Problem $5$

$Ms.$ Bast owns all the common shares $of$ Batterup $Ltd.,$ a Canadian$-$controlled private corporation,

which started operations $in2009.$ Batterup $Ltd.$ has been quite profitable $in$ recent years. $As$ a result, Three$-$Strikes $Ltd.,$ a Canadian public corporation, has offered $Ms.$ Bast $$2,525,000$ for the assets,excluding cash, $asat$ December $31,2023.$ The offer price reflects unrecorded goodwill $of$ $$475,000.Ms.$ Bast wants $to$ wind $up$ the company after the sale $of$ the assets.

The pro forma balance sheet $of$ Batterup $Ltd.as$

$at$ December $31,2023,isas$ follows:

Cost UCC $FMV$

Assets

Cash $$25,000$

Account Receivable$(net)87,500$ $$75,000$

Inventory $222,500155,000$

Land $110,000-450,000$

Building $350,000$ $$75,000950,000$

Equipment $450,000220,000100,000$

Marketable $securities142,500-320,000$

$1,387,500$ $$2,050,000$

Liabilities

Current Liabilities $$540,000$

Future income taxes $50,000$

Shareholder's Equity

Share Capital$(PUC)100,000$

Retained earnings $697,500$

Total liabilities and equity $$1,387,500$

Additional Information

$(1)$ Batterup $Ltd.$ pays corporate tax $atan$ overall combined rate $of13\%on$ active business income

eligible for the small business deduction, $27\%on$ active business income not eligible for the small

business deduction, and $an$ initial $40\%$ rate for investment income, plus the $10\%3\%$ additional refundable

tax $on$ investment income. The corporation has a GRIP balance $of$ zero.

$(2)$ The reserve for doubtful accounts $at$ December $31,2023$ was $$15,000.$

$(3)$ Batterup $Ltd.$ and Three$-$Strikes $Ltd.$ elected under section $22.$

$(4)$ The company has a capital dividend account balance $of$ $$40,000.$ You have agreed $todo$ the

following for $Ms.$ Bast:

$(A)$ Compute the amount available for distribution $to$ the shareholder.

$(B)$ Determine the components $of$ the distribution $to$ the shareholder.

$(C)$ Compute the taxable capital gain $or$ allowable capital loss $on$ the disposition $ofMs.$ Bast's

shares $on$ the winding$-up.(Assume$ the adjusted cost base $ofMs.$ Bast's common shares $is$

$$100,000.)$

$(D)$ Explain the conditions for and advantages $of$ using a section $22$ election.