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Irene purchased various assets ten years ago and has been operating the business as a sole proprietor since that time. The business sells and installs

Irene purchased various assets ten years ago and has been operating the business as a sole proprietor since that time. The business sells and installs custom office furniture and equipment.

Irene now wants to incorporate her business. She will transfer the assets of her sole proprietorship to a new corporation, ABC Inc., in exchange for shares and debt of that corporation.

The balance sheet of Irene's sole proprietorship is as follows:

Assets

Cash

$ 15,000

Marketable securities

20,000

Accounts receivable

50,000

Inventory

100,000

$185,000

Equipment

50,000

Building

250,000

Land

180,000

Goodwill

39,000

$704,000

Liabilities

Accounts payable

$ 10,000

Current portion of bank loan

15,000

$ 25,000

Non-current portion of bank loan

155,000

$180,000

Equity

524,000

$704,000

You are provided with the following additional information

Asset

FMV

Cost

UCC

Marketable securities

IGNORE

IGNORE

IGNORE

Accounts receivable

45,000

50,000

N/A

Inventory

160,000

100,000

N/A

Equipment

35,000

98,000

$50,000

Building

340,000

290,000

250,000

Land

IGNORE

IGNORE

IGNORE

Goodwill

120,000

60,000

39,000

For the section 85 rollover, IGNORE the marketable securities and the land.

When Christine originally acquired the proprietorship assets, $60,000 of the price she paid was attributed to goodwill. A recent appraisal of the business indicates a goodwill value of $120,000, as noted above. This is reflected in the chart above.

Christine would like to transfer the assets of her proprietorship to ABC Inc., on a tax-deferred basis. FOCUS ONLY ON THE HIGHLIGHTED ASSETS.

As consideration, she would like to receive the maximum debt (boot) possible. The remaining consideration will consist of common shares of ABC.

Required

  1. For the assets which it makes sense to use section 85 (i.e. where there is a gain (either recapture or a capital gain) to be deferred, prepare a table showing the details of the FMV, tax costs (ACB and UCC if applicable), elected amount, debt consideration and share consideration for all the assets and on a total basis. Hint use the frameworks from chapter 12 on the section 85 rollover and the exercises completed in the webinar.

  1. For any assets which do not have negative tax consequences (i.e. no recapture and no gain), these would be sold to the corporation at FVM. Calculate the consequences of that, if any.

  1. Remember to calculate the ACB and the PUC of the shares received on the transfer.

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