Chapter 18 Rollovers Under Section 85. © 2006, C. Byrd Inc.2 Rollovers Defined.

Slides:



Advertisements
Similar presentations
C6 - 1 Corporations, Partnerships, Estates & Trusts Chapter 6 Corporations: Redemptions and Liquidations Corporations: Redemptions and Liquidations Copyright.
Advertisements

Corporate Formations and Capital Structure (Day 4)
Chapter 2: Corporate Formations and Capital Structure
Agenda BA128A-1 4/12 Return exams Go over exam Projects Review - Chapter C2 Assignment - C2-30,33,40 Additional - C2- 38,39.
Demystifying Corporate Owned Life Insurance
Bus 225D – International Transactions II Instructor: Carol Rutlen, CPA
PricewaterhouseCoopers LLP The colour contrast has been set to maximum. Click on PwC, Tools, Colour Contrast, to select Normal-contrast colours. The colour.
Individual Income Taxes Copyright ©2009 Cengage Learning
Chapter 16 Integration, Refundable Taxes, And Special Incentives For Corporations.
Family Succession Jack Bernstein Aird & Berlis LLP Toronto, Ontario
Module 14 Transactions Between a Corporation and Its Shareholders.
Individual Income Taxes C14-1 Chapter 14 Property Transactions: Determination of Gain or Loss and Basis Considerations Property Transactions: Determination.
Chapter 19 Other Rollovers, Business Valuation, Sale Of An Incorporated Business, And Tax Shelters.
Chapter 20 Partnerships © 2008 Clarence Byrd Inc. 2 Taxable Entities In Canada  Income Tax Act › Individuals › Corporations › Trusts  Partnership income.
MODULE 19 Computing Gain or Loss on Disposition of Assets.
Chapter 15 Taxable Income And Tax Payable For Corporations.
Chapter 8 Capital Gains and Losses Income Tax Fundamentals 2011 Gerald E. Whittenburg & Martha Altus-Buller Student’s Copy 2011 Cengage Learning.
1 Electronic Presentations in Microsoft® PowerPoint® Prepared by Nathalie Johnstone University of Saskatchewan CHAPTER 12: Organization, Capital Structures,
Chapter 3 Property Dispositions Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter Objectives Be able to: n Explain the difference between capital income and business income. n Apply the general rules in determining capital gains.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12 Special Property Transactions “A fool and his money.
McGraw-Hill Education Copyright © 2015 by the McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized.
Chapter 16 Integration, Refundable Taxes, And Special Incentives For Corporations.
Chapter 15 Taxable Income And Tax Payable For Corporations.
S Corporation Chapter 46 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 An “S” Corporation is a corporation that.
Chapter 5 Property Transactions: Capital Gains and Losses 1.
Chapter 7 Capital Gains: Personal 1. Overview of the Taxation of Capital Gains History Time PeriodInclusion Rate Prior to 1972Not taxable 1972 to %
Chapter 18 Partnerships © 2008 Clarence Byrd Inc. 2 Taxable Entities In Canada  Income Tax Act › Individuals › Corporations › Trusts  Partnership income.
Rollovers Under Section 85
Depreciable Property and Eligible Capital Property
Chapter 18 Rollovers Under Section 85. © 2007, Clarence Byrd Inc.2 Rollovers Defined.
Chapter 12 Partnership Distributions
2-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter 6 Income from Property 1. Inclusions Sec. 12 Interest income from savings, deposits, loans, bonds, and debentures; Dividends from shares; and.
Chapter 17 Property Transactions: § 1231 and Recapture Provisions Copyright ©2006 South-Western/Thomson Learning Individual Income Taxes.
Howard E. Abrams. Sell the partnership interest  Sections 741, 751(a), 743(b) Receive a liquidating distribution of cash  Sections 731, 751(b), 734(b)
Chapter 14 Other Issues In Corporate Taxation © 2011, Clarence Byrd Inc.2 Acquisition Of Control - The Problem Profit Company Loss Company Acquisition.
8-1 Nontaxable Exchanges  An exchange of property involves the disposition of an asset and acquisition of another (non-cash) asset  An exchange of property.
Chapter 14 Property Transactions: Determination of Gain or Loss and Basis Considerations Property Transactions: Determination of Gain or Loss and Basis.
Chapter 8 Capital Gains: Business Related 1. Capital Gains: Business Avoidance – GAAR Capital Receipt versus Income Receipt –Primary intention –Secondary.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Trusts And Estate Planning What is a Trust? © 2008 Clarence Byrd Inc.2 SettlorTrusteeBeneficiaries PropertyBenefits Legal Ownership.
Chapter 5 Property Transactions: Capital Gains and Losses.
McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 3 Chapter 3 Employee Compensation.
McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
2-1 ©2008 Prentice Hall, Inc ©2008 Prentice Hall, Inc. CORPORATE FORMATIONS & CAPITAL STRUCTURE (1 of 2)  Organization forms available  Check-the-box.
McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 11 Chapter 11 Dispositions of.
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 3 Employee Compensation Strategies.
2-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall.
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 11 Dispositions of Equity Interests.
Property Dispositions
Section 85 rollover.
Tax Considerations for Farm Transitioning
Corporate Formation, Reorganization, and Liquidation
Corporate Formation, Reorganization, and Liquidation
©2012 Pearson Education, Inc. publishing as Prentice Hall
Special Property Transactions
Property Dispositions
Corporate Formation, Reorganization, and Liquidation
Special Property Transactions
Tax Lesson 24 YOURLOGO Start Lecture
Tax Lesson 25 YOURLOGO Start Lecture
Corporate Formation, Reorganization, and Liquidation
Other Rollovers, Sale Of An Incorporated Business
Taxable Income and Tax Payable Part Two
Chapter 12 Partnership Distributions
Taxation of Individuals and Business Entities
Tax Lesson 16 YOURLOGO Start Lecture
Presentation transcript:

Chapter 18 Rollovers Under Section 85

© 2006, C. Byrd Inc.2 Rollovers Defined

© 2006, C. Byrd Inc.3 Important Examples Transfers Of Property At Tax Values ITA 73: Inter Vivos To ASpouse ITA 70: To Spouse At Death ITA 85: To Corporation At Elected Values

© 2006, C. Byrd Inc.4 The Standard Section 85 Scenario Example: An unincorporated business has assets with tax values of $800,000 and liabilities of $200,000 (net tax value of $600,000). The assets have a net fair market value of $2,000,000 (potential gain of $1,200,000). Elect $800,000 for assets, corporation assumes liabilities $800,000 = POD = ACB Boot (Non-share consideration) = $800,000 (including the $200,000 in old liabilities)

© 2006, C. Byrd Inc.5 Section 85 Basic Rules Who Can Make The Transfer ITA 85(1) Taxpayer Individual Trust Corporation ITA 85(2) Partnership

© 2006, C. Byrd Inc.6 Conditions For Transfer Type Of Corporation Canadian (Resident) Subject To Tax Does Not Have To Be A New Corporation

© 2006, C. Byrd Inc.7 Conditions For Transfer Type Of Property - ITA 85(5.1) Inclusions: Capital Property Canadian And Foreign Resource Properties Eligible Capital Property Inventories Exclusions: Inventories Of Real Property Real Estate Owned By Non-Residents

© 2006, C. Byrd Inc.8 Conditions For Transfer Consideration To Transferor Shares Must Be Included (At Least One) C/S (Growth) And P/S (Non-Growth)

© 2006, C. Byrd Inc.9 Conditions For Transfer Consideration To Transferor Non-Share Consideration (Boot) Cash, Other Assets, New Debt Or The Assumption Of Old Debt Important Because It Is A Tax Free Distribution

© 2006, C. Byrd Inc.10 Conditions For Transfer Election Form 2057 (Taxpayer) Or 2058 (Partnership) If An Asset Is Not Listed, It Is Deemed Transferred At FMV (Can Be A Significant Problem) Late Or Amended (1/4 Percent Per Month On Any Deferred Gain: Minimum $100 Per Month - Maximum total $8,000)

© 2006, C. Byrd Inc.11 Limits On Transfer Price Upper Limit [ITA 85(1)(c)] = Fair Market Value

© 2006, C. Byrd Inc.12 Limits On Transfer Price Lower Limit = Greater Of Boot [ITA 85(1)(b)] Lesser Or Least Of See Next Slides

© 2006, C. Byrd Inc.13 Limits On Transfer Price Non-Depreciable Property – ITA 85(1)(c.1) Lesser Of FMV = $1,000 ACB = $500

© 2006, C. Byrd Inc.14 Limits On Transfer Price Depreciable Capital Property – ITA 85(1)(e) Least Of FMV = $1,500 Cost = $1,000 UCC = $800

© 2006, C. Byrd Inc.15 Limits On Transfer Price Eligible Capital Property – ITA 85(1)(d) Least Of FMV = $1,500 ACB = 4/3 CEC = 4/3($750) = $1,000 Cost $1,200

© 2006, C. Byrd Inc.16 Selection Of Transfer Price Importance ITA 85(1)(a) POD To Transferor ACB To Transferee Minimum Election Equals Maximum Deferral Generally Boot = Elected Value Generally Avoid Losses

© 2006, C. Byrd Inc.17 Position Of Corporation Non-Depreciable Capital Assets Elected Value = New ACB Usually Equal To Old ACB

© 2006, C. Byrd Inc.18 Position Of Corporation Depreciable Assets 1. No 1st Year Rules If Previously Used In Business 2. Capital Cost Equal To Elected Value (Unusual) Elected Value = Cost = UCC

© 2006, C. Byrd Inc.19 Position Of Corporation Depreciable Assets Elected Value < Cost (Normal) Cost = $350,000; UCC = Elected Value = $275,000 New UCC = $275,000 New Capital Cost = $350,000 – ITA 85(5) $75,000 Difference Is Deemed CCA

© 2006, C. Byrd Inc.20 Position Of Shareholder Allocation Of Consideration Elected ValueXXXXX Non-Share Consideration [85(1)(f)]( XXXX) ACB All SharesXXXX* ACB Preferred Shares [85(1)(g)]( XXX) ACB Common Shares [85(1)(h)]XX* *Usually Nil

© 2006, C. Byrd Inc.21 Losses On Transfer Of Non-Depreciable Property To Affiliated Persons Affiliated Persons (ITA 251.1) Individuals: Spouses Only Corporation Is Affiliated With: A Person By Whom It Is Controlled Each Member Of An Affiliated Group That Controls Spouse Of Any Of The Above

© 2006, C. Byrd Inc.22 Losses On Transfer Of Non-Depreciable Property To Affiliated Persons Stop Loss Provision ITA 40(2)(g) Deems Certain Losses To Be Nil (Including Superficial Losses) Superficial Losses Include Transfers To A Corporation By An Affiliated Person

© 2006, C. Byrd Inc.23 Losses On Transfer Of Non-Depreciable Property To Affiliated Persons Treatment Of Loss Individuals: Add To ACB Of Property On Books Of Transferee Corporations, Trusts, And Partnerships: Retained As A Separate CCA Class By Transferor Loss Deferred Until  Property Is Sold  There Is An ITA 88(2) Winding Up  There Is An Acquisition Of Control Of The Corporation

© 2006, C. Byrd Inc.24 Establishing PUC - Example General Rules PUC = Legal Stated Capital = FMV Of Consideration Given For Shares PUC (Before Reduction) In Following Example = $489,000 ($225,000 + $264,000) ACB = $289,001 ($225,000 + $64,001)

© 2006, C. Byrd Inc.25 Establishing PUC – The Problem The Problem Sale Of Shares Would Result In Capital Gain Of $199,999 (Use Of ITA 110.6) Redemption Would Result In No ITA 84(3) Dividend And A Capital Gain Of $199,999 (Use Of ITA 110.6) However, PUC Of $489,000 Could Be Removed Tax Free

© 2006, C. Byrd Inc.26 ITA 85(2.1) PUC Reduction Where, A = Increase in legal stated capital of all shares B = Elected amount, less boot C = FMV of particular class of shares

© 2006, C. Byrd Inc.27 PUC Reduction Example LSC$489,000 Elected Amount$614,001 Boot( 325,000)( 289,001) PUC Reduction$199,999 P/S = $225,000 - [(225/489)($199,999)]$132,976 C/S = $264,000 - ](264/489)($199,999)] 156,025 Total PUC$289,001

© 2006, C. Byrd Inc.28 Sale Of Shares Proceeds Of Disposition$489,000 Adjusted Cost Base ($225,000 + $64,001)( 289,001) Capital Gain$199,999

© 2006, C. Byrd Inc.29 Redemption At FMV PreferredCommon POD$225,000 $264,000 PUC( 132,976)( 156,025) ITA 84(3) Deemed Dividend$ 92,024 $107,975 Proceeds Received$225,000 $264,000 ITA 84(3) Deemed Dividend( 92,024)( 107,975) Adjusted POD$132,976 $156,025 ACB( 225,000)( 64,001) Capital Gain (Loss)($ 92,024)92,024

© 2006, C. Byrd Inc.30 Depreciable Property Ordering Under ITA 85(e.1) Property AProperty B Capital Cost$100,000$200,000 FMV$125,000$180,000 Possible Elections$100,000$180,000 UCC Of Class = $210,000 Least Of: $210,000 (The Class) $280,000 (Cost Of A + FMV Of B) Can Avoid Recapture By Electing One At A Time

© 2006, C. Byrd Inc.31 Terminal Losses Example: Asset With A Cost Of $200,000 And A FMV Of $75,000. Balance In UCC = $150,000. ■Terminal Loss Of $75,000 ■Disallowed On Transfer To Affiliated Person ■No Reason To Use ITA 85

© 2006, C. Byrd Inc.32 Capital Gains Triggers Example: Asset with cost of $45,000 and FMV of $70,000. UCC for class 40,000. Elect $70,000: Gives capital gain of $25,000, recapture of $5,000. ITA 13(7)(e) Cost$45,000 Elected Value $70,000 Less: Capital Cost( 45,000) Bump Up$25,000 Inclusion Rate ½12,500 Deemed Capital Cost (CCA Only)$57,500

© 2006, C. Byrd Inc.33 Benefit To Related Person - ITA 85(1)(e.2) – Example Property with an ACB of $100,000 and a FMV of $250,000, is transferred to a corporation. The transferor elects a value of $100,000 for the property. The transferor takes back a $100,000 Note and Preferred Stock that is redeemable at $80,000 (FMV)

© 2006, C. Byrd Inc.34 Benefit To Related Person - ITA 85(1)(e.2) – Example If related party holds Common Stock of corporation, than there is a gift of $70,000 ($250,000 - $180,000).

© 2006, C. Byrd Inc.35 Benefit To Related Person - ITA 85(1)(e.2) – Example Election Price = Amount Elected, Plus Gift ACB: Preferred Shares = Nil ACB: Common Shares = Unchanged Income At Transfer$ 70,000 Sale Of P/S80,000 Sale Of C/S 70,000 Total$220,000 More Than The $150,000 that would result from sale of property.

© 2006, C. Byrd Inc.36 Benefit To Transferor Shareholder - ITA 15(1) - Example Property with an ACB of $100,000 and a fair market value of $200,000, is transferred to a corporation. The transferor takes back cash of $250,000 and shares with a FMV and PUC of $30,000.

© 2006, C. Byrd Inc.37 Benefit To Transferor Shareholder - ITA 15(1) If FMV Consideration > FMV Of Assets Transferred: A Benefit Under ITA 15(1) Cash$250,000 FMV Of Assets Transferred( 200,000) ITA 15(1) Benefit$ 50,000 PUC Of Shares$30,000 Increase In Net AssetsNil ITA 84(1) Deemed Dividend$30,000

© 2006, C. Byrd Inc.38 Price Adjustment Clauses The Problem FMVs Are Uncertain Adverse Effects If Wrong (e.g., ITA 69) IT-169 Provides For Price Adjustment Clause IC89-3 Provides Guidance On Business Valuation IT-405 Provides Remedies Where Errors Are Accidental

© 2006, C. Byrd Inc.39 Dividend Strips - Conditions Sale Of Shares Of A Subject Corporation By A Canadian Taxpayer Other Than A Corporation Corporation Shares Must Be Capital Property Corporation Must Be Resident In Canada Purchaser Must Be A Corporation With Which The Taxpayer Is Not Dealing At Arm’s Length Subject And Purchaser Corporations Must Be Connected

© 2006, C. Byrd Inc.40 Basic Data Mr. Jones owns all of the outstanding shares of Jones Ltd. These shares have a PUC of $50,000. This is also the ACB of the shares. The shares have a current FMV of $500,000. Mr. Jones wishes to retain control of the company. Mr. Jones has made no use of his lifetime capital gains deduction and Jones Ltd. is a qualified small business corporation.

© 2006, C. Byrd Inc.41 Mr. Jones Jones Holding (JHL) 3. Tax Free Dividends To Pay Loan 2. JL Shares To JHL Under ITA 85(1). Elect $500,000. Receives $400,000, Plus Shares With PUC And ACB Of $100, JHL Borrows $400,000 Jones Limited (JL)

© 2006, C. Byrd Inc.42 Results Without ITA 84.1 TCG = ($500,000 - $50,000)(1/2) = $22,000 Use ITA And Receive Tax Free

© 2006, C. Byrd Inc.43 Results With ITA 84.1 ITA 84.1(1)(a) PUC Reduction Increase In LSC$100,000 PUC Or ACB$ 50,000 Boot( 400,000)Nil PUC Reduction$100,000 PUC = $100,000 - $100,000 = Nil

© 2006, C. Byrd Inc.44 Results With ITA 84.1 ITA 84.1(1)(b) Deemed Dividend Increase In Legal Capital$100,000 Boot400, ,000 Greater PUC or ACB$50,000 PUC Reduction100,000 ( 150,000) ITA 84.1 Deemed Dividend$350,000 $350,000 = $400,000 - $50,000

© 2006, C. Byrd Inc.45 Dividend Strips Capital Gain Proceeds ($500,000 - $350,000)$150,000 ACB( 50,000) Capital Gain$100,000

© 2006, C. Byrd Inc.46 Capital Gains Strips - Conditions Deductible Dividends A Component Of An Arm’s Length Disposition Of Shares Objective To Convert Capital Gain To Dividend

© 2006, C. Byrd Inc.47 Example One Capital Gains Strip Company A Owns 100 Percent Of The Outstanding Shares Of Company B ACB = $100,000 Company B PUC = $100,000 FMV = $500,000 RDTOH = Nil 1. B Borrows $400, Pays $400,000 Dividend To A 3. Shares Are Sold For $100,000 (FMV)

© 2006, C. Byrd Inc.48 Example One Application Of 55(2) Dividend$400,000 Post-1971 EarningsNil Deemed POD [ITA 55(2)]$400,000 Actual POD100,000 Total POD$500,000 ACB( 100,000) Capital Gain$400,000

© 2006, C. Byrd Inc.49 Example Two Company A Owns 100 Percent Of The Outstanding Shares Of Company B ACB = $100,000 Company B PUC = $100,000 FMV = $500,000 RDTOH = Nil Purchaser Corporation ITA 85 - B Company Shares At $100,000 $500,000 Redeemable P/S PUC = ACB = $100,000

© 2006, C. Byrd Inc.50 Example Two Application Of 55(2) Redemption Price$500,000 PUC( 100,000) ITA 84(3) Dividend$400,000 Deemed Not To Be A Dividend( 400,000) Remaining ITA 84(3) DividendNil Actual POD$500,000 ITA 84(3) DividendNil Adjusted POD$500,000 ACB( 100,000) Capital Gain$400,000

© 2006, C. Byrd Inc.51