Tristan Lang is the sole shareholder of Hot Water Ltd., a corporation with an October 31 year-end. Hot Water Ltd. produces trivia games. Tristan started the corporation with an initial capital investment of $30,000 for which he received 1,000 shares.

Tristan has let it be known that he wants to sell his business to enable him to build up a new tax consulting business. As a result, Tristan has received two separate offers, both from individuals and both effective January 1, 2021.

Offer One

Scarlett Shark is willing to pay $995,000 for the shares of Hot Water Ltd.

Offer Two

Noah Cod is willing to buy the assets through an existing corporation that she owns. Noah’s offer is as follows:

Asset	Offer
Marketable securities	$ 14,000
Accounts receivable	60,000
Inventory	254,000
Land	372,000
Building	330,000
Equipment	12,000
Goodwill	180,000
Total offer	$1,222,000

 

You have been given the following additional information.

1. Details of the assets and liabilities of Hot Water Ltd.

Assets	Tax Value
Cash	$ 15,000
Marketable securities, adjusted cost base	26,000
Acc receivable face value $62,000 Less: allowance                   (6,000)	56,000
Inventory, cost amount	230,000
Land, adjusted cost base	144,000
Building undepreciated capital cost (UCC) (capital cost is $235,000)	203,000

 

Equipment, UCC (capital cost is $65,000)	22,000
Goodwill, UCC Class 14.1 (cost is $38,000; acquired 2017)	33,500
Liabilities
Trade payables	47,000
Bank loan	118,000

2. The paid-up capital of the outstanding shares in Hot Water Ltd. is $30,000.

3. The capital dividend account of Hot Water Ltd. is $94,000 before any sale of assets under the offer above.

4. The non-eligible refundable dividend tax on hand balance of Hot Water Ltd. was $18,000 on October 31, 2020.

5. Tristan and Noah have agreed to file an election under section 22 of the Income Tax Act for the transfer of the accounts receivable should they eventually agree to a deal.

6. Hot Water Ltd. has the following tax rates:
   1. 13% on active business income up to the small business deduction limit (there are no associated companies)
   2. 40% on other income (before the 10⅔% additional refundable tax on aggregate investment income and before the refundable Part I tax on investment income)

The corporation will have a nil GRIP balance at the time of a winding-up.

7. Tristan pays personal tax at the top marginal combined federal and provincial rate of 41% on actual dividends from the low-rate income of a CCPC and 50% on all other income.

8. Tristan utilized all of his capital gains exemption on a previous sale of the shares of a qualified small business corporation.

Required:

1. If Tristan sells the assets to Noah and winds up Hot Water after the asset sale, what would be the net amount available for distribution to him after paying all liabilities? (18 marks)
2. If the funds are distributed to Tristan, determine the amount and nature of the components of the distribution to him for tax purposes. Also calculate the net proceeds after tax. (6 marks)
3. Calculate the net proceeds after tax if Tristan sells his shares in Hot Water to Scarlett. Which offer should Tristan accept? (3 marks)