Question 2: Section 85 Rollover(44 marks)

Brad Pits started a small business, Aniston Hair Products, in 2019 as a proprietorship. The company distributes hair products and styling equipment to hair salons. Given the level of profits he is realizing, he would like to incorporate in January 2021. The revenues for the business for 2020 were $50,000 and as a result Brad registered the business for HST during the year.He is expecting revenues to increase in 2021 to $90,000.The latest balance sheet of his proprietorship as of December 31, 2020 with the estimated values of the assets of the business is as follows.The company's first taxation year end will be December 31, 2021.

Brad and his wife Jennifer will each own 50% of the 100 common shares of the new corporation to be issued to them on incorporation for $50 each.Brad plans to take back preferred shares on the transfer of the business assets to his new corporation.Brad wants to receive the maximum possible non-share consideration on the transfer, without any adverse tax consequences, by assuming existing debt of the business and issuing new debt as a note receivable.

Aniston Hair Products

Balance Sheet

December 31, 2020

Assets FMV

Cash 5000

Accounts Receivable 15000 14000

Leasehold Improvements 9000 7000

Office Equipment (cost) 10000 9500

` 39000

Liabilities

Bank Loan 4000

Accounts Payable 5000

9000

Equity 30000

39000

UCC

Leasehold Improvement Class 13 6000

Office Equipment Class 8 9000

Brad advises you that the current value of the goodwill is $20,000. Brad does not want to pay any tax on the transfer of his business to the corporation.Once incorporated, he would like to use the future taxes method of reporting for income taxes.

Assume a provincial corporate tax rate of 12% and 4% applicable to income eligible for the small business deduction.

Required

1.Determine the elected amounts, and optimal share and non-share consideration for the properties that can be transferred using a Section 85 election.Your election should eliminate any tax on the transfer for Brad and allow him to easily access cash from the company in the future.

2.Determine the amount and type of consideration for the properties that cannot be transferred using Section 85.

3.Determine adjusted cost base (ACB), capital cost (CC) and undepreciated capital cost (UCC) amounts for the assets owned by the corporation following the transfer.

4.Determine Brad's adjusted cost base and paid up capital (PUC) of the preferred shares he will take back on the transfer of the properties to the corporation.

5.What are Brad's HST filing obligations for 2020 for the proprietorship?

6.Will the corporation need to register for HST and what will the filing requirements for the corporation be?

7.Will HST apply to the asset transfer and is there anything that could be done to eliminate HST on the transfer?