Tax Final Exam Prep

Tax Final Exam Prep

Chapter 21 – GST

• GST was introduced in Canada on January 1, 1991 replacing the narrowly focused federal sales tax on G&S transactions
• GST started at 7% then reduced to 5% in January 1, 2008
• GST is used to apply to all G&S transactions, but there are many exemptions and modifications that make this more complicated due to political considerations
• HST is a combination of GST and PST which eliminates the separate provincial sales tax

• An advantage of HST is it is administered by the federal government that eliminates the need for dual administrative system in the collection process

• The different rates and rebates of the provincial portion of the tax that some provinces have and don’t have increases complexity
• Majority of businesses in Canada file GST tax returns, while charities and unincorporated business must file GST returns even though they aren’t required to file income tax returns
• Factors that support the increased use of transaction taxes

• Simplicity – transaction taxes are easy to administer and collect; no forms required
• Incentives to Work – not able to discourage individual initiative to work and invest
• Consistency – transaction taxes avoid fluctuating income that are progressive income tax systems
• Keeping the Tax Revenues in Canada

• Income taxation are still used given the advantages of transaction taxes because of the question of fairness. Lower income spend more on consumption; higher effective rates for transaction taxes
•  ETA 123(1) Supply - provision of property or a service including sale, transfer, exchange, etc.
•  The problems

• Due to the range of tax rates (5%-15%), which rate should be applied to a particular supply of G&S ... the location of the registrant providing the supply or the recipient of the supply?
• For Tangible Goods, the answer is the recipient of the supply
• For Real Property, the answer is which province the property is located
• For Services, the answer is the province where the supply was used to provide the services

• Input Tax Credits

• A GST registrant must collect and remit GST on supplies on fully taxable G&S
• The registrant would have incurred cost for the commercial activity in which they can claim a refund of the GST that has been included in the cost (Cost to product $100 = $105 TC with a SP of $150. Can claim a refund for $5.)
• The refund available are referred to as the ITC – If the available ITC exceeds the GST collections for the period
• ITC has no matching of costs and revenues; For inventory purchases – ITC becomes available at the time of purchase. For Capital Expenditures – ITC becomes available when the asset is acquired and not the useful life  
• Current Expenditure – >=90% of Current expenditure is related to commercial activity then all GST paid can be claimed as ITC. Between 10-90% ITC is GST paid x % commercial activity usage. <= 10% has no ITC that can be claimed.
• Capital Expenditures (excluding passenger vehicles) – ITC can be claimed at the time of purchase regardless of payments for >50%. <=50% cannot claim ITC
• Restrictions – passenger vehicles, club memberships, business meals and entertainment, personal expenses, and provision of recreational facilities

• Accounting vs Income Tax vs GST/HST
• GST Procedures and Administration

• The supplier becomes responsible for the tax when the invoice for the G&S is issued, payment is due, and is received >>> Registrant becomes responsible for remitting when the customer is invoiced
• Annual Taxable Supplies $1.5k or less have an assigned reporting option of annual and optional of monthly/quarterly; Between $1.5k-6k have an assigned reporting of quarterly and optional of monthly; >$6k has an assigned reporting of monthly with no optional reporting
• If GST is not paid on the due date, interest is assessed
• Late filing penalty is 1% of the unpaid amount + 25% of 1% per month for a max of 12 months

• Sale of a Business

• Sale of Assets are taxable but not shares
• The rollover of is a taxable transaction for GST

**Do calculations and look over ppt slides

Chapter 19 – Trusts

• Basic Concepts

• A trust is when a settlor transfers property to a trustee to hold and administer for exclusive benefits of the beneficiaries [Settlor > Trustee > Beneficiaries]
• The trustee holds the legal title to that property until the beneficiaries are eligible to receive the property – they can also receive interest from the property income
• A trust is not a separate legal entity which they can’t own property, enter contracts, and can’t be defendant or plaintiff in a legal action
• ITA 104(2) says a trust must have a separate Taxable Income and Tax Payable, and file income tax return separately
• Trust is different from estate because an estate doesn’t provide the beneficiaries any interest in the estate assets while they are still owned by the administration of the executor (Executor = Trustee). Trust – Trusts holds legal title but beneficiaries hold equitable title.
• Establishing a Trust has 3 certainties

• Certainty of Intention – person must have the intention to create a trust that is clear to outside observers using a written document
• Certainty of the Property – the property to be held in trust must be known with certainty at the time trust was created by specifying it in the trust document
• Certainty of Beneficiaries – Beneficiaries must be known with certainty when the trust was created by specifying their names or class on the trust document
• The importance of proper documentation is that missing information can lead to significant tax consequences. E.g. trust to adult children > could be taxed to the settlor instead of the adult children

• Non-Tax Reasons for Using Trusts

• Administration of Assets – Trust can be used to separate the administration of assets from the receipt of the benefits (e.g. Father’s death > transfer assets in a trust to children); professional management of assets
• Protection from Creditors – Individuals might place their personal assets in a trust to protect them from claims by creditors, unless the transfer is during the financial difficulties then it cannot be done
• Privacy – the information from the trust will not be available to the public
•  Avoiding Changes in Beneficiaries – only the original and ultimate beneficiaries will receive the benefits (properties)

• Classification of Trusts

• ITA 248(1) Personal Trusts – a testamentary or inter vivos trust  

• ITA 108(1) Testamentary Trust – means a trust created due to a death of an individual; a will.
• Inter vivos Trust – a trust other than a testamentary trust; a living individual.

• Spousal or Common-law Partner Trust (Testamentary or Inter Vivos)
• Alter Ego Trust (Inter Vivos) – created by someone who is 65 yrs or older with himself as the beneficiary during his lifetime
• Joint Spousal/C-L Partner Trust (Inter Vivos) – Created by someone 65 or older but with a spouse as the sole beneficiaries during their lifetime
• Family Trust (Inter Vivos) – Created by an individual for the benefit of the family members (income splitting)

• Taxation of Trusts

• Settlor’s Transfer to the Trust – results in a disposition where these are deemed at FMV
• Transfers of Trust Property to Beneficiaries – POD to the trust minus the cost to the beneficiary = tax cost recorded in the trust
• Income from the Trust Property – Once property has been transferred to the trust, income will start to accrue to the trust which can be deducted by the trust from the NITP. Any income that is not distributed to the beneficiaries will be taxed to the trust.
• Rollovers to a Trust – Spousal/CL partner, alter ego, and joint spousal/CL partner trust can make transfers on a rollover basis – when the trust qualifies, the rollover is accomplished by deeming the disposed property by the settlor at its ACB (for Non-depreciable) or UCC (for depreciable) = no tax consequence for the settlor at the time of transfer.

• Qualifying for Spousal/CL Partner – ITA 73(1.01) Inter vivos and ITA 70(6)(b) Testamentary. Alter Ego – ITA 73(1.01) (c)(ii). Joint Spousal/CL – ITA 73 (1.01) (c)(iii). The individuals are the only ones entitled to receive the income that arises before the death and no other = no tax consequence.
• Rollovers to Capital Beneficiaries – resulting from a disposition. ITA 107(2) provides a tax free rollover transfer by deeming the property to have been disposed of by the trust at either ACB (non-depreciable) or UCC (depreciable). With the exception in the case of:

• Property is transferred out of an alter ego trust to anyone other than the settlor
• Property is transferred out of a joint spousal or CL partner to anyone other than the settlor and transferred out of a qualifying spousal/CL partner trust to anyone other than the spouse

• If the ITA 107(2) rollover provision doesn’t apply, the transferred assets will be recorded at the FMV

• 21-Year Deemed Disposition Rule

• Limits any deferral from capital asset disposition in which ITA 104(4)(b) requires deemed disposition and reacquisition of trust capital property every 21 years that is deemed at FMV (accrued cap gains/losses).
• Only applies to personal trusts
• For qualifying spousal/CL partner deemed disposition occurs at the death of spouse/CL partner; Alter egos, death of settlor; joint spousal, at the later of the settlor (spouse/CL)

• NITP for Trusts

• ITA 104(2) says Trusts should be treated as an individual; Cap gains/losses are realized resulting from an asset disposition, any taxable dividends not allocated to beneficiaries are grossed up, and deductions are allowed for non-capital, net capital, and certain types of loss carry overs

• Taxable Income for Trusts

• Similar to individuals

• Income Allocation to Beneficiaries

• Any income accrued by trust asset will initially accrue to the trust. But, any income allocated to beneficiaries can be deducted in the trusts’ NITP calculation (must be paid or payable to the beneficiaries), but will be added to beneficiaries’ NITP and pay taxes. Must be paid/payable to Deduct from NITP
• Discretionary vs Non-Discretionary Distribution

• Testamentary and Inter vivos can be set up both Disc. Or Non-Disc. Trusts (Disc Trust – trustees are given power to decide amounts allocated to beneficiaries and control the timing of distribution; Non-Disc. – amount and timing of allocations are specified in the trust agreement which may be a combo of both disc. And non-disc.

• Flow Through Provisions

• Income paid to beneficiaries = deemed to be property income
• The flow through allows some income from a trust to retain same tax characteristics when it is earned in the personal trust (avoiding paying taxes)
• Types of income covered by this flow through: capital gains, taxable dividends, and capital dividends, which are usually taxed more favourably than other income

• Dividends – eligible and non-eligible from taxable Canadian corporation that are distributed to beneficiaries of the trust. If paid to beneficiaries, they will use the same gross up and tax credit procedures but these will be deducted in the trusts’ NITP. If not distributed, the amounts remained will be grossed up and included in the NITP. Also, dividend tax credit can be deducted in Tax Payable for the year. (capital dividends are tax free so no effect)
• Capital Gains – under tax legislation, one-half of capital gains are payable to the beneficiaries on a tax-free basis (beneficiaries pay the tax) unless that half doesn’t get paid and the trust would have to pay the tax. The half of the capital gain will be included in the beneficiaries’ income (taxable) while the trust receives the other half as a tax-free capital distribution.
• Tax on Split Income (provides tax savings refer to tax planning) – Specified income such as dividends or benefits from private companies earned by a trust and are allocated to beneficiaries under 17 yrs old (before beginning of year) will be subject to tax on split income (29% maximum federal rate on all eligible amounts; available credits are dividend tax credit and foreign source of income credit)    
• Business Income, CCA, Recapture, and Terminal Losses – amount of income to be distributed to beneficiaries must be after amortization expense (problem = difference in Net Inc. and NITP; solution = acct amort. Expense equal to maximum CCA). Business income calculation including CCA deduction, recapture, and terminal losses allocated to beneficiaries will be as property income which eliminates liability for CPP and GST without flow through.

• Income Attribution – Trusts

• Transfer to a Spouse/CL Partner – ITA 74.1(1), income and capital gain earned from a transfer of property to spouse while holding the property that is less than FMV will be attributed back to the transferor even without the ITA 73 rollover election
• Transfer to Related Minor – ITA 74.1(2) Income earned from a transfer of property less than FMV to an individual below 18 while holding the property will be attributed back to the transferor. Capital gains will not be attributed by the transferor.

• Purchase or Sale of an Interest in a trust

• Income Interest in a trust is the right of the beneficiary to receive all or part of the income. The purchaser of the interest income will have cost = FMV of consideration given for the interest. This cost can be deducted against Trusts’ income amount and would have been included in the individual’s Taxable Income and any undeducted portion can be carried forward to be deducted in future years

• Tax Planning

• Family Trusts

• Personal trust established with settlor’s family members as beneficiaries (can be inter vivos or testamentary)  
• Main objective of this trust is income splitting using discretionary trust to reduce complexity of splitting (ability to change share of income)
• Tax savings from income splitting can be significant if the income is distributed ton individual with no other source of income and not subject to income attribution rules – tax savings can be done annually

• Qualifying Spousal or CL Partner Trusts

• A trust is not required to implement a tax-free transfer of a property for the benefit of a spouse and not required to perform a rollover
• Reasons why qualifying spousal/CL partner trust is important:

• Appropriate management of transferred assets (esp. with no experience) with the trust document can ensure professional management
• Ensure asset distributed are desired by the settlor. When settlor dies, the trust document will say to whom he or she wants the assets to go to

• Alter Ego Trusts

• Most common reason to use this trust is trust property will not be subject to probate procedures (test validity and authenticity of will) since it will not be included in the settlor’s estate
• Advantages of avoiding probate

• Probate fees can be high
• Probate process can be consuming – liquidity issues for active business
• Once probated, will is in public domain – privacy

• Joint Spousal/CL Partner Trust

• Same characteristics of alter ego, but this trust is established to hold combined assets of both an individual and spouse/CL partner

• Estate Planning

• Non-tax considerations in estate planning

• Intent of Testator – ensures testator (person died and left will) will get his wish for his asset distribution by having a primary document
• Simplicity – large estate disposition ensure that plan can be understood by testator and all legal age beneficiaries
• Avoidance of family disputes (common) – testator will ensure all beneficiaries believe in equal and fair treatment in distributing assets

• Tax Considerations

• Prior to death – use of discretionary trust can help defer tax on income earned prior to death and transfer the before-tax income to the beneficiaries
• Year of death – planning should minimize testator’s taxes payable. Some deferred income must be included in their final tax return = tax deferred rollovers to spouse
• Income splitting, foreign jurisdictions, and administration period

• Estate Freeze

• Objective is to freeze value of estate for tax purposes at a particular point in time.

Chapter 18 – Partnerships

• Partnerships Defined

• No specific definition in the ITA. IT-90 says a partnership is the relationship between persons carrying on a business with a common view to earn profit. A Partnership must

1. Must be 2 or more taxable entities involved 2. Must be carrying a business 3. Must be viewed to carry on profit

• Professional individuals who practice together
• Not a taxable separate entity and cannot own a property (no cap gains/losses)
• Partnership Agreements – their required contributions, profit/loss allocation, rights & duties of partners, etc.
• A Partnership interest is when a partner has rights and obligations in the partnership agreement and is a tradeable asset that can be bought/sold. The profits retained adds to their capital/equity

• Types of Partnerships

• General Partnerships

• All general partners (a partner who has unlimited personal liabilities for debts and obligations of the partnership. They are jointly and liable for partnership debt and wrongful acts of other partners. All property bought by partnership funds must be exclusive for partnership use. They are also entitled to share profit/loss (unless in agreement).

• Limited Partnerships

• A partnership with at least one general partner and one or more limited partners. A partnership must be registered to be under the provincial registry to be considered. If not, then general partnership. Same as general partnership, except the limited partner/s which is only liable for partnership debt and wrongful act based on their actual and promised contribution.  Also, some must have passive investors whereas general doesn’t need to. LP deductions cannot exceed at-risk amounts.
• Uses – a venture that requires a large amount of equity capital (passive investors)

• LLP

• Only available to certain types of professionals specified in the provincial legislation. Members of LLP are personably liable for most types of partnership debt, but not for obligations arising from the wrongful or negligent action of the partners, and others involved in conducting partnership business.

• Partnership vs Joint Venture vs Co-ownership

• Co-Ownership

• 2 or more persons co-own property and share the rights of ownership in the property such as profits and losses

• Joint Ventures

• Corporations that are controlled by 2 or more shareholders (subject to same tax rules that are applicable to corporate taxpayers)
• Incorporated are taxable entities while unincorporated are hard to distinguish between partnership

• Syndicates

• A group of people who agreed to pool their money/asset for a specific purpose

• A Partnership needs a separate calculation of income for the partners whereas joint venture and co-ownership does not need it. JV has more flexibility.

• Importance for Partnerships – What’s good about Partnerships?

• Complete Flow Through with Income (Dividends, Cap Gains, and Business/Property) and losses (deductions, tax credits, etc) – same characteristics and source. Advantage of flow through is that losses can be offset of partners’ other income ITA 96(1) and can utilize losses that can increase cash available.
• Lack of Double taxation (No 2nd level tax) because of ACB treatment
• At-Risk Rules - annual limit on the amount of tax preferences that may flow through to limited partners. Calculation: ACB of Partnership Interest – Share of Partnership Income in Current year = Subtotal – Less (Amt owed to partnership and other risk reduction amts) = At-Risk Amount

Chapter 17 – Other Rollovers and Sale of an Incorporated Business

• Corporate Reorganization – the current tax policy provides that when a reorganization occurs, they can elect a form of transaction that doesn’t result in FMV disposition of assets. This election defers taxes related to the disposition; asset transfer price can be 1. Automatically be deemed equal to FMV ITA 69(1) 2. Equal to the cost for tax purposes ITA 85(1)
• ITA 85.1 Rollover for Shares Exchanged for Shares

• Easier to accomplish than Section 85 rollover when there are many diverse shareholders because there is no need for each S/H to file an election.
• Rules:

• ITA 85.1(1)(a) – vendor is deemed to have disposed exchanged shares for POD = to ACB
• ITA 85.1(1)(b) – cost to the purchaser of each acquired shares is deemed to be lesser of: FMV and PUC (can be subject to capital gain if ACB>PUC = tax; better (1)(a))
• ITA 85.1(2.1) – PUC of the purchaser shares that was issued to the vendor is limited to the shares given up by the same vendor

• Conditions for applicability of rollover

• ITA 85.1(2)(a) – vendor-purchaser dealing must be arms length
• ITA 85.1(2)(b) – Non-arms length vendor cannot control purchaser immediately after exchange.
• ITA 85.1(2)(c) – vendor and purchaser can’t have filed an election under ITA 85 with respect to exchanged shares
• Transferred shares must be Taxable Canadian Property and the Purchaser must be a Taxable Canadian Corporation; may not recognize gain or loss

• POD for transferor = ACB; ACB for Purchaser = Lesser of FMV and PUC; ACB for Transferor’s new shares = ACB; PUC of purchaser’s shares = old PUC

• ITA 85 vs ITA 85.1

• 85 allows for receipt of boot (up to lesser of ACB or PUC of shares); not 85.1
• 85 applies to both inventory and capital property; 85.1 only capital property
• 85 has higher cost of shares but easier to be determined
• 85 requires joint election which is an admin inconvenience
• 85.1 requires parties to be arms length  

• Draw figure on page 895

• ITA 86 Exchange of Shares in A Reorganization

• When there is an exchange of shares within a single corporation on tax deferred basis; wanting to change the corp’s nature w/o changing the amount of $ capital invested
• Purpose is to provide rollover to defer gains
• S/H of CS and Corp = $100k >> S/H of PS $100k + New S/H of CS $50k = $150k Corp
• ITA 86(1) allows redemption of taxpayer’s current shareholding combined with an acquisition of new shareholding to take place w/o tax consequence to taxpayer whose shares are being redeemed
• Most common application of 86(1) is Estate Freeze – owner of business pass on future growth of business to other family members or other individuals (issuing Non-share consideration and PS bc of fixed amount = FMV = then issue CS to family members w/ same FMV @ the time of freeze). As long as non-cons shares < PUC and ACB of CS = no tax consequences).

• Future Tax Consequence: future taxable income when individual is bought out and = to FMV today AND the tax depends whether PS are bought out by company (deemed dividends) or family member (capital gains). For the fam members, if they buy out individual’s shares in the future, individual gets tax for cap gains and cap gains deduction, but for fam members, they will be subject to two levels of taxation. For company, if they buy out individual’s shares, tax on 1 level tax on corporate tax.
• Estate Freeze Objective: Transfer future growth, defer tax = eventual tax liability, maintain control until ready to leave, source of income for retirement, and tax advantages (income splitting and use cap gains deductions)

• Conditions for Reorganization:

• Shares Must Be Capital Property – the original owner must have his/her shares as capital property and not just being held for trading purposes
• All Shares Held by Transferor in a Particular Class – all shares in a class must be exchanged for some other type
• Reorganization of Capital – share exchange must be integral (important) to a reorganization of the corp’s capital. Requires articles of incorporation to authorize new class of shares
• Transferor Must Receive Shares and can receive non-share consideration (tax deferred) < ACB of redeemed shares

• Tax Consequences: Cost of Boot = FMV. Cost of New Shares = old ACB – boot. Proceeds of Redemption = boot + PUC of new shares. POD = boot + ACB of new shares. PUC Reduction = new LSC – (old PUC – boot).
• “Why ITA 86 don’t need another company?” – 86(1) may be simpler to implement than 85 rollover bc it doesn’t need to set up a new corp. The corporate laws are easier, only requiring shares to be exchanged and possibly new share classes to be formed. Lastly, it doesn’t require an election to be filed with the CRA.

• Disadvantage of 86(1) – difficulty in segregating investment income from ABI bc of only single corp is used. Also, it exposes assets to operating risk and limited liability is reduced. Lastly, all shares have to be exchanged but S/H may want to retain some C/S for growth.

• ITA 86(2) Gifting Rule

• Conditions: FM of old shares > FMV of new shares + boot AND excess can be regarded as a gift
• POD (old) = lesser of (boot + gift) and (FMV of old shares) // If Loss on Old Shares = deemed Nil under 86(2)(d) in which gain will be taxed // ACB (new) = ACB (old) – (boot + gift).

• ITA 87 Amalgamations

• Nature

• Provides tax deferred rollover when there is an amalgamation of corporations
• May involve 2 independent corporation wishing to merge and continue business or related corporation may amalgamate to pursue common goal
• ITA 87 rollover provision provides tax-free basis in transferring assets. If no 87, it would create dispositions and acquisition = tax cap gains and recapture
• Conditions:

• All predecessors must be taxable Canadian Corporation
• All S/H must receive shares of the amalgamated corporation
• All assets and liabilities of predecessor must be transferred to the amalgamated corporation
• Transfers must be supported by corporate legislation identifying transactions of amalgamation

• Position

• Amalgamated Company

• Asset Transfer: Inventory = cost; Depreciable Property = UCC; Non-Dep Cap Property = ACB; Eligible Cap Property = 4/3 of CEC; the rest are flowed through = same.
• Tax Accts: Cap Dividends and RDTOH Balances transferred AND both corps must be private
• Deemed YE: Old Corp: short fiscal year for CCA and SBD; Counts as a year for loss carry forward purposes. New Corp: can choose new fiscal year and may also be short fiscal year
• Loss Carry Forwards: no change in # of available years, deemed YE counts as one year, and may/may not be acquisition of control. GRIP will be carried forward

• Shareholders

• ACB (old) = ACB (new)
• Conditions: No boot, original shares are capital property, and gift to related parties are prohibited

• Asset Bump-Up

• Requires 100% ownership
• The Bump-Up in certain asset values is to reflect the parent company’s excess of its investments cost over the sub’s tax values. Since parent companies usually pay higher than CVs and FMVs of the subs identifiable assets, which the tax values are based on, creating a problem for an amalgamation. The excess amount may be lost if not for special provision.

• Non-tax Considerations

• Legal complications (contracts w/ employees, creditors, suppliers, and customers)

• Tax Planning Consideration

•  Utilization of Losses may not be absorbed (no acquisition od control – 2 companies are only related). When there is an acquisition of control (If 1 S/H), loss carry forward restrictions apply.
• Combining profitable and non-profitable corp allows faster write off of cap assets through CCA
• Increase M&P tax deductions

• ITA 88 Winding Up a 90% Owned Subsidiary

• Nature

• Tax-free wind-up requires all outstanding creditors be satisfied and all corporate property must be distributed to S/H before wind-up
• Reasons for winding-up: allows losses from sub to be carried over to parent and simplify organizational structure
• 2 Types: 88(1) tax-free rollover when parent owns >90% of each class of sub’s shares and 88(2) No rollover
• Allows to 2 companies to combine w/o recognizing accrued cap gains and recaptured CCA on transfers. Transfer price = tax values of assets transferred

• Acquisition of Assets

• Bump-up (non-depreciable owned since acquisition) = lesser of 1. ACB of shares – (tax cost of sub’s net assets @ wind-up + dividends paid to parent since acquisition) 2. FMV of non-dep when control acquired less tax cost of property @ wind-up

• Subsidiary Losses

• Deduct in parent’s 1st year following wind-up

• Disposition of Shares – POD = ACB of shares (no cap gains)
• Amalgamation vs Winding Up (table on page 913)

Chapter 16: Rollovers Under ITA 85

• General Rules

• Rollovers to redistribute or defer Taxes Payable, but FMV may differ from ACB = capital gains and recapture of CCA (FMV- Net Tax Values) in Transferor’s Taxable Income = more taxes payable
• Transferor and Considerations

• Can be an individual (proprietorship), Corporation, Trust (assets), and Partner (Incorporate partnership interest)
• Considerations (85(1)): 1. Must consist of shares of the transferee corporation that may be issued either PS or CS. 2. Non-Share Consideration (Boot – cash, other assets, new debt, and old debt) < can be a tax free consideration

• Transferee

• Must be taxable Canadian Corporation

• Eligible Property that can be transferred (defined in ITA 85(1.1))

• Depreciable and Non-Dep capital properties
• Canadian and foreign resource properties
• Eligible capital property
• Inventories (not of real property)
• Real estate owned by non-resident AND used in a Canadian business

• Making the Election

• By filing the T2057 form (taxpayers) or T2058 (partnership) due the earlier of transferor’s or transferee’s tax return due date
• Late election is allowed up to 3 years after the date with penalties ($100-$8k per month)
• The elected value for the assets transferred is used to establish ACB of all considerations received by the transferor

• Establishing Transfer Price

• Elected Value = deemed POD of transferred property to transferor; EV = tax cost of transferred property to transferee; EV determines ACB (&PUC) of share and non-share considerations received by transferor (85(1)(a))
• Rules

• Upper Limit (ITA 85(1)(c)) = FMV of property transferred

• To prevent transferor from extracting benefits from transferee company

• Lower Limit = Greater of 1. Boot 2. Tax values of assets transferred

• Boot - To prevent transferor from receiving boot on a tax-deferred gains but allows transferor to extract tax basis in boot
• Tax values (ACB/UCC) of assets transferred – to prevent transferor from triggering superficial loss

• The floor is usually used as the elected value so that the transferor will not earn income/gain that could = pay taxes; If boot > ACB = gain= tax liability to transferor
• For transferor, no tax consequences. For transferee, a deferred tax on gain if they were to sell assets at FMV with the same ACB. This means the gains were not eliminated but only deferred; (Elected value of ACB/boot = ACB for transferor)  
• Double taxation occurs at the corporate and individual level due if the election value is FMV

• Transfer Price Detailed Rules

• AR

• Can but should not be transferred under ITA 85 (ITA 22 instead) because a disposition may result in a loss that is only half deductible and no deduction can be made for bad debts. 22 allows full deduction for these.

• Inventories and other Non-Dep Cap Properties

• Ceiling = FMV; Floor = greater of: Boot and lesser of (FMV and ACB)

• Depreciable Properties

• Ceiling = FMV; Floor = greater of: Boot and least of (FMV of individual asset, Cost of individual asset, and UCC of the class) *May have recapture/gain if floor>UCC (dep)

• Eligible Capital Properties

• Ceiling = FMV; Floor = greater of: Boot and least of (4/3 of CEC balance, Cost of individual property, and FMV of individual property)
• If continue to carry on business, ¾ of disposition proceeds will be subtracted from CEC: Negative balance will be taken into income like recapture; Positive balance will be treated like a terminal loss and will be disallowed if transfer is to an affiliated person (spouse, corp that has control)

• Allocation of Elected Value (calculations)

• Non-Depreciable Capital Assets

• Elected value = New ACB
• Usually = old ACB

• Depreciable Assets

• Elected Value < Cost

• PUC of Shares Issued

• PUC Reduction

• PUC represents amount that can be distributed to S/H as tax-free return of capital
• PUC = legal stated capital = FMV of consideration given for shares
• PUC Reduction = (A-B)*(C/A); A = Increase in legal stated capital of all shares, B = Elected Amount – Boot, C = FMV of particular class of shares

• Dividend Stripping ITA 84.1

• Applies to 2 types of situations involving an individual attempting to remove assets from a corporation on a tax free basis; would not be a problem if control is given up by selling shares @ arms length
• Dividends stripping often provide tax free removal of assets
• Conditions

• A disposition of shares of a Canadian Corporation by a Canadian taxpayer other than a corporation
• Corporation shares must be a capital property
• Corporation must be a resident in Canada
• Purchaser must be a corporation with which the taxpayer is not dealing @ arms length
• Subject and purchaser corporations must be connected

• Capital Gains Stripping ITA 55(2)

• The Problem

• When a corporation owns shares in a different corporation and there is an accrued capital gain, when they dispose these shares, they will increase Taxable Income and Payable.
• 55(2) is applicable when:

• A corporation has received dividends that deductible under ITA 112(1) as part of transaction
• One of the purposes of the dividend was to reduce any capital gain
• The disposition was to an arms length party

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