taxation
On July 1, 2020, Gi acquired 100% of the shares of Losses Limited (L) an unrelated CCPC that manufactures and distributes dietary supplements. LL has generated sig nificant losses in recent years due to a number of its new products failing to obtain the necessary regulatory approval for sale in Canada "We are very excited about this opportunity." said Gary Acetti, CEO of Gl. "The sale of dietary supplements is a terrific fit with our business model and we plan to open up supplement shops at our gym locations all across Canada by 2021" Today is October 18, 2020 and you are a tax associate at CPA firm that was approached to assist with the tax implications of the purchase of You were provided with the following information regarding the assets of that July 1, 2020 Cest uce FMV Land $700.000 1.000.000 Building (Class 1) 1.200,000 5720,000 1.700.000 Manufacturing equipment (Class) 1.500.000 890.000 Inventory 800,000 550.000 Investment in marketable securities 50.000 Patents (Class 44) 118.000 35,000 150,000 LL incurred a business loss for tax purposes of $240,000 for the January 1, 2020 to June 30, 2020 period before considering any tax implications resulting from the acquisition by G December 31, 2020 was selected as the first fiscal year-end for after the purchase At some point in 2021, Gt would be to amalgamate with LL in order to utilize lowes against the profitable gym business You were provided with a copy of u's tax return for the previous taxation year ending December 31, 2019. Upon checking Schedule 4 of the return, you were able to determine the following loss carryforwards: Year incurred Amount Non-capital losses from property 2015 $ 80,000) Non-capital losses from business 2016 (90.000) Non-capital losses from business 2017 (430,000) Non-capital losses from business 2018 (600.000) Total non-capital losses at December 31, 2019 200.000) Total net capital losses at December 31, 2019 S28.000 Through your research you were also able to find a CRA interpretation stating that the CRA does not consider the business of dietary supplement manufacturing to be similar to the operation of a cym. Required: 1. Describe the tax implications to LL resulting from the acquisition of control by GI, assuming that no elective provisions of the Income Tax Act are used. Include the following in your response: a) Calculate the business loss for tax purposes for the period January 1, 2020 through June 30, 2020. 4 marks [b] State the tax value (0.8, ACB, UCC) for each of the assets owned by Llon July 1, 2020. 9 marks c) State the amount of net capital losses available as at June 30, 2020. What will happen to these losses after the acquisition of control on July 1, 2020? 3 marks (d) Explain what conditions must be met in order for the non-capital losses incurred up to June 30, 2020 to be used in the December 31, 2020 and future taxation years, 4 marks 09 TAHO (e) Assuming the conditions you described in Part (d) were met, what would be the maximum amount of non-capital losses available? 5 marks 2. Assuming a paragraph 111(4)(e) election will be made to utilize any expiring losses, indicate: (a) All of the assets that are eligible for the election 3 marks (b) The asset you would recommend for the election and why 3 marks (c) The minimum amount you would suggest as the elected proceeds 6 marks (d) The benefit of making the election 2 marks 3. Based on Gl's objective to amalgamate with LL in 2021 in order to deduct losses from the supplement business against the income of the gym operations, would you recommend that Gl proceed with this plan? Briefly explain why or why not. 2 marks On July 1, 2020, Gl acquired 100% of the shares of Losses Limited (LL), an unrelated CCPC that manufactures and distributes dietary supplements. LL has generated sig. nificant losses in recent years due to a number of its new products failing to obtain the necessary regulatory approval for sale in Canada. "We are very excited about this opportunity," said Gary Acetti, CEO of GI. "The sale of dietary supplements is a terrific fit with our business model and we plan to open up supplement shops at our gym locations all across Canada by 2021." Today is October 18, 2020 and you are a tax associate at a CPA firm that was approached to assist Gl with the tax implications of the purchase of LL. You were provided with the following information regarding the assets of LL at July 1, 2020: UCC Land Building (Class 1) Manufacturing equipment (Class 43) Inventory Investment in marketable securities Patents (Class 44) Cost $ 700,000 1,200,000 1,500,000 800,000 50,000 118,000 $720,000 850,000 FMV $1,000,000 1,700,000 500,000 550,000 32,000 150,000 35,000 LL incurred a business loss for tax purposes of $240,000 for the January 1, 2020 to June 30, 2020 period before considering any tax implications resulting from the acquisition by GI. December 31, 2020 was selected as the first fiscal year-end for LL after the purchase. At some point in 2021, GI would like to amalgamate with LL in order to utilize losses against the profitable gym business. You were provided with a copy of Ll's tax return for the previous taxation year ending December 31, 2019. Upon checking Schedule 4 of the return, you were able to determine the following loss carryforwards: Non-capital losses from property Non-capital losses from business Non-capital losses from business Non-capital losses from business Total non-capital losses at December 31, 2019 Total net capital losses at December 31, 2019 Year Incurred 2015 2016 2017 2018 Amount $ (80,000) (90,000) (430,000) 1600.000) (1.200.000 $(28.000) Through your research you were also able to find a CRA interpretation stating that the CRA does not consider the business of dietary supplement manufacturing to be similar to the operation of a gym. Required: 1. Describe the tax implications to LL resulting from the acquisition of control by GI, assuming that no elective provisions of the Income Tax Act are used. Include the following in your response: (a) Calculate the business loss for tax purposes for the period January 1, 2020 through June 30, 2020. 4 marks (b) State the tax value (e.g., ACB, UCC) for each of the assets owned by LL on July 1, 2020. 9 marks (c) State the amount of net capital losses available as at June 30, 2020. What will happen to these losses after the acquisition of control on July 1, 2020? 3 marks (d) Explain what conditions must be met in order for the non-capital losses incurred up to June 30, 2020 to be used in the December 31, 2020 and future taxation years. 4 marks (e) Assuming the conditions you described in Part (d) were met, what would be the maximum al of non-capital losses available? 5 marks 2. Assuming a paragraph 111(4)(e) election will be made to utilize any expiring losses, indicate: (a) All of the assets that are eligible for the election 3 marks (b) The asset you would recommend for the election and why 3 marks (c) The minimum amount you would suggest as the elected proceeds 6 marks (d) The benefit of making the election 2 marks 3. Based on Gi's objective to amalgamate with LL in 2021 in order to deduct losses from the supplement business against the income of the gym operations, would you recommend that Gl proceed with this plan? Briefly explain why or why not. 2 marks On July 1, 2020, Gi acquired 100% of the shares of Losses Limited (L) an unrelated CCPC that manufactures and distributes dietary supplements. LL has generated sig nificant losses in recent years due to a number of its new products failing to obtain the necessary regulatory approval for sale in Canada "We are very excited about this opportunity." said Gary Acetti, CEO of Gl. "The sale of dietary supplements is a terrific fit with our business model and we plan to open up supplement shops at our gym locations all across Canada by 2021" Today is October 18, 2020 and you are a tax associate at CPA firm that was approached to assist with the tax implications of the purchase of You were provided with the following information regarding the assets of that July 1, 2020 Cest uce FMV Land $700.000 1.000.000 Building (Class 1) 1.200,000 5720,000 1.700.000 Manufacturing equipment (Class) 1.500.000 890.000 Inventory 800,000 550.000 Investment in marketable securities 50.000 Patents (Class 44) 118.000 35,000 150,000 LL incurred a business loss for tax purposes of $240,000 for the January 1, 2020 to June 30, 2020 period before considering any tax implications resulting from the acquisition by G December 31, 2020 was selected as the first fiscal year-end for after the purchase At some point in 2021, Gt would be to amalgamate with LL in order to utilize lowes against the profitable gym business You were provided with a copy of u's tax return for the previous taxation year ending December 31, 2019. Upon checking Schedule 4 of the return, you were able to determine the following loss carryforwards: Year incurred Amount Non-capital losses from property 2015 $ 80,000) Non-capital losses from business 2016 (90.000) Non-capital losses from business 2017 (430,000) Non-capital losses from business 2018 (600.000) Total non-capital losses at December 31, 2019 200.000) Total net capital losses at December 31, 2019 S28.000 Through your research you were also able to find a CRA interpretation stating that the CRA does not consider the business of dietary supplement manufacturing to be similar to the operation of a cym. Required: 1. Describe the tax implications to LL resulting from the acquisition of control by GI, assuming that no elective provisions of the Income Tax Act are used. Include the following in your response: a) Calculate the business loss for tax purposes for the period January 1, 2020 through June 30, 2020. 4 marks [b] State the tax value (0.8, ACB, UCC) for each of the assets owned by Llon July 1, 2020. 9 marks c) State the amount of net capital losses available as at June 30, 2020. What will happen to these losses after the acquisition of control on July 1, 2020? 3 marks (d) Explain what conditions must be met in order for the non-capital losses incurred up to June 30, 2020 to be used in the December 31, 2020 and future taxation years, 4 marks 09 TAHO (e) Assuming the conditions you described in Part (d) were met, what would be the maximum amount of non-capital losses available? 5 marks 2. Assuming a paragraph 111(4)(e) election will be made to utilize any expiring losses, indicate: (a) All of the assets that are eligible for the election 3 marks (b) The asset you would recommend for the election and why 3 marks (c) The minimum amount you would suggest as the elected proceeds 6 marks (d) The benefit of making the election 2 marks 3. Based on Gl's objective to amalgamate with LL in 2021 in order to deduct losses from the supplement business against the income of the gym operations, would you recommend that Gl proceed with this plan? Briefly explain why or why not. 2 marks On July 1, 2020, Gl acquired 100% of the shares of Losses Limited (LL), an unrelated CCPC that manufactures and distributes dietary supplements. LL has generated sig. nificant losses in recent years due to a number of its new products failing to obtain the necessary regulatory approval for sale in Canada. "We are very excited about this opportunity," said Gary Acetti, CEO of GI. "The sale of dietary supplements is a terrific fit with our business model and we plan to open up supplement shops at our gym locations all across Canada by 2021." Today is October 18, 2020 and you are a tax associate at a CPA firm that was approached to assist Gl with the tax implications of the purchase of LL. You were provided with the following information regarding the assets of LL at July 1, 2020: UCC Land Building (Class 1) Manufacturing equipment (Class 43) Inventory Investment in marketable securities Patents (Class 44) Cost $ 700,000 1,200,000 1,500,000 800,000 50,000 118,000 $720,000 850,000 FMV $1,000,000 1,700,000 500,000 550,000 32,000 150,000 35,000 LL incurred a business loss for tax purposes of $240,000 for the January 1, 2020 to June 30, 2020 period before considering any tax implications resulting from the acquisition by GI. December 31, 2020 was selected as the first fiscal year-end for LL after the purchase. At some point in 2021, GI would like to amalgamate with LL in order to utilize losses against the profitable gym business. You were provided with a copy of Ll's tax return for the previous taxation year ending December 31, 2019. Upon checking Schedule 4 of the return, you were able to determine the following loss carryforwards: Non-capital losses from property Non-capital losses from business Non-capital losses from business Non-capital losses from business Total non-capital losses at December 31, 2019 Total net capital losses at December 31, 2019 Year Incurred 2015 2016 2017 2018 Amount $ (80,000) (90,000) (430,000) 1600.000) (1.200.000 $(28.000) Through your research you were also able to find a CRA interpretation stating that the CRA does not consider the business of dietary supplement manufacturing to be similar to the operation of a gym. Required: 1. Describe the tax implications to LL resulting from the acquisition of control by GI, assuming that no elective provisions of the Income Tax Act are used. Include the following in your response: (a) Calculate the business loss for tax purposes for the period January 1, 2020 through June 30, 2020. 4 marks (b) State the tax value (e.g., ACB, UCC) for each of the assets owned by LL on July 1, 2020. 9 marks (c) State the amount of net capital losses available as at June 30, 2020. What will happen to these losses after the acquisition of control on July 1, 2020? 3 marks (d) Explain what conditions must be met in order for the non-capital losses incurred up to June 30, 2020 to be used in the December 31, 2020 and future taxation years. 4 marks (e) Assuming the conditions you described in Part (d) were met, what would be the maximum al of non-capital losses available? 5 marks 2. Assuming a paragraph 111(4)(e) election will be made to utilize any expiring losses, indicate: (a) All of the assets that are eligible for the election 3 marks (b) The asset you would recommend for the election and why 3 marks (c) The minimum amount you would suggest as the elected proceeds 6 marks (d) The benefit of making the election 2 marks 3. Based on Gi's objective to amalgamate with LL in 2021 in order to deduct losses from the supplement business against the income of the gym operations, would you recommend that Gl proceed with this plan? Briefly explain why or why not. 2 marks
