Ms. Martha Fleck owns an unincorporated business that she operates out of leased premises, (Transfers To A Corporation And Share Redemption) In order to simplify record keeping, her general accounting information is the same as that which she uses for tax purposes. On December 31, 2018, the business has the following assets Assignment Problem Sixteen - 8 Tax Value $132,000 261,000 351,000 Nil $744,000 ( 142,500) $601,500 and liabilities. Fair Market Value $ 127,500 Accounts Receivable 312,000 Inventory 475,500 Equipment (Cost = $420,000) 525,000 Goodwill $1,440,000 Total Assets ( 142,500) Liabilities $1,297,500 Net Assets All of the assets of the unincorporated business will be transferred to Rollex Inc., a new corpo- ration established for the purpose of this transfer. The Accounts Receivable have a face value of $132,000 and will be transferred using the ITA 22 joint election. The remaining assets will be transferred under the provisions of ITA 85(1). The total consider- ation received by Ms. Fleck will have a value of $1,312,500 ($1,440,000 - $127,500), the fair market value of the assets other than Accounts Receivable. The consideration is made up of new debt of $112,500, assumption of the old debt of $142,500, preferred stock with a fair market value of $337,500, and common stock with a fair market value of $720,000. The new corporation does not have a balance in its General Rate Income Pool (GRIP) account in any of the years under consideration. Ms. Fleck wishes to incorporate her business in a manner that minimizes or eliminates any tax effects resulting from the transaction. Required: Ignore the lifetime capital gains deduction in your solution. A. Do you agree with the decision to transfer the accounts receivable using ITA 22? Explain your conclusion and determine the tax consequences of this decision. B. Given that Ms. Fleck wishes to minimize or eliminate current taxes, indicate the values that should be elected for each of the assets to be transferred. C. Determine the adjusted cost base of the debt, preferred shares, and common shares that would be received by Ms. Fleck on the rollover. D. Determine the Paid Up Capital of the common stock and preferred stock that were issued by the new corporation to Ms. Fleck. E. Determine the tax consequences to Ms. Fleck if the preferred and common shares that she received in the rollover were immediately redeemed in January, 2019 by the new corpo ration at fair market values. Ms. Martha Fleck owns an unincorporated business that she operates out of leased premises, (Transfers To A Corporation And Share Redemption) In order to simplify record keeping, her general accounting information is the same as that which she uses for tax purposes. On December 31, 2018, the business has the following assets Assignment Problem Sixteen - 8 Tax Value $132,000 261,000 351,000 Nil $744,000 ( 142,500) $601,500 and liabilities. Fair Market Value $ 127,500 Accounts Receivable 312,000 Inventory 475,500 Equipment (Cost = $420,000) 525,000 Goodwill $1,440,000 Total Assets ( 142,500) Liabilities $1,297,500 Net Assets All of the assets of the unincorporated business will be transferred to Rollex Inc., a new corpo- ration established for the purpose of this transfer. The Accounts Receivable have a face value of $132,000 and will be transferred using the ITA 22 joint election. The remaining assets will be transferred under the provisions of ITA 85(1). The total consider- ation received by Ms. Fleck will have a value of $1,312,500 ($1,440,000 - $127,500), the fair market value of the assets other than Accounts Receivable. The consideration is made up of new debt of $112,500, assumption of the old debt of $142,500, preferred stock with a fair market value of $337,500, and common stock with a fair market value of $720,000. The new corporation does not have a balance in its General Rate Income Pool (GRIP) account in any of the years under consideration. Ms. Fleck wishes to incorporate her business in a manner that minimizes or eliminates any tax effects resulting from the transaction. Required: Ignore the lifetime capital gains deduction in your solution. A. Do you agree with the decision to transfer the accounts receivable using ITA 22? Explain your conclusion and determine the tax consequences of this decision. B. Given that Ms. Fleck wishes to minimize or eliminate current taxes, indicate the values that should be elected for each of the assets to be transferred. C. Determine the adjusted cost base of the debt, preferred shares, and common shares that would be received by Ms. Fleck on the rollover. D. Determine the Paid Up Capital of the common stock and preferred stock that were issued by the new corporation to Ms. Fleck. E. Determine the tax consequences to Ms. Fleck if the preferred and common shares that she received in the rollover were immediately redeemed in January, 2019 by the new corpo ration at fair market values
