance 4,000 -
Cash 2,500
Accounts receivable 7,500 (1,250) -
Inventory 15,500 (6,750)
Land 45,000 17,000 17,000
Building 95,000 27,500 30,000 30,000
Equipment 10,000 (12,000)
Goodwill 47,500 23,750 23,750
Marketable securities 32,000 8,875 8,875
Liabilities (54,000) 7,500 79,625
13% 50.67%
Income taxes (41,318) 975 40,343
After-tax Proceeds 159,682
Dividend Refund 24,418 24,418
184,100 83,625 24,418
/ 38.33%
63,700
(B) Funds available for distribution 184,100

Deemed taxable dividend (sufficient to clear RDTOH) 90,475
(C) Proceeds on winding-up 184,100

Cost (10,000)
Capital gain -
(D)
In order to deduct a reserve for doubtful debt or write off a bad debt, an amount in respect of the debt must
have been included previously in income. This is not the case, if accounts receivable had been purchased from
someone else. Where a person has sold all or substantially all of the property used in a business to a purchaser
who will continue the business, section 22 provides for a joint election by the vendor and purchaser which results
in permitting the purchaser to take the reserve or write-off with respect to the accounts receivable.
Under section 22, the purchaser must include in income the difference between the face amount and
amounts paid. This inclusion will allow the purchaser to deduct a reasonable reserve for doubtful debts on the
accounts receivable purchased and to deduct any bad debts as they occur.
The vendor, regardless of whether section 22 is used, must add to income the reserve for doubtful accounts
deducted in computing Division B income for the preceding taxation year. Under section 22, the vendor would ITA 12(1)(d)
have a business loss with respect to the disposition of the accounts receivable.
If section 22 is not used, any loss on the disposition of the accounts receivable would be considered a capital
loss, and any loss realized by the purchaser on the collection of accounts receivable will be a capital loss with no
reserve or write-off permitted to the purchaser.
(1) The reserve for doubtful accounts of $1,500 must be added to income regardless of whether a
section 22 election is used.
If a section 22 election is used, the excess of face amount over proceeds of $2,750 would be a business loss
such that the net effect on income would be a $1,250 business loss.
(2) Income/loss from business is the difference between the fair market value and the cost of inventory. In
this case such a loss results due to:
Fair market value (proceeds)................................................................................................... $ 15,500
Cost of inventory..................................................................................................................... 22,250
$ (6,750)
(3) Land
Taxable capital gain:
Proceeds.......................................................................................................................... $ 45,000
Adjusted cost base........................................................................................................... 11,000
Gain................................................................................................................................ $ 34,000
Taxable capital gain (1/2 of gain)..................................................................................... $ 17,000
Capital dividend account (1/2 of gain)...................................................................................... $ 17,000
(4) Building
Proceeds.......................................................................................................................... $ 95,000
Capital cost (adjusted cost base)...................................................................................... 35,000
Gain................................................................................................................................ $ 60,000
Active business income
UCC $ 7,500
LCP................................................................................................................................. $ 35,000
Negative balance is recapture.......................................................................................... $ (27,500)
(5) Equipment
UCC $ 22,000
LCP......................................................................................................................................... $ 10,000
Positive balance erminal loss.................................................................................................. $ 12,000

(6) Marketable securities
Proceeds.......................................................................................................................... $ 32,000
Adjusted cost base........................................................................................................... 14,250
Gain................................................................................................................................ $ 17,750
(7)
(a) Unrecorded goodwill (given) Class 14.1
Proceeds.......................................................................................................................... $ 47,500
Cost................................................................................................................................. -
Capital gain..................................................................................................................... $ 47,500
Taxable capital gain........................................................................................................ $ 23,750
(b) Capital dividend account................................................................................................. $ 23,750

(8) Income taxes
Investment income:
502/3%  $79,625............................................................................................................. $ 40,343
Business income:
13%  $7,500.................................................................................................................. 975
Tax payable............................................................................................................................. $ 41,318
(9) Refundable Part 1 Tax
302/3%  $79,625..................................................................................................................... $ 24,418
Solution 8: Sale of Assets With Wind-Up

Mr. Chow
100%
ACB $20,000 Purchaser
Chow
Enterprises
PUC $20,000
GRIP – Nil
Non-Eligible RDTOH 5K
CDA 8K
 Since Mr. Chow controls Chow Enterprises, he is related and affiliated to CEL and they do not deal at
arm’s length
 Purchaser – no information on purchaser (assumed unrelated)
 Mr. Chow
1. An individual
2. A Canadian resident
 Chow Enterprises
1. A CCPC
2. Carries on an active business in Canada therefore eligible for the small business deduction
3. Has a non-eligible RDTOH balance of $5,000
4. Has a capital dividend account balance of $8,000
 Purchaser
1. Corporation
2. They will continue the business
 Mr. Chow is the key decision maker
 His goal is to sell the business of Chow Enterprises
 His decision is:
 If he sells the assets and keeps the corporation, how much would he have available in the
corporation to invest?
 If he sells the assets should he wind up the company?
 How much would he need to sell the shares for to be as well off as selling the assets?
 Wondering about HST implications of the asset sale (optional).
timeline
Incorporated 2007
Goodwill acquired 2010
Future sale of assets/potential wind up OR share sale.
Incorporated Current: Company Future decision: Does

selling assets he keep the company
or wind it up?
Or, should he sell the
shares of Chow?
 This is a planning transaction

Identify the Issues
a. Tax treatment of an asset sale
i. Quantitative: after-tax cash available to invest
b. Tax treatment of wind up of CEL after the asset sale
i. Quantitative: after-tax cash available to invest after wind up
c. Pros and cons of retaining CEL after the asset sale
d. Tax treatment of a share sale.
i. Quantitative: Determine the price he would need to receive for the shares to be as
well off as if he sold the assets
e. HST consequences of asset sale (optional)

 That the purchaser and Chow Enterprises are neither related not affiliated
Analyze the Major Issues

Issue 1 Tax treatment of asset sale
 The sale of assets will result in:
o Dispositions of the properties sold for tax purposes.
o Taxable income in CEL
o Possible additions to the CDA and non-eligible RDTOH

o Liabilities, including income tax are to be paid
o After-tax cash in the corporation available for distribution to Mr. Chow
Issue 2 Tax treatment of a Windup of CEL
 If CEL is to be “wound up” so s. 84(2) applies
o While s. 88(2) does apply, the assets have already been sold so there are no assets
remaining to be deemed to be disposed of; the only asset is cash. 88(2) applies to a
Canadian corporation where all or substantially all of the properties of the corporation are
distributed to the shareholders on a wind up.
o Consequences of wind-up – The shares will disappear along with the company. As a
result, the wind-up is treated like a redemption since the funds are coming from the
company to Mr. Chow. Therefore, calculate
 Deemed dividend [84(2)]
 Capital gain or loss [84(9)]
Issue 3 Pros and cons of retaining CEL after the asset sale.
 If CEL is NOT to be wound up:
o The PUC and CDA can still be paid out tax free
o The dividend refund is not received but future dividends can be paid to generate a
dividend refund at a small tax cost
o Defers the significant tax on the deemed dividend on wind up under 84(2). The tax can be
deferred until a future year when Mr. Chow is in a lower tax bracket.
o What does Mr. Chow plan to do with the after-tax funds from the asset sale? Investment
income in a corporation is taxed at the highest rate and there is a tax cost associated with
earning investment income in a corporation.
o If he plans to purchase another business, it would be tax effective to keep CEL and earn
the business income in the corporation.
If CEL is wound up:

 No ongoing filing and administration costs associated with retaining a corporation.
 After-tax funds can be invested personally in a tax effective manner; TFSAs, RRSPs etc.
 Significant tax liability at highest marginal tax rate on the wind up dividend.
Issue 4 Tax treatment of a share sale;
- Capital gain on the disposition on the sale.
- Mr. Chow could use his capital gains exemption of the shares are QSBCS at the time of sale if he has
any remaining capital gains exemption. You need to find out how much capital gains exemption he has
available.
 Determine if the shares of Chow Enterprises are QSBC shares
 If not, can the company meet the QSBC conditions by December 31st?
 Determine the selling price for the shares needed to give Mr. Chow the same after tax cash as if the
company sold the assets and wound up
Issue 5 HST consequences of asset sale;
 Refer to the solution for Problem 8 of Chapter 21, for a discussion of the GST/HST implications
related to the wind up of Chow Enterprises Ltd.
Are the shares of Chow Enterprises QSBC shares?

Three tests:
1. SBC test – CEL does meet this test since the company does not have any non-active business assets.
2. Holding period test – Sidney has held the shares for more than two years.
3. Basic asset test – throughout the previous 24 months CEL has had more than 50% of its assets used in
an active business carried on in Canada.
- To calculate the share price equivalent, we need to start with the after-tax personal cash assuming a
wind-up.
Sell the assets and keep the company
 Tax payable on the sale of the assets
 After-tax cash after the sale of the assets
 After-tax corporate cash to invest
 Tax components of the funds available for distribution – PUC, CDA, RDTOH .
 Note that without a wind up or dividend, the non-eligible RDTOH of $53,300 will not be refunded.
Non-Eligible
Proceeds ABI AII CDA RDTOH
Cash 10,000
Accounts receivable 18,000 (7,000) 1
Land 150,000 47,500 47,500 2
Building 320,000 75,000 75,000 75,000 3
Equipment 3,000 (9,000) 4
Goodwill 120,000 22,350 35,000 35,000 5
Liabilities (35,000) 81,350 157,500
13.0% 50.67%
Income taxes (90,381) 10,576 79,805 48,300 6
495,619
Dividend Refund 53,300 165,500 53,300 7
548,919 38.33%
139,056
Sell the assets and wind up

- Same analysis as “sell the assets and keep the company” but now pay out any funds at the corporate
level as a dividend to Mr. Chow
Deemed Dividend
Funds available for distribution 548,919
Deemed taxable dividend (sufficient to clear non-eligible RDTOH) 363,419
Cost (20,000)
Capital gain -
Calculate the tax cost and after-tax cash to Mr. Prasad personally
Cash distribution 548,919
Tax on non-eligible dividend @ * 42.5% 363,419 (154,453)
* (1 + .15) x 50% - .15 = 42.5%
Sell the assets and don’t wind up

Compare the after-tax cash available to invest if CEL is wound up (Option A) to the after-tax cash available
if the company is retained (Options B & C). If the company is retained, the PUC and CDA can be
distributed tax free to provide some personal funds for Mr. Chow to invest (Option B). If the company is
retained, it would also be possible to pay a non-eligible dividend of $139,056 to receive a refund of the
company’s non-eligible RDTOH balance of $53,300 at a low tax cost of $5,799. A capital dividend of
$165,500 and a PUC distribution of $20K can still be received by Mr. C tax free. Overall he will have
$495,619 Option B (or $489,821 Option C) available to invest if he retains the corporation.
Option A Option B Option C

Asset Sale Asset Sale Asset Sale
Wind Up No Wind Up No Wind Up
Corporation CEL CEL CEL

After- tax Cash 495,619 495,619
PUC Distribution (20,000) (20,000)
Capital Dividend (165,500) (165,500)
Taxable Dividend Paid - (139,056)
Dividend Refund - 53,300
Available to Invest - 310,119 224,364
Individual Mr C Mr C Mr C
Cash Received on Wind up 548,919
PUC Distribution Rec'd 20,000 20,000
Capital Dividend Rec'd 165,500 165,500
Taxable Dividend Rec'd - 139,056
Tax on Dividend (154,453) (59,099)
Available to Invest 394,466 185,500 265,457
Total Available to Invest 394,466 495,619 489,821
If the company is retained, paying out the PUC and CDA will leave cash of $185,500 in Mr. Chow’s hands
and $310,119 in the company for a total of $495,619 to invest.
The shareholder can defer the tax on the deemed taxable dividend that arose on the winding-up.
If the $310,119 is later paid as a dividend it will generate a dividend refund of $53,300 resulting in a total
dividend of $363,419. When this $363,419 is paid in the future, as a dividend, a further tax of $154,453 will
be paid leaving after-tax cash of $208,966 in Mr. Chow’s personal account.
If he sells the assets, should he keep the after-tax cash in the company or wind up the company?
Unless Mr. Chow needs the funds from the sale of the business personally, should not wind up the company
since he will be paying personal tax of $154,453 earlier than he needs to on the windup dividend.
Determine the selling price for the shares needed to give Mr. Chow the same after-tax cash as if the
company sold the assets and wound up.
From the sale of assets and the resulting distribution Sidney would realize after-tax cash of $394,466.
Given that Sidney has the full capital gains exemption available to him, he would need to sell the shares for
$394,466 to be in the same after-tax position as if he sold the assets and wound up the company.
If he does not have capital gains exemption available to him, he would need to sell the shares for $519,288 to be
in the same after-tax position as if he sold the assets and wound up the company.
CGE Available CGE Not Available
After-tax cash on the sale of assets and windup 394,466 519,288
Proceeds on sale of CEL shares 394,466 519,288

ACB (20,000) (20,000)
Capital Gain 374,466 499,288
Taxable capital gain 187,233 249,644

Capital Gains Deduction (187,233) -
Tax at 50% 0 124,822
After-tax cash from sale of shares 394,466 394,466
If Mr. Chow is not able to use his capital gains exemption he will need to ask for a higher share price.
The equivalent share price would be calculated using the following formula;
P – 50%[1/2(P-20,000)] = $394,466
P = $519,288
He could have CEL pay out a capital dividend of $8,000 before the sale. This would reduce the equivalent share
price to $386,466 if he has his capital gains exemption available;
The equivalent share price would be calculated using the following formula if he does not have his capital gains
exemption available;
8,000 + P – 50%[1/2(P-20,000)] = $394,466

P = $508,621
CGE Not
CGE Available Available
Capital Div Pd $8K Capital Div Pd $8K
After- tax Cash on Sale of Assets and Wind Up 394,466 394,466
Capital Dividend - Tax Free 8,000 8,000

Proceeds on sale of CEL shares 386,466 508,621
ACB (20,000) (20,000)
Capital Gain 366,466 488,621
Taxable capital gain 183,233 244,311

Capital gains deduction (183,233)
Tax at 50% (122,155)
After-tax cash from share sale 394,466 394,466
Check on the amount of capital gains exemption available to Mr. Chow.
Check to ensure that the basic asset test is met. i.e., the company did not own non active business assets that
made up more than 50% of the fair market value of all of the assets in the corporation in the 24 months prior to
the sale date.
4. Reach a conclusion based on your analysis of each major issue

If the company sells the assets and does not wind up:
 The company will have $495,619 available to invest
 Mr. Chow can take the paid-up capital ($20,000) and the capital dividend account ($165,500) out
of the company tax free
 When he eventually does wind up the company, he will receive a dividend refund of $53,300 and
there will be a tax cost on the dividend of $154,453 if he is in the highest tax bracket at that time.
If the company sells the assets and does wind up:

 Mr. Chow will have $394,466 available to invest
Sale of shares
 Mr. Chow would need to sell the shares for at least $394,466 to be as well off as if the company
sold the assets and wound up if he can use his capital gains exemption.
 Mr. Chow would need to sell the shares for at least $519,288 to be as well off as if the company
sold the assets and wound up if he does not have capital gains exemption available to him.
 He could in either case consider having the company pay out an $8,000 capital dividend prior to
the share sale.
 If he does so the price he would need to get to be as well off would be lower at $386,466 (capital
gains exemption available) and $508,621(no capital gains exemption available).

None identified
Conclude and Advise

Advise your client, integrating your conclusions on each of the issues with the client’s objectives, giving
 If Mr. Chow wants to maximize his funds for investment then he should not wind up the company
but keep it to invest the funds available for distribution.
 He should pay out the CDA, the PUC and the dividend needed to generate a dividend refund.
 If he can sell the shares for more than $394,466 he will be better off, in the long term, to sell the
shares as long as he can use his capital gains exemption.
NOTES TO SOLUTION
(1) Inclusion of last year’s reserve (active business income) $ 5,000
Proceeds of disposition.................................................................................. $ 18,000
Cost................................................................................................................ (30,000)
Business loss.................................................................................................. $ (12,000)*
* The disposition does qualify for section 22 election, since the accounts re ceivable were sold to a
purchaser and the disposition does meet the “all or substantially all” and “carrying on the business”
tests.
(2) Taxable capital gain (½  ($150K – $55K)) (investment income)....................................... $ 47,500
Capital dividend account (½  ($150K – $55K))................................................................. $ 47,500
(3) UCC..................................................................................................................................... $ 95,000

LCP...................................................................................................................................... (170,000)
Recapture ($95K – $170K) (active business income).................................... $ (75,000)
Capital gain:
Proceeds of disposition........................................................................... $ 320,000
Cost........................................................................................................ (170,000)
Capital gain............................................................................................ $ 150,000
Taxable capital gain (½  $150,000) (investment income)............................ $ 75,000
Capital dividend account (½  $150,000)...................................................... $ 75,000
(4) UCC $ 12,000

LCP...................................................................................................................................... 3,000
Terminal loss (active business income offset)...................................................................... $ 9,000
(5) Sale of Goodwill (class 14.1)

Proceeds $120,000
Cost (50,000)
UCC opening balance $15,150

LCP (50,000)
Adjustment: 25% x LCP 12,500
Recapture (active business income) $(22,350)
(6) Tax @ 13% on active business income (13% of $81,350)................................................... $ 10,576

Tax @ 50⅔% on investment income (50⅔% of $157,500).................................................. 79,805
Total tax............................................................................................................................... $ 90,381
Refundable Part I (30⅔% of $157,500)................................................................................ $ 48,300
(7) Assumes a minimum $139,056 (i.e., $53,300/38.33%) is to be distributed as a taxable dividend to

produce a refund to clear the non-eligible RDTOH.
Solution 9: Corporate Distribution
(A) Corporation’s position
Proceeds for land and building ($700,000 – $170,000) ..............................................$ 530,000
Cost ............................................................................................................................ (400,000)
Capital gain ................................................................................................................$ 130,000
Taxable capital gain (1/2  $130,000)........................................................................... $ 65,000
Proceeds for goodwill..................................................................................................$ 170,000
Cost ............................................................................................................................ (100,000)

Capital gain ................................................................................................................$ 70,000
Taxable capital gain............................................................................................................................ 35,000
Division B income and taxable income............................................................................................... $ 100,000
Tax (502/3%  $100,000)..................................................................................................................... $ 50,667
Refundable portion of Part I tax on TCG............................................................................................
(302/3% of $100,000) $ 30,667
Capital dividend account:
Land and building....................................................................................................................... $ 65,000
Goodwill..................................................................................................................................... 35,000
Balance....................................................................................................................................... $ 100,000
Funds available for distribution:
Proceeds on sale of business....................................................................................................... $ 700,000
Tax.............................................................................................................................................. (50,667)
Dividend refund (requires taxable dividend of $80,000)............................................................. 30,667
Funds available........................................................................................................................... $ 680,000
Distribution by corporation:
Repay loan (no tax consequences).............................................................................................. $ 499,999
Redeem share (tax-free).............................................................................................................. 1
Elect capital dividend (tax-free) [ssec. 83(2)]............................................................................. 100,000
Taxable dividend (sufficient for dividend refund)....................................................................... 80,000
Total distribution......................................................................................................................... $ 680,000
(B) Shareholder’s position
Taxable dividend (non-eligible).......................................................................................................... $ 80,000
Gross-up (15%  $80,000).................................................................................................................. 12,000
Increase in taxable income.................................................................................................................. $ 92,000
Tax on taxable income increase:.........................................................................................................
Combined federal and provincial tax @ 50%.............................................................................. $ 46,000
Less: combined dividend tax credit (9/13 $12,000 + 4/13  $12,000)............................................ (12,000)
Net tax on distribution from corporation $ 34,000
(C) Summary
Proceeds to corporation...................................................................................................................... $ 700,000
Net tax paid by corporation ($50,667 – $30,667) .......................................................$ 20,000
Net tax paid by shareholder ........................................................................................ 34,000 54,000
Net retained by shareholder................................................................................................................ $ 646,000
Solution 10: Assets vs. Shares

Non-Eligible
(A) Proceeds ABI AII CDA RDTOH
Opening balance 48,000 -
Cash 23,000
Marketable Securities 54,000 (2,000) (2,000) 1
Inventory 50,000 9,000
Land 210,000 28,000 28,000 2
Building 440,000 215,000 15,000 15,000 3
Goodwill 85,000 42,500 42,500 4
Liabilities (43,000) 224,000 83,500
13.0% 50.67%
Income taxes (71,429) 29,120 42,309 25,607 5
747,571
Dividend Refund 25,607 131,500 25,607 6
773,177 38.33%
66,806
Deemed Dividend
(B) Funds available for distribution 773,177
Deemed taxable dividend (sufficient to clear non-eligible RDTOH) 521,677
Cost (120,000)
Capital gain -
Calculate the tax cost and after-tax cash to Ms. Debbie personally
(C) Cash distribution 773,177
Tax on non-eligible dividend @ * 42.5% 521,677 (221,713)
* (1 + .15) x 50% - .15 = 42.5%
(D) Minimum share price acceptable to Ms. Debbie:

The calculation of net retention can be represented algebraically as:
P – .50 [½ (P – $120,000)], where P = proceeds of disposition
To equate the above expression with the net cash retained of $551,464 derived in Part (C), above, from the
sale of assets and the wind-up of the corporation, the following equation with P as the unknown results:
P – .50 [½ (P – $120,000)] = $551,464
Solving for P, P = $695,285
Therefore, Ms. Debbie should require an offer of $695,285 for the shares, given the indicated fair market
value of the net assets.
(E) Impact of Capital Dividend payment prior to sale
If the capital dividend account is paid to Ms. Debbie, before the sale of the shares, the $48,000 would be received
tax free, instead of as proceeds for the shares. Although the value of the shares would fall, tax on $48,000 of
capital gain would be saved. In that case, the minimum share price would be determined from the following:
$48,000 + P – .50 [½ (P – $120,000)] = $551,464
Solving for P, P = $631,285
(F) Maximum share price acceptable to Let’s-Make-A-Deal:

On the purchase of marketable securities, which are part of the working capital requirements of the business,
the ACB is established at fair market value of $54,000. If shares of Shining Ltd. are purchased, the resultant
acquisition of control will require a realization of the accrued capital loss [par. 111(4)(c)] at the deemed taxation
year-end with a new ACB established at $54,000, the fair market value. Therefore, there is no difference in the
tax consequences between a purchase of assets and a purchase of shares on the marketable securities.
On the purchase of inventory, the cost is established at fair market value of $50,000. If shares are purchased,
the purchaser steps into the vendor’s tax position for the inventory which has a cost of $41,000. A gain of $9,000
will be realized on the ultimate disposition of the inventory by the purchaser corporation. Therefore, on the
purchase of the shares there is an inherent tax liability of $1,170 (i.e., $9,000  .13) on the sale of inventory
within the year. This inherent tax liability should lower the value (i.e., increase the cost) of the shares by $1,170
from the purchaser’s perspective.
On the purchase of the land, the ACB is established at fair market value of $210,000. If the shares are
purchased, the purchaser assumes the inherent tax liability for the $56,000 of capital gain accrued on the land.
However, this tax is only incurred on the sale of the land by the purchaser. In this case, since the purchaser does
not anticipate a sale in the foreseeable future, the present value of this future tax can be assumed to be negligible.
On the purchase of the building, the UCC and the ACB are established at fair market value of $440,000. If
shares are purchased, the purchaser assumes the tax liability for the recapture of $215,000 and the capital gain of
$30,000 if they are ultimately realized on the disposition of the building. Again, since the purchaser does not
anticipate a sale of the building in the foreseeable future, the present value of this future tax can be assumed to be
negligible.
However, on the purchase of the building, the purchaser can benefit from an increase in CCA, relative to a
purchase of shares, which will shield future income from tax. The present value of the tax shield for the purchase
of a building in Class 1(4%) in this case is given by:
= [(440,000x.04x.13)/(.04+.05)] x [(1+1.5x.05)/(1+.05)]
= $26,028
If shares are purchased, the corporation continues to deduct CCA in Class 1 on a UCC base of $195,000,
providing a tax shield with a present value given by:
(195,000x.04x.13)/(.04+.05)
= $11,267
The incremental tax saved from CCA on the purchase of assets in present value terms is $14,761 (i.e.,
$26,028 – $11,267).
On the purchase of goodwill at a fair market value of $85,000, the purchaser can add $85,000 to Class 14.1
and it can amortize that amount at 5% on a declining balance basis. The present value of the write-off is given
by:
[(85,000x.05x.13)/(.05+.05)] x [(1+1.5x.05)/(1+.05)]
= $5,657
To summarize these effects, the following is a calculation of the cost of a purchase of assets net of the cost
reduction discussed above:
Cost of assets at FMV ($839,000 + $23,000*)................................................................................. $ 862,000

Tax savings:
PV of future CCA:
Building..................................................................................................... $ 26,028
Goodwill.................................................................................................... 5,657 (31,685)
After-tax cost of assets..................................................................................................................... $ 830,315
Next, we need to determine what the purchaser would pay for the shares to have an after-tax cost of $830,315 .
This calculation would be as follows:
Price of shares........................................................................................................... x= $797,412
Liabilities assumed.................................................................................................... $ 43,000 43,000
Tax savings:
PV of future CCA:
Building..................................................................................................... (11,267) (11,267)
Tax costs:
PV of tax on accrued gains:
Inventory................................................................................................... 1,170 1,170
After-tax cost of shares............................................................................................. $ 830,315 $ 830,315
This net cost of $797,412 is the maximum amount that the purchaser should be willing to pay for the shares
of Shining Ltd.
The results of the analysis of Parts (E) and (F) can be summarized, in terms of pre-tax costs and equivalent
values, as follows:
Purchaser’s after-tax cost:
Pre-tax After-tax
Asset purchase............................................ $ 862,000 $ 830,315
Share purchase............................................ $ 797,412 $ 830,315
Vendor’s after-tax proceeds:

Pre-tax After-tax
Asset sale.................................................... $ 862,000 $ 551,464
Share sale.................................................... $ 695,285 $ 551,464
This table can be further summarized as follows:
Assets Shares
The maximum the purchaser will pay...............................................................
$ 862,000 $ 797,412
The minimum the vendor will accept................................................................ 862,000 695,285
In this case, given that the value of the assets is established to be $862,000, a transaction in shares can be
negotiated to the benefit of both vendor and purchaser. To be better off on the sale of shares, Ms. Debbie, the
vendor, must receive more than $695,285. To be better off on the purchase of the shares, the purchaser must pay
less than $797,412. In this case, therefore, there is a negotiation range for a transaction in shares between
$695,285 and $797,412.
If the $48,000 balance in the capital dividend account is paid to Ms. Debbie as a tax-free dividend, then she
requires a minimum of only $631,285 for the shares, to be indifferent between a sale of shares and a sale of
assets (see Part D above). In this case, the range for negotiation of a share price changes from a low of $631,285
to a high of $749,412 (i.e., $797,412 – $48,000), since the value of the shares to the purchaser will decrease by
the $48,000 distributed as a capital dividend).
* While the purchaser would not buy cash, if the corporation requires the $23,000 for working capital, the purchaser will
have to invest that amount in the business being acquired.
(1) Proceeds of disposition............................................................................................................. $ 54,000
ACB.......................................................................................................................................... (58,000)
Capital loss............................................................................................................................... $ (4,000)
Allowable capital loss............................................................................................................... $ (2,000)
Capital dividend account........................................................................................................... $ (2,000)

ACB.......................................................................................................................................... (154,000)
Capital gain............................................................................................................................... $ 56,000
Taxable capital gain (½  $56,000)........................................................................................... $ 28,000
Capital dividend account........................................................................................................... $ 28,000

Capital cost............................................................................................................................... (410,000)
Capital gain............................................................................................................................... $ 30,000
Taxable capital gain.................................................................................................................. $ 15,000
Recapture ($195,000 – $410,000)............................................................................................. $ 215,000
(4) Taxable capital gain = 50% x (proceeds – cost) = 50% x ($85,000 – nil).................................. $ 42,500
The $500,000 business limit for the small business deduction must be prorated for the
number of days in the taxation year. Since the winding-up may take some time to complete,
this solution assumes that the corporation maintains its eligibility for the small business
deduction in the year in which the sale of assets occurs [IT-73R6 pa. 9].
(5) Tax @ 13% of $224,000........................................................................................................... $ 29,120

Tax @ 502/3% (i.e., 40% + 102/3%) of $83,500.......................................................................... 42,309
Total Part I tax.......................................................................................................................... $ 71,429
(6) Refundable portion of Part I tax for non-eligible RDTOH (302/3% of $83,500)........................ $ 25,607
Solution 11: Purchase of Assets vs. Shares
 Main issues:
 Should Glenda
purchase the
shares or
assets of the
corporation?
 If she were to
purchase the
assets, should
she
incorporate a
new company
(presently or
in the future)?
 Factors to be considered:
(1) If Glenda purchases the shares of the corporation, the non-capital loss carryforwards will continue to be
available to the corporation (against future profits from that business) as the loss business is continuing to
operate. As she is forecasting continuing profits, there is a low risk that the carryforward losses could expire
before they are used.
(2) If Glenda acquires assets and operates the business as a proprietorship, the accumulated non-capital loss
carryover is lost. However, as she has not paid anything for the “value” of those losses, she has not really
lost anything in this respect.
(3) If Glenda acquires assets and operates as a proprietorship, if the operating losses continue they would be
deductible from her other sources of income. This way, there would at least be some tax recovery from the
losses, whereas inside the corporation, there is no income to deduct them from. Should the business prove to
be profitable (as projected) in the future, she can always incorporate at that time.
(4) If Glenda acquires the shares, she could write off her share purchase price as an ABIL (against any type of
income), should the business fail. In an asset purchase scenario, the same would be true, only it would be
terminal losses on equipment and on goodwill, if any.
(5) Although a corporation provides “limited liability ” in the event of a business failure, banks advancing loans
often require that shareholders sign personal guarantees. Considering Glenda’s lack of business experience,
she will most likely have to sign such a guarantee in order to obtain her 6% small business loan. The
corporate form of organization does not provide Glenda with limited liability in regard to the bank loan.
(6) No information is provided about the purchase price of either the assets or the shares. If shares are being
acquired, the purchase price is (presumably) less as liabilities are also being assumed. The two different
prices must be considered in any decision.
(7) If the shares are acquired, what protection does she have from undisclosed liabilities or potential future tax
reassessments for potential wrongful past tax filings? She should retain an accounting firm to perform a due
diligence review to identify potential risks.
Recommendation;
The conservative approach would be to acquire assets and, then, if the business ultimately proves profitable,
incorporate.
Solution 12: Refundable Dividend Tax on Hand; Capital Dividend Account
Part A Capital Dividend Account
Paragraph (a) of the definition of "capital dividend account" in ssec. 89(1)
Land
P of D $175,000
ACB (115,000)
Capital Gain 60,000
Addition to capital dividend account

½ × 60,000 $ 30,000
Equipment
(No capital loss on depreciable property)
Securities
P of D 22,500
ACB (31,500)
Capital loss (9,000)
Deduction from capital dividend account

½ × (9,000) (4,500)
Sale of licence
½ × 300,000 150,000
Vacant Land
P of D 290,000
ACB (485,000)
Capital loss (195,000)
Deduction from capital dividend account

½ × 195,000 (97,500)
Total paragraph (a) (balance cannot be negative) $ 78,000
Paragraph (b) of the definition of "capital dividend account" in ssec. 89(1)
Subsection 83(2) dividends received 50,000
Less:
Capital dividends paid ( 50,000)
Balance in Capital dividend account as at February 28, 2021 $78,000
Recommendation:
XYZ Limited should pay a capital dividend prior to January 31, 2021, before the capital loss realized on the sale
of the land reduces the available balance in the company's capital dividend account. By paying the capital
dividend on or before January 30, 2021, XYZ Limited could pay out a capital dividend in the amount of
$175,500 ($30,000 - $4,500 + $150,000).
Part B
Taxable dividends (eligible) subject to Part IV tax $ 10,000
Part IV tax @ 38⅓% $ 3,833
Refundable Part I Tax

Least of:
(a) 30⅔% × AII - NBFTC - 8% × FII
= 30⅔% × $15,500 - Nil – Nil $ 4,753
(b) 30⅔% × (TI - SBD amt - 100/38 2/3 × NBFTC

- 4 × BFTC)
= 30⅔% × ($515,500 * - $500,000 - Nil - Nil) $ 4,753
(c) Part I tax (given) $ 72,853
Least = $4,753
* taxable income = $500,000 active business income + $15,500 of taxable interest income
Eligible RDTOH
Opening balance $ 0
Part IV tax (eligible RDTOH) 3,833
$ 3,833
The eligible dividend needed to reduce eligible RDTOH to Nil is $3,833/38 1/3% = $10,000. The company will
have GRIP of $10,000 related to the eligible dividends received from non-connected companies. It is possible to
designate an eligible dividend to be paid from this GRIP balance.
Non-eligible RDTOH
Opening balance $ 0
Refundable Part I (non-eligible RDTOH) $4,753

$ 4,753
The taxable dividend needed to reduce non-eligible RDTOH to 0 is $4,753 / 38 ⅓% = $ 12,399
Alternatively, a $22,398 non-eligible dividend can be paid to obtain a refund of both the non-eligible and
eligible RDTOH balances. The non-eligible RDTOH balance must be fully exhausted before any eligible
RDTOH can be refunded.

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Chapter 16 Sol 2020 WK

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CHAPTER 16

Corporate Distributions, Asset Sales and Winding-

Solution 1: Capital Dividend Account

UCC balance....................................................................................................... $16,000

Capital Dividend Account

Solution 2: Capital Dividend Account

Assess the Situation

Stein Ltd. CCPC incorporated in 2004

Analyze the Issues

(1) Recapture is not included in the capital dividend account.

(3) Sale of customer list

4. Reach a conclusion on each issue

5. Evaluate the strengths/weaknesses/risks of your conclusions

Solution 3: Deemed Dividends

Explanation of paid-up capital and how it is calculated

Calculation of tax consequences

Capital $11,050 cash

Deemed dividend $1,000 1,000

Opening balance 4,500 22,500

(d) Shareholder Cash $15,400

Baker Corp Ltd. Assets $38,400

PUC/ACB Common shares 23,000

Repurchase price $30,000

Proceeds of disposition $30,000

Solution 4: Redeem vs. Sell Shares

Assess the Situation

1,000 Cl A 1,000 Cl B 1,000 Cl C 1,000 Cl D

Identify the Issues

Analyze the Major Issues

Redemption proceeds 50,000 50,000 50,000 50,000

Corp A Corp B Corp C Corp D

After- Tax Cash 42,500 47,500 37,500 57,500

Solution 5: Withdrawing funds from investment corporation

Assess the Situation

2019 2020 2021

Aug 31 Dec 31 Aug 31 Dec 31 Aug 31

Identify the Issues

Analyze the Issues

Assess the Situation

Mr. Prasad Cdn resident

related 100% ACB/PUC 18K Purchaser

J. Tilkenhurst Ltd CCPC

Inventory 127,000 17,000 2

Land 150,000 32,500 32,500 3

Building 97,000 43,000 15,500 15,500 4

Equipment 6,000 (4,000) 5

Marketable securities 26,000 - 6

Class 14.1 Assets 130,000 11,239 43,774 43,774 7

Liabilities (45,000) 72,239 87,774

Income taxes (53,863) 9,391 44,472

537,054 99,774 32,917

Wind up the Company

Calculate the components of the distribution

Option A Option B Option C

Corporation JTL JTL JTL

Total Available to Invest 358,860 504,137 500,559

Proceeds of disposition........................................................................................................................ $ 97,000

(6) Marketable securities:

(7) Sale of intangibles

UCC opening balance $20,600

(8) Tax @ 13% on active business income (13% of $72,239)........................................................... $ 9,391

(B) Funds available for distribution 184,100

(C) Proceeds on winding-up 184,100

Negative balance is recapture.......................................................................................... $ (27,500)