Question
Frank Francis is the only shareholder of Being Frank Ltd. (the Company) , a Canadian controlled private corporation. The Company was formed in 2006, with
Frank Francis is the only shareholder of Being Frank Ltd. (the Company), a Canadian controlled private corporation. The Company was formed in 2006, with an investment in common shares of $168,000. No additional shares have been issued since that time. The Company has a taxation year that ends on December 31.
As he is now over 65 years of age and eager to start living the care-free life of a retiree, Frank is planning to sell his business in any manner that he can. He is considering an offer that he has received from Melissa.
She has indicated that she would only buy the assets of the Company, not the shares. She is willing to pay a price that will include an agreed-upon price for the goodwill. She has offered a purchase price, effective January 1, 2020, of $ 3,582,350 that reflects a fair market value for the business. She insists that from the sale proceeds, the Company must discharge all of its current and other liabilities. She has agreed to file a joint ITA 22 election with respect to the Accounts Receivables. Once the business assets are sold, it is Franks intention to wind up the company.
You are provided with the following statement of information about the Companys assets:
Being Frank Ltd. | ||||
Statement of Assets | ||||
As at January 1, 2020 | ||||
Accounting Net Book Value | Tax Value | Fair Market Value | Purchase Price | |
Cash | $ 37,600 | $ 37,600 | $ 37,600 | N/A |
Accounts Receivable | 312,500 | 312,500 | 278,900 | 278,900 |
Inventories | 623,400 | 623,400 | 676,250 | 678,250 |
Land | 326,000 | 326,000 | 403,000 | 403,000 |
Building (Note One) | 427,300 | 396,400 | 1,265,000 | 1,265,000 |
Equipment (Note Two) | 326,500 | 285,400 | 297,600 | 297,600 |
Goodwill | Nil | Nil | 624,000 | 624,000 |
Totals | $2,053,300 | $1,981,300 | $3,582,350 | $3,582,350 |
Note One. The brick and mortar original cost of this building $983,200.
Note Two. The Equipment had an original cost of $623,500.
At the same time that the Statement of Assets was prepared, a Statement of Equities was also drawn up as at January 1, 2020. This statement contained the following information regarding accounting and tax values:
Accounting Book Value | Tax Value | |
Current Liabilities | $ 426,250 | $ 426,250 |
Loan from Shareholder | 186,400 | 186,400 |
Future Income Tax Liability | 363,200 | N/A |
Common Stock - No Par | 168,000 | 168,000 |
Capital Dividend Account | N/A | 94,550 |
Retained Earnings | 909,450 | N/A |
Other Income Retained | N/A | 1,106,100 |
Totals | $2,053,300 | $1,981,300 |
In addition to the information included in the preceding statements, the following information about the Company is available:
- On December 31, 2019, the Company has no RDTOH balance. There was no Adjusted Aggregate Investment Income earned in 2019.
- Being Frank Ltd. is subject to the following tax combined federal and provincial income tax rates:
- Active business income eligible for Small Business Deduction-15%
- Active business income not eligible for the Small Business Deduction- 35%
- Investment income- 50 2/3%
- Franks personal all-inclusive income tax rate is 45% (this rate includes all dividend tax credits)
Required:
Part A. If Frank accepts Melissas offer, effective on January 1, 2020, in a concise schedule format, determine the total after-tax cash amount that would be in the Companys bank account and available to Frank pursuant to a wind-up of the Company. This after-tax cash available schedule must include the impact of:
- all the proceeds received from the sale of all the corporate assets;
- the payment of all corporate and other debts;
- the payment of all corporate income taxes; and
- the receipt of any tax account refunds (15 marks)
Part B. After the sale of the assets, and in regard to the final wind up of the Company, assume that all the appropriate elections or designations will be made to minimize personal income taxes. What will be the final after-tax amount that will be available to Frank pursuant to the total wind up of the Company? (5 marks)
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