Question
Hal Lelulia is the sole shareholder of Microcosm Ltd., a corporation with an October 31 year-end. Microcosm Ltd. produces trivia games. Hal started the corporation
Hal Lelulia is the sole shareholder of Microcosm Ltd., a corporation with an October 31 year-end. Microcosm Ltd. produces trivia games. Hal started the corporation with an initial capital investment of $30,000 for which he received 1,000 shares. Hal Lelulia is a resident of Canada for tax purposes.
Hal has let it be known that he wants to sell his business to enable him to build up a new tax consulting business. As a result, Hal has received two separate offers, both from individuals and both effective January 1, 2022. (both individuals are residents of Canada for tax purposes)
Offer One:
Tu Taxed is willing to pay $1,000,000 for the shares of Microcosm Ltd.
Offer Two:
Shel Ter is willing to buy the assets through an existing corporation that she owns. Shels offer is as follows:
Asset | Offer |
Marketable securities | $ 14,000 |
Accounts receivable | 60,000 |
Inventory | 254,000 |
Land | 372,000 |
Building | 330,000 |
Equipment | 12,000 |
Goodwill | 180,000 |
Total offer | $1,222,000 |
You have been given the following additional information.
- Details of the assets and liabilities of Microcosm Ltd.
Assets | Tax Value |
Cash | $ 15,000 |
Marketable securities adjusted cost base | 26,000 |
Accounts receivable $62,000 Less: allowance (6,000) | 56,000 |
Inventory, cost amount | 230,000 |
Land, adjusted cost base | 144,000 |
Building UCC (capital cost is $235,000) | 203,000 |
Equipment UCC (capital cost is $65,000) | 22,000 |
Goodwill UCC Class 14.1 (cost is $38,000; acquired 2018) | 33,500 |
Liabilities | |
Trade payables | 47,000 |
Bank loan | 118,000 |
- The paid-up capital of the outstanding shares in Microcosm Ltd. is $30,000.
- The capital dividend account of Microcosm Ltd. is $94,000 before any sale of assets under the offer above.
- The refundable dividend tax on hand balance of Microcosm Ltd. was $18,000 on October 31, 2021.
- Hal and Shel have agreed to file an election under section 22 of the Income Tax Act for the transfer of the accounts receivable should they eventually agree to a deal.
- Microcosm Ltd. has the following tax rates:
- 13% on active business income up to the small business deduction limit (there are no associated companies)
- 40% on aggregate investment income (before the 10% additional refundable tax)
7. The GRIP balance of Microcosm Ltd. was $0 on October 31st, 2021
8. Hal pays personal tax at the top marginal combined federal and provincial rate of 42.5% on cash dividends from the low-rate income of a CCPC and 50% on all other income.
9. Hal utilized all of his capital gains exemption on a previous sale of the shares of a qualified small business corporation.
Required:
Advise Hal as to which offer (sale of shares or sale of assets) will provide him with the most after-tax funds.
Please use excel to answer the question; include as much detail as you can
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