Income Taxation Solutions Manual 1

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COMPREHENSIVE CASE SOLUTIONS – CHAPTERS 12 - 21
NOTE: The cases related to these solutions are posted on our website www.mcgrawhill.ca/olc/buckwold. They are not printed in the text.

Solution to COMPREHENSIVE CASE ONE
Seacourt Restaurants
All of the issues in this case have been examined in depth in problems and cases of previous chapters and therefore the following solution briefly refers to the main issues of each segment.
Where applicable, tax rates are assumed to be:
Individual

Corporation

- dividends (eligible)
- dividends (ineligible)
- other income
- SBD income
- ABI over $500,000
- investment income

28%
33%
45%
15%
25%
44 2/3% (38 + 6 2/3)

Incorporation of Proprietorship
The primary benefit of incorporation is the ability to
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This still leaves the old corporation with a value equal to $1,140,000 plus the value of the other assets substituted for the property transferred out. While certain steps could be taken to perhaps alleviate this problem, they are rather complex and beyond the scope of this question
(see section 55). However, by tracing the process of moving out the land and building, the student will see the roadblocks that appear.
A much simpler approach is to transfer the business assets (inventory, equipment and goodwill) to a separate entity (new corporation or partnership) that is owned by the existing corporation and Spud. Whether the new entity is a corporation or partnership, the transfer of the business assets to it will automatically be at fair market value unless an elected amount is chosen for tax purposes. As Court will continue to own 80% of the business, it is unlikely that he would be prepared to incur a tax liability on the full value. Therefore, the election option is recommended.
As Spud has no money to contribute to the new entity, one possibility is the following:
A new corporation is organized by issuing 80% the of common shares to the Court's existing corporation and 20% to Spud in exchange for a nominal contribution of capital (say $8 for
Court and $2 for Spud).
The new corporation buys the business assets for $1,140,000 (using the elected values for tax purposes) and pays Court's corporation with the required combination of debt and
preferred
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