Winding-Up Of A Corporation

Due to his advanced age, Gordon Korngold, the only shareholder of Korngold Ltd., has decided to retire. As the Company activities are largely based on Gordons effort, he intends to sell the assets of the company, followed by a wind-up and distribution of the resulting cash.

Korngold Ltd. is a CCPC with a December 31 taxation year end. In contemplation of this liqui- dation, a Balance Sheet has been prepared based on the tax values of its assets and liabilities as at January 1, 2018. This Balance Sheet, after all closing entries, is as follows:

Korngold Ltd.

Balance Sheet As At January 1, 2018

Inventories (Net Realizable Value And Tax Cost) Refundable Dividend Tax On Hand Land - Adjusted Cost Base Building - Undepreciated Capital Cost

Total Assets

Liabilities Paid Up Capital Capital Dividend Account Other Income Retained

Total Equities

Other Information:

1. The current fair market value of the Land is $2,600,000.

$

$1,747,085

$ 313,260 625,000 326,470 482,355

$1,747,085

TIF Problem Seventeen - 11

Winding-Up Of A Corporation

48,650

32,345 942,450 723,640

2. The Building had a capital cost of $1,160,000. Its fair market value on January 1, 2018 is $1,846,000.

3. The adjusted cost base of the common shares is equal to $625,000, their paid up capital.

4. On January 1, 2018, the Company has a nil balance in its General Rate Income Pool (GRIP) account.

5. All of the assets are disposed of on January 1, 2018 at their fair market values. The corpo- ration's liabilities are also paid on this date. The after tax proceeds from the sale are distributed to shareholders on January 15, 2018.

6. The provincial tax rate for the corporation on income that qualifies for the small business deduction is 3 percent. On all other income, the provincial rate is 14 percent.

7. No dividends have been paid in the previous two years.

Required:

1. Calculate the amount that will be available for distribution to Mr. Korngold after the liqui- dation.

2. Determine the components of the distribution to Mr. Korngold, and the amount of taxable capitalgainsthatwillaccruetohimasaresultofthewinding-upofKorngoldLtd. Assume that appropriate elections or designations will be made to minimize the taxes that will be paid by Mr. Korngold.

Test Item File Problems for Canadian Tax Principles 2018 - 2019 595

TIF PROBLEM SEVENTEEN - 12

Sale Of Assets

TIF Problem Seventeen - 12

Sale Of Assets

Pellerin Fabrication Ltd. is a Canadian controlled private corporation with a June 30 year end. All of the shares of the corporation are owned by Mr. Denis Pellerin, the founder of the corpo- ration. On June 30, 2018, the Balance Sheet of the Company, after all closing entries and prepared in accordance with generally accepted accounting principles, is as follows:

Cash Accounts Receivable Inventories (Lower Of Cost And Market) Land (Cost) Building (Cost) Accumulated Amortization

Total Assets

Liabilities Common Stock - No Par Retained Earnings

Total Equities

$

50,000 215,000 375,000 132,000 850,000 263,000)

(

$1,359,000

$ 373,000 600,000 386,000

$1,359,000

Mr. Pellerin wishes to retire and has agreed to sell all of the non-cash assets of the business, including goodwill, at their fair market values on July 1, 2018. The buyer will assume all of the liabilities of the corporation and will pay the purchase price in cash. The relevant fair market values and the resulting purchase prices are as follows:

Accounts Receivable Inventories Land Building

Goodwill Liabilities

Purchase Price

Other Information:

$195,000 375,000 193,875 550,000

56,250 ( 386,125)

$984,000

1. With respect to the transfer of the Accounts Receivable, the appropriate election is made under ITA 22.

2. The UCC of the Building is $492,000.

3. As at June 30, 2018, the corporation has a balance in its Refundable Dividend Tax On Hand account of $31,000. No dividends were paid during the previous year ending June 30, 2017.

4. As at June 30, 2018, the capital dividend account has a balance of $63,000 and there is a nil balance in the General Rate Income Pool (GRIP) account.

5. The PUC of the corporation is equal to the account balance for the Common Stock. This is also Mr. Pellerins adjusted cost base for the shares.

6. The corporation is subject to a provincial tax rate of 3 percent on income eligible for the federal small business deduction and 13 percent on other income.

Test Item File Problems for Canadian Tax Principles 2018 - 2019 596

TIF Problem Seventeen - 12

Sale Of Assets

7. For 2018, Mr. Pellerin will have income from other sources in excess of $300,000. This means his marginal income is taxed at a 33 percent rate at the federal level and a 16 per- cent rate at the provincial level. The provincial dividend tax credit for non-eligible dividends is equal to 8/29 of the gross up.

8. Shares of Pellerin Fabrication Ltd. are not qualified small business corporation shares.

Required:

1. Calculate the after corporate tax amount that will be available for distribution to Mr. Pellerin after the asset sale.

2. Calculate the amount that will be available to Mr. Pellerin, after personal taxes are paid, on the distribution of the funds resulting from the winding-up of Pellerin Fabrication Ltd. Assume that appropriate elections and designations will be made to minimize the taxes that will be paid by Mr. Pellerin.