Norm Bass has just met with you to ask your advice on the possible merger of his two companies. Norm, a Canadian resident, owns 100% of Normpar Inc. which in turn owns 100% of Jonsub Inc. Both are Canadian companies located in Saskatchewan and both have December 31st year ends. Normpar purchased the shares of Jonsub in 2014 at a cost of $4.0 million. The first few years were profitable and in 2016 Jonsub paid a dividend of $500,000 to Normpar. But the last two years have not been good as Jonsub has realized non- and net capital losses. It is unlikely that Jonsub will generate sufficient income to absorb the losses in the foreseeable future. However, Normpar expects to generate sufficient business income and taxable capital gains to absorb all of Jonsub’s losses. Norm has heard that he could amalgamate the two companies or wind up Jonsub into Normpar so Normpar could offset its income with the losses. Norm would like your advice on when Normpar can gain access to the losses of Jonsub if the two companies merged on June 30, 2019, either by amalgamating or by winding up Jonsub into Normpar. After the transaction, they want to retain the December 31st year-end. Norm is also concerned about what will happen to the $4.0 million ACB that Normpar has in the shares of Jonsub after an amalgamation or wind-up. The balance sheet of Jonsub Ltd. immediately before the merger is as follows:

Assets:

FMV Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000

Accounts receivable (net of $30,000 reserve) . . . . . . . . . 800,000

Inventory at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 920,000 $ 920,000

Land at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 2,000,000

Building at UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 500,000

Equipment at UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000

Goodwill (FMV $500,000) . . . . . . . . . . . . . . . . . . . . . . . 500,000 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000

Liabilities and shareholder’s equity:

Accounts payable and accrued liabilities . . . . . . . . . . . . . 709,000

Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000

Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,090,000 $3,500,000

Other Information

(1) The fair market value of the land and building at the time Normpar Ltd. acquired control were $1.9 million and $400,000, respectively.

(2) The fair market value of goodwill developed by Jonsub Ltd. (i.e., not purchased) was $300,000 at the time Normpar Ltd. acquired control.

(3) Jonsub has the following losses:

Non-capital

Taxation year of loss loss Net capital loss

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,000 $14,000

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 10,000

Before you meet with them you want to: (A) Assess the situation. (B) Identify the issues. (C) Analyze the issues. (D) Advise/recommend.