Problem 4 (Advanced)-Income Tax II-

Book: Introduction to Federal Income Taxation Canada

[ITA: 87, 88(1)]

Jonsub Ltd. is a wholly owned subsidiary of Normpar Ltd. Normpar Ltd. plans to merge the two companies, either by amalgamating with the subsidiary [sec. 87] or by winding up the subsidiary [ssec. 88(1)]. The balance sheet of Jonsub Ltd. immediately before the merger is as follows:

Assets:
Cash..................................................................................	$ 80,000
Accounts receivable (net of $30,000 reserve)..................	800,000
Inventory at cost (FMV $920,000)....................................	920,000
Land at cost (FMV $2,000,000).........................................	1,200,000
Building at UCC (FMV $500,000)....................................	300,000
Equipment at UCC (FMV $150,000) Goodwill (FMV $500,000)...............................................	200,000 0
Total current assets	$ 3,500,000
Liabilities and shareholders 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

Normpar Ltd. acquired all of the shares of Jonsub Ltd. for $4,000,000 about 5 years ago. The first few years were profitable and in the second year of ownership Jonsubpaid a dividend of $ 500,000 to Normpar, but the last two yers have not been good as Jonsub has realized non and capital losses. It is unlikely that Jonsub will generate sufficient income to absorb the losses in the foreseeable future. However, Normpar expects to genetate sufficient business income and taxable capital gains to absorb all of Jonsubs losses.

Norm has heard thet he could amalgamate the two companies or wind up Jonsub onto Normpar, so Normpar could offset its income with the losses.

N|orm would like your aadvice on when Normpar can gain access to the losses of Jonsub if the two companies merge on June 30,2016 either by amalgamating or by winding up Jonsub into Normpar. After the transcation they want to reatin the December 31^styear end. Norm is also concerned about what will happen to the $4.0 million ACB that Nompar has in the share of Jonsub after an amalgamation or wind up.

.

(3) The fair market value of the land and building at the time Normpar Ltd. acquired control were $1,900,000 and $400,000 respectively.

(4) The fair market value of goodwill developed by Jonsub Ltd. (i.e., not purchased) was $300,000 at the time Normpar Ltd. acquired control and $500,000 immediately before the merger.

Jonsub has the following Losses.

Taxation year of loss Non-capital loss Net capital loss

2014 $43,000 $14,000

2013 $ 7,000 $10,000

REQUIRED

What are the tax consequences to both Jonsub and Normpar on either an amalgamation [sec. 87] or a winding-up [ssec. 88(1)]?