PROBLEM TWO

Subpump Limited is an active business corporation owned 50% by Jude Simpson and 50% by Shola Clowes. The owners have been attempting to sell the company for several years and have recently received an offer from a serious buyer.

As of December 31, 2020, the companys financial position was as follows:

Assets

Accounts receivable		$2,000,000
Inventory (at cost)		700,000
Land		1,000,000
Building (at cost)	$1,520,000
Accumulated capital cost allowance	(620,000)	900,000
Equipment (at undepreciated capital cost)		400,000
Goodwill (at cost)	$ 280,000
Accumulated capital cost allowance	(100,000)	180,000
		$5,180,000

Liabilities and Shareholders Equity

Current liabilities		$2,380,000
Shareholders equity:
Common shares	$ 10,000
Retained earnings	2,790,000	2,800,000
		$5,180,000

Additional information

1. Relevant asset values are as follows:

	Fair market value	UCC
Inventory	$ 750,000	0
Land	1,200,000	0
Building	1,700,000	$900,000
Equipment	350,000	400,000
Goodwill	500,000	180,000

2. On December 31, 2020, the company had a balance of $9,000 in its capital dividend account. The balances in the NERDTOH and GRIP accounts were NIL.

3. Each owner acquired their shares of Subpump 10 years ago for $500,000.

4. Shola once owned shares of another small business corporation. She sold them last year and realized a capital gain of $900,000. She claimed the maximum capital gain deduction at that time.

5. The purchaser has stated two alternatives in their purchase offer:

A purchase of all assets at fair market value and an assumption of all liabilities; with the balance paid in cash immediately; or

A purchase of the shares for $3,100,000 in cash.

6. Both shareholders want to go their separate ways after the sale. Because of this, Shola thinks the sale of shares is the best alternative, as it avoids additional tax costs.

7. Both shareholders are in the highest marginal tax bracket. Both expect to remain in that bracket in the future. The combined (federal and provincial) marginal tax rate for both shareholders is 35% on eligible dividends and 43% on non-eligible dividends received (net of the dividend tax credit) and 50% on other income. Subpumps tax rate is 27% on business income not subject to the small-business deduction and 13% on earnings subject to the small-business deduction. Investment income is subject to a 50 2/3% tax rate, including a 10 23% refundable tax.

Required:

1. Which offer should the shareholders accept? Show all calculations.

2. If the assets are sold, is there any way that the two shareholders can divide the cash remaining in the company without paying personal tax? If so, what is it?