Assignment 4

Ms. Maya Regierk wants to transfer the assets of her unincorporated wholesaling business to a newly incorporated company of which she is the only shareholder. She has just received the proforma financial statements that you prepared as at December 31, 2019 and wants to transfer the assets by January 1, 2020.

Maya wants to avoid triggering any income tax on the transfer. Liabilities of the proprietorship, except for the mortgage, are to be assumed by the corporation, first, in payment for assets transferred to the corporation other than under a subsection 85(1) election and, then, in payment for assets transferred to the corporation by a subsection 85(1) election. The mortgage is to be assumed by the corporation in partial payment for the land and the building. New debt is to be issued (to the nearest $100) by the corporation to the maximum that will permit a full deferral of unrealized income on assets transferred. She will own only common shares after the transfer.

The following is the pro forma balance sheet of Maya Wholesaling, as at December 31, 2019, along with expected fair market values at that time. The proprietorship has used the same asset values and depreciation for accounting and tax purposes.

Maya Wholesaling

(a sole proprietorship)

Pro Forma Balance Sheet

as at December 31, 2019

Assets Book ValueFMV

Cash$14,200 $14,200

Marketable securities, at cost13,0007,600

Accounts receivable (face value: $138,800; reserve: $10,900)127,800109,300

Inventory28,40040,400

Prepaid insurance3,3003,300

Land in Waterloo held for speculation, at cost 54,600273,000

Fixed assets (see schedule below)182,300298,700

$423,600$746,500

Liabilities and Proprietor's Equity

Bank loan$68,800

Accounts payable and accrued liabilities95,100

Mortgage on land and buildings101,600

265,500

Owner's capital158,100

$423,600

Maya has indicated that she has recently received an unsolicited offer of $746,500 for all of the assets of his business together (without the assumption of liabilities). This amount appears to be a good indication of the fair market value of her business.

Schedule of Fixed Assets

CostUCCFMV

Land$ 87,400$103,800

Class1 (building)60,100$ 47,00092,900

Class8 (office furniture)54,60024,00020,800

Class 10 (automotive equipment;

no accrued capital gains on any asset)41,20017,50015,300

Class 12 (computer software)5,500Nil2,200

Class 14.1 (intangibles)9,8006,40063,700

Required:

Analyze in technical detail the following issues in preparation of your advice to Maya.

(a)With respect to the assets described above consider:

(i)which assets should be transferred to the corporation under a subsection 85(1) election.