Carl owns 100% of the common shares of Extra Ltd., a Canadian-controlled private corporation operating a wholesale business in eastern Canada. Extra’s fiscal year end is May 31, 20X8. It is now April 15, 20X8, and Carl has just signed a letter of intent to sell the wholesale business to Q Ltd.

The initial discussions involved the sale of specific assets of Extra, but a sale of the shares of the company may also be considered. Carl has requested your assistance in estimating the tax liability to Extra if the business assets are sold. Information relating to the sale and to the current year’s operating income is provided below.

1. The balance sheet of Extra at May 31, 20X8, is estimated as follows:

Accounts receivable …………………………..	$ 120,000
Inventory, at cost …………………………..	400,000
Land, at cost …………………………..	30,000
Building, at book value …………………………..	280,000
Equipment, at book value …………………………..	170,000
Licence, at book value …………………………..	40,000
	$1,040,000
Liabilities …………………………..	$ 500,000
Share capital …………………………..	1,000
Retained earnings …………………………..	539,000
…………………………..…………………………..	$1,040,000

2. Net income before income tax and net gains from the sale of assets for the year ended May 31, 20X8, is estimated as follows:

Income from wholesale operations …………………………..	$490,000
Dividend income …………………………..	1,000
Net income before tax …………………………..	$491,000

The following additional information relates to the net income:

•     The dividend income is from a Canadian public corporation, the shares of which were sold during the year for proceeds equal to their original cost.

•     Expenses deducted from revenues included the following items:

Legal fees for collection of bad debts………	$ 2,000
Donations to registered charities………………	3,000
Meals and beverages to entertain customers ………………	4,000
Dividend paid to Carl on March 31, 20X8 ………………	20,000
Replacing a broken window in the building ………………	2,400

3. The 20X7 income tax return indicates the following tax account balances:

RDTOH ………………	NIL
Capital dividend account ………………	NIL
Cumulative eligible capital ………………	NIL
GRIP………………	NIL
Undepreciated capital cost
Class 1 ………………	290,000
Class 8 ………………	140,000
Class 14 ………………	42,000

4. The letter of intent regarding the sale of the business indicates that the closing date will be May 31, 20X8.The letter included the following list of assets to be sold, together with each asset’s estimated market value. For information, the original cost of each asset is provided.

Payment for the above assets would consist of cash plus the assumption of Extra’s liabilities.

5.      You have suggested to Carl that he consider selling the common shares of Extra, rather than the specific assets. You have estimated the market value of the shares to be $600,000.The shares were acquired in 20X1 for a cost of $100,000. In previous years, Carl had used the capital gains deduction to exempt $120,000 of gains from tax.  His cumulative net investment loss (CNIL) at the end of 20X8 is estimated to be $40,000.

Required:

1. Under Part I of the Income Tax Act, determine the minimum income for tax purposes and the minimum taxable income for Extra for the 20X8 taxation year, assuming that all assets are sold.

2. Based on your answer to Requirement 1, calculate the minimum Part I and Part IV federal income tax for the 20X8 taxation year. Your answer should include a calculation of the RDTOH and dividend refund, if any.

3. If an agreement is made to sell the assets of Extra, would you recommend the planned closing date of May 31, 20X8, or a delay of one day to June 1, 20X8? Explain.

4. Briefly outline what the purchaser should consider when choosing between the purchase of assets and the purchase of shares.

5. If Carl decides to sell the shares of Extra, what amount will be added to his net income for tax purposes in his 20X8 taxation year?

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Market value Cost Accounts receivable S 120,000 S120,000 400.000 30,000 320,000 200,000 50,000 100,000 - S1.205000 1120.000 410,000 40.000 400.000 90,000 45,000 inventory an Building Equipment Licence Goodwil1