Question
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:
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You are provided with the following additional information
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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
- 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.
- 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.
- Remember to calculate the ACB and the PUC of the shares received on the transfer.
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