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Rollovers Under Section 85 - True Or False 1. The taxpayer who is the transferor in an ITA 85(1) rollover must receive at least one share of the transferee corporation. True or False? 2. The elected transfer price in an ITA 85(1) rollover can never be below the amount of non-share consideration received. True or False? 3. ITA 85(1) can only be used to transfer an unincorporated business to a new corporation. True or False? Transferee can be an individual, corporation, trust, or partnership The transferred business can also be a corporation or a trust. In addition, the transferee corporation does not have to be a new corporation. 4. For purposes of ITA 85(1), eligible property includes real property owned by a non-resident person and used in the year in a business carried on by that person in Canada. True or False? 5. In an ITA 85(1) rollover, consideration for the transferor can only include debt and common shares. True or False? Non share consideration like cash/note payable and preferred shares Consideration can also include non-share consideration other than cash, as well as preferred shares. 6. In a Section 85(1) rollover, the elected value serves as proceeds of disposition for the property given up, the adjusted cost base of the property received from the corporation and the tax cost of the property received by the corporation. True or False? 7. In the context of ITA 85(1) rollovers, the term “boot” refers to any consideration received by the transferor other than common shares. True or False? Boot is anything other than common and preferred shares The term refers only to non-share consideration and this would exclude both preferred and common shares. 8. The elected value in a Section 85(1) rollover can never be above the fair market value of the non-share consideration. True or False? Max is FMV of property transferred 9. For an individual, the only “affiliated person” is the individual’s spouse or common-law partner. True or False? 10. When a depreciable asset is transferred in an ITA 85(1) rollover, the transferor may elect a value in excess of the capital cost of the asset. For the transferee corporation, the elected value will be the capital cost for CCA purposes. True or False? The capital cost will be = ACB + TCG The capital cost for CCA purposes will be the transferor’s capital cost, plus one-half of any capital gain that results from the transfer.

11. In an ITA 85(1) rollover, any required PUC reduction will be allocated first to preferred shares issues, with any remaining balance allocated to common shares issued. True or False? The PUC reduction is prorated based on the FMV class of shares/ FMV all shares Any required PUC reduction will be allocated to preferred and common shares using a pro-rata allocation based on their relative fair market value. 12. If an asset is transferred in an ITA 85 rollover at an elected value that results in a capital gain to the transferor, the cost to the transferee for CCA purposes will be the transferor’s cost, plus one-half of the excess of the elected value over the transferor’s cost. True or False? TIF PROBLEM SIXTEEN - 3 Rollovers Under Section 85 - Multiple Choice General Rules For Transfer 1. Which of the following assets CANNOT be transferred to a corporation under the provisions of ITA 85(1)? A. Real property owned by a non-resident person and used in the year in a business carried on by that person in Canada. B. Canadian Resource Property. C. Eligible Capital Property. D. Prepayments. 2. Which of the following would NOT be considered part of the boot received by a transferor in an ITA 85(1) rollover? A. Bonds issued by the new corporation. B. Redeemable preferred shares of the transferee. C. The assumption of transferor debt by the transferee. D. A non-interest bearing note issued by the new corporation. 3. Which of the following statements fully describes a transferor or transferee under the provisions of ITA 85(1) and (2)? A. A transferee must be a corporation or trust. B. A transferee must be a Canadian corporation. C. A transferor must be an individual or a corporation. D. Only individuals are permitted to be transferors under ITA 85(1). 4. There is only one requirement specified in ITA 85(1) with respect to the consideration that the corporation must give the transferor in exchange for property transferred to the corporation. What is it? A. The consideration given to the transferor must include shares of the corporation. B. The consideration given to the transferor must include cash equal to the tax value of the property transferred to the corporation. C. The consideration given to the transferor must include cash equal to the fair market value of the property transferred to the corporation. D. The consideration given to the transferor can only include cash and shares of the corporation. 5. Which of the following would be considered part of the boot received by a transferor in an ITA 85(1) rollover? A. Common shares of the transferee. B. Redeemable preferred shares of the transferee.

C. Non-redeemable preferred shares of the transferee. D. The assumption of transferor debt by the transferee. 6. Which of the following scenarios would be most appropriate for a Section 85 rollover? A. A shareholder of a corporation wishes to transfer property with a fair market value of $150,000 and a tax cost of $100,000 to his corporation. B. A shareholder of a corporation wishes to transfer property with a fair market value of $100,000 and a tax cost of $150,000 to his corporation. C. A shareholder of a corporation wishes to transfer property with a fair market value of $150,000 and a tax cost of $100,000 from his corporation. D. A shareholder of a corporation wishes to transfer property with a fair market value of $100,000 and a tax cost of $150,000 from his corporation. Transfer Prices - Detailed Rules 7. Myron Cohen owns a retail store that he is currently operating as a proprietorship. In transferring the assets of this business to a corporation under the provisions of ITA 85(1), the elected value for the depreciable assets will be more than their UCC but less than their capital cost. This will result in: A. A capital gain. B. A terminal loss. C. Recapture of CCA. D. A capital loss and recapture of CCA. 8. Mary Battle transfers a depreciable capital property with a fair market value of $100,000, a capital cost of $85,000, and a UCC of $47,500 to Battle Ltd. In consideration she receives cash of $60,000 and shares with a fair market value of $40,000, for a total value of $100,000. Using the provisions of Section 85 for the transfer, she elects a value of $90,000. Which of the following statements is correct? A. Mary will have to report a capital gain of $5,000 and no recapture of CCA. B. Because she is using Section 85, she does not have to report any income. C. Mary will have to report recapture of CCA of $47,500. D. Mary will have to report a capital gain of $5,000 and recapture of CCA of $37,500. 9. The general rules for transfer prices establish a range for the elected transfer price under ITA 85(1). Which of the following statements accurately describes the ceiling value? A. The fair market value of the share consideration given to the transferor. B. The fair market value of the non-share consideration given to the transferor. C. The fair market value of the assets transferred to the corporation. D. The fair market value of the share and non-share consideration given to the transferor. 10. In transferring a business to a corporation, accounts receivable can be transferred using either ITA 22 or ITA 85(1), but not both. One advantage of using ITA 22 is: A. The vendor will be able to deduct a capital loss. B. The acquiring corporation will be able to deduct a bad debts reserve after the transfer. C. The vendor will not have to add back to income any previously deducted reserve. D. The vendor will have a loss that may be considered superficial. 11. Eric Lehnserr owns 100 percent of Magnus Products Ltd. The shares were originally issued in 1982 for $20,000. In 1986, they were acquired by Eric’s father for $25,000. In 2002, Eric’s father died and left the shares to Eric. At that time, they were deemed to have been disposed of for $100,000. On the terminal return for Eric’s father, a capital gain of $75,000 was reported, and tax was paid on the taxable capital gain of $37,500. Eric

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wishes to transfer the shares, now valued at $250,000, to a holding corporation owned by himself, electing under Section 85(1) of the Income Tax Act . Magnus Products Ltd. has never paid dividends of any kind. Which one of the following amounts represents the minimum possible elected amount under Section 85(1), ignoring the impact of consideration received? A. $20,000. B. $25,000. C. $100,000. He bought them at 100,000 – before TCG – and FMV now is 250,000 D. $250,000. 12. Noor Ali transfers shares in Ali Manufacturing Inc. to Ali Holdings Ltd., a corporation which she controls. The shares have an adjusted cost base of $35,000 and a fair market value of $5,000. Noor elects to transfer these shares under Section 85 at an elected value of $5,000. The $30,000 capital loss on this transfer: A. Will be disallowed and kept in the tax records of the transferor to be recognized when the corporation is subject to an acquisition of control or is wound up. B. Will be disallowed and allocated to the ACB of the shares in the tax records of Ali Holdings Ltd. C. Will be deductible to the transferor as the transferor is an individual. D. Will be deductible to the transferee as the transferor is an individual. 13. Ali Manufacturing Inc. owns shares in Ali Holdings Inc, which it will transfer to Family Holdings Ltd. using Section 85. The shares have an adjusted cost base of $35,000 and a fair market value of $5,000, and an elected transfer price of $5,000 is used. The $30,000 capital loss on this transfer: A. Will be disallowed and kept in the tax records of the transferor to be recognized when the corporation is subject to an acquisition of control or is wound up. B. Will be disallowed with no opportunity to deduct the loss in the future. C. Will be allocated to the ACB of the shares in the tax records of Family Holdings Ltd., as the transferor is a corporation. D. Will be carried forward as a net capital loss in the records of Family Holdings Ltd., and will be deductible in a future year against any capital gains that are earned by that corporation. 14. Mayumi Tajima transfers a depreciable asset to a CCPC in which she is the only shareholder. The asset has a cost of $100,000 and a UCC of $64,000. Mayumi will elect a transfer price equal to the fair market value of the asset which is $150,000. This transfer will result in: A. A taxable capital gain of $43,000 with the capital cost of the asset to the transferee being $150,000. B. A taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the asset to the transferee will be $100,000. C. A taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the asset to the transferee will be $150,000. D. A taxable capital gain of $25,000, recapture of $36,000 and the capital cost of the asset to the transferee will be $125,000. Capital cost transferee = ACB + TCG = 100,000 +25,000 15. Meng Zheng wishes to transfer a piece of machinery to a corporation using ITA 85(1). This machinery is currently used to produce income. It has a capital cost of $250,000, a UCC balance of $58,000 and a fair market value of $50,000. Which of the following statements is correct? A. Section 85(1) does not apply. The terminal loss will be denied permanently if the property is transferred to the corporation. B. This proposed transfer can be completed using ITA 85(1). As an alternative, the property could be transferred to the corporation by selling it at fair market value, in which case the terminal loss will be deductible in the year of transfer. C. Section 85(1) does not apply. The proceeds of the disposition are deemed to be the UCC amount, thereby disallowing the terminal loss. D. This proposed transfer can be completed using ITA 85(1). The terminal loss will be deductible to the transferor as long as the corporation continues to use the machinery to produce income.

16. Bridget transferred a piece of land she held personally to her wholly owned corporation using the provisions of ITA 85. The land had an adjusted cost base of $150,000 and a fair market value of $250,000 at the time of transfer. The property was mortgaged for $50,000. As consideration for the transfer, Bridget received cash of $200,000 and preferred shares with a legal stated capital of $10,000. The corporation assumed the mortgage. Which one of the following is the elected transfer price (first) and the adjusted cost base of the preferred shares (second)? A. $250,000 and Nil B. $250,000 and $240,000 C. $260,000 and $50,000 D. $150,000 and Nil A.A Max = FMV 250,000 – A.A Min – greater of NSC 250,000 Lessor of: ACB – 150,000 FMV – 250,000 UCC – n/a 150,000 250,000 – A.A ACB – preferred shares A.A 250,000 NSC (250,000) ACB shares nil Elected amount = $200,000 + $50,000 = $250,000 ACB = $250,000 - $200,000 - $50,000 = Nil Allocation Of The Elected Value 17. Using the provisions of Section 85(1), Marion transferred a piece of land she held personally to a corporation in which she owned all of the shares. The adjusted cost base of the land was $150,000 and it had a fair market value of $225,000. In order to utilize a $25,000 capital loss, she elected a value of $175,000. What is the adjusted cost base of the land to the corporation? A. $175,000. B. $150,000. C. $225,000. D. $162,500 18. Under the provisions of ITA 85(1), Jason transferred a piece of land he held personally to a corporation in which he owned all of the shares. The adjusted cost base of the land was $120,000 and, at the time of the transfer, it had a fair market value of $390,000. The transfer took place at an elected value of $120,000. As consideration, Jason received a promissory note for $60,000, preferred shares with a fair market value of $210,000, and common shares with a fair market value of $120,000. Which one of the following is the adjusted cost base of the preferred shares (first) and the adjusted cost base of the common shares (second)? A. Nil and $60,000. B. $60,000 and Nil. C. $38,181 and $21,819. D. $210,000 and $120,000. A.A 120,000 NSC (60,000) ACB shares 60,000 P.S (60,000) C.S nil

19. Under the provisions of ITA 85(1), Marx Stanislawski transfers a depreciable asset to a corporation in which he is the only shareholder. The asset has a fair market value of $500,000, a capital cost of $320,000 and a UCC of $180,000. Marx elects a transfer price of $180,000. As consideration, he receives cash of $140,000, and common shares with a legal stated capital of $360,000. What is the required PUC reduction for the common shares? A. $320,000. B. $220,000. C. $180,000. D. $40,000. PUC reduction LSC 360,000 Less: excess A.A 180,000 NSC (140,000) (40,000) PUC reduction 320,000 20. Harold Warren incorporated Warren Enterprises Ltd. at the beginning of the current year. In addition to a $100,000 cash contribution, Harold contributed assets with a total tax value of $100,000 and a total fair market value of $150,000. In return, he receives 25,000 voting shares in the new corporation. If he elects a value that will result in minimum current Tax Payable, the adjusted cost base of the voting shares will be: A. $100,000. B. $150,000. C. $200,000. D. $250,000. A.A to minimize tax payable will = ACB = 200,000 (cash investment + assets) A.A 200,000 NSC (0) ACB shares 200,000 21. Barry Hicks owns a building with a capital cost of $200,000, a UCC balance of $150,000, and a fair market value of $600,000. This property is transferred to a corporation under the provisions of ITA 85(1). The corporation assumes the $50,000 mortgage on the building. In return for the building, Barry receives a promissory note for $40,000 and preferred shares with a fair market value of $510,000. If Barry elects a value that will maximize tax deferral, the adjusted cost base of the preferred shares is: A. Nil. B. $60,000. C. $110,000. D. $600,000. Maximize tax deferral = UCC = 150,000 A.A 150,000 NSC (90,000) ACB shares 60,000 22. Mr. Santaguida wishes to transfer his proprietorship to a corporation. The proprietorship does not have a balance in Class 14.1. However, you are recommending that he transfer goodwill at an elected value of $1. Why? A. It is a requirement of ITA 85(1) to transfer goodwill at an elected value of $1 in every rollover that is completed. B. The general rules for transfer price elections for eligible capital property set the minimum transfer price for assets such as goodwill at a value of $1.

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C. The amount of $1 is the fair market value of the goodwill since it is not carried on the balance sheet. D. To ensure the goodwill is included in the election, and also ensure that the transfer of goodwill is not considered a gift. 23. Daniel Kwok transfers his business assets to a corporation and elects a value of $678,000 for the assets transferred. These assets have a fair market value of $1,250,000. Daniel receives the following consideration: Cash $150,000 Preferred shares of the new corporation with a fair market value 500,000 Common shares of the new corporation with a fair market value 600,000 How will the elected value be allocated between: the non-share consideration, the preferred shares issued, and the common stock issued. A. $150,000; $0; $528,000 B. $150,000; $500,000; $28,000 C. $150,000; $528,000; $0 D. $150,000; $264,000; $264,000 A.A 678,000 NSC (150,000) Shares 528,000 ACB P.S (500,000) ACB C.S 28,000 24. Jason transferred a piece of land he held personally to a corporation in which he owned all of the shares using the provisions of ITA 85. The adjusted cost base of the land was $60,000 and it had a fair market value of $120,000 at the time of the transfer. In order to utilize a capital loss, Jason elected a transfer price of $105,000. What is the adjusted cost base of the land to the corporation? A. $60,000 B. $82,500 C. $105,000 D. $120,000 Paid Up Capital of Shares Issued 25. Mary Hanson is holding 1,000 shares of Hanson Operations. They have an adjusted cost base and Paid Up Capital of $20,000. Their current fair market value is equal to $200,000. Electing under ITA 85 in a manner that will maximize tax deferral, the shares are transferred to Hanson Holdings Inc., in return for $8,000 in cash and 250 Hanson Holdings shares with a fair market value of $192,000. The Paid Up Capital of the Hanson Holdings shares will be: A. $12,000. B. $20,000. C. $192,000. D. $200,000. LSC 192,000 PUC Reduction LSC 192,000 Less: excess A.A 20,000 NSC (8,000) (12,000) (180,000) PUC 12,000

Gift to Related Person – Section 85 26. Mr. Fingula transfers property to a corporation owned by his daughter. In which of the following situations do the indirect gift rules apply? A. The property is transferred to the corporation at an elected amount that is equal to the fair market value of the asset and the consideration. B. The property has a fair market value that exceeds the greater of the fair market value of the consideration received and the elected value. C. The property has a fair market value that is less than the greater of the fair market value of the consideration received and the elected value. D. The property is transferred to the corporation at an elected amount that is less than the fair market value and Mr. Fingula receives consideration equal to the fair market value. 27. Ms. Bimo transfers a non-depreciable capital property to a corporation in which all of the common shares are owned by her son. The property has a fair market value of $150,000 and an adjusted cost base of $35,000. Ms. Bimo transfers the property using an elected amount of $35,000 and the corporation issues her a note payable in the amount of $35,000 and preferred shares with a fair market value of $100,000. The ITA 85(1)(e.2) excess amount (i.e. indirect gift) is: A. $15,000 B. $115,000 C. $100,000 D. $35,000 FMV transferred = 150,000 FMV received = 135,000 Gift = 150,0000 – 35,000 28. Bruno owns 75 percent of the common shares of a corporation. His adult daughter owns the remaining 25 percent. During the current year, Bruno transferred shares from his investment portfolio that had an adjusted cost base of $55,000 to the corporation. These shares had a fair market value of $85,000 at the time of transfer and Bruno elected to transfer them at $55,000 under the provisions of ITA 85. As consideration for the transfer, he received a promissory note for $55,000 and preferred shares with a fair market value of $20,000. Which one of the following is the elected transfer price (first) and the adjusted cost base of the preferred shares (second)? A. $55,000 and $20,000 B. $55,000 and $30,000 C. $65,000 and $20,000 D. $65,000 and Nil FMV transferred = 85,000 FMV received = 75,000 Gift = 10,000 A.A = 55,000 + 10,000 = 65,000 A.A w/out gift 55,000 NSC (55,000) ACB shares nil

Section 85 – Excess Consideration 29. The use of ITA 85(1) to transfer property to a corporation would result in a benefit to a shareholder under ITA 15(1) in a situation where: A. The fair market value of the property transferred is less than the consideration received. B. A capital gain is triggered on the transfer resulting in taxable income to the transferor. C. The elected value is received entirely in the form of non-share consideration. D. The fair market value of the property transferred is greater than the consideration received. 30. Which of the following statements involving ITA 85 rollovers with excess consideration is correct? A. Only one-half of the shareholder benefit under ITA 15(1) will be included in Net Income For Tax Purposes. B. The amount of the shareholder benefit under ITA 15(1) will be added to the adjusted cost base of the consideration received by the transferor. C. The amount of the shareholder benefit under ITA 15(1) will be added to the adjusted cost base of the shares received by the transferor. D. The amount of the shareholder benefit under ITA 15(1) will be added to the PUC of the consideration received by the transferor. Dividend Stripping 31. Which of the following conditions is NOT required for ITA 84.1 (dividend stripping rules) to be applicable? A. The shares that are disposed of must have been held as capital property. B. The subject corporation must be associated with the purchaser corporation after the disposition of the shares. C. The share disposition must be made to a corporation with which the taxpayer does not deal at arm’s length. D. The taxpayer who disposes of the shares must be a Canadian resident. 32. Jean Hill, a Canadian resident, transfers 100 percent of the shares in Hill Inc. to a new company, Jean Ltd. The Hill Inc. shares have an adjusted cost base and PUC of $100,000, and a fair market value of $1,000,000. The transfer is made under the provisions of ITA 85 at an elected value of $850,000. Ms. Hill receives cash of $850,000 and retractable preferred shares with a fair market value of $150,000. What are the immediate tax consequences to Ms. Hill, resulting from this transfer? A. A capital gain of $900,000. B. An ITA 84.1(1) deemed dividend of $750,000 and no capital gain. C. An ITA 84.1(1) deemed dividend of $750,000, plus a capital gain of $150,000. D. A capital gain of $750,000. Step 1: ACB = 100,000 – CGD = 100,000 – 0 = 100,000 Step 2: PUC LSC 150,000 PUC reduction: LSC 150,000 Less: greater of PUC old shares 100,000 ACB old shares 100,000 (100,000) Minus NSC (850,000) (150,000) PUC nil Step 3: deemed dividend D.D = [LSC + NSC] – [(greater of PUC & ACB) + PUD red] D.D = [150,000 +850,000] – [100,000 + 150,000] D.D = 1,000,000 – 250,000

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D.D = 750,000 Capital Gains Stripping 33. Which of the following conditions is NOT required for ITA 55(2) (capital gains stripping rules) to apply? A. There is a disposition of shares by a corporation to an arm’s length party. B. The corporation that has disposed of the shares has received dividends that are deductible under ITA 112(1). C. One of the purposes of the dividend received by the corporation was to significantly reduce a capital gain on the disposition of shares. D. The corporation selling the shares must be a private company. 34. Parent Co. owns 100 percent of the shares of Son Co. They have a fair market value of $950,000, and an adjusted cost base of $75,000. Son Co. has safe income of $60,000. In order to complete a sale of Son Co. to Unrelated Co., an arm’s length corporation, Son Co. borrows $875,000 from a bank, and uses the funds to pay a dividend to Parent Co. As a result, the fair market value of the Son Co. shares drops to $75,000. At this point, the shares are sold to Unrelated Co. for $75,000. Under these circumstances, the tax consequences for Parent Co. are: A. A taxable capital gain of $437,500 and no dividends. B. Dividend income of $875,000 and no capital gains. C. A taxable capital gain of $437,500 and a dividend of $875,000. D. A taxable capital gain of $ 407,500 and a dividend of $60,000.

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