Hollymar Ltd Case Study

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Indefinite-life franchise, at cost (FMV $10,000) 10,000

The acquisition gave King's shares in Jack an ACB of $14 per share. King had acquired 4,500 of the voting shares in Jack upon the incorporation of the latter in 2004. The remaining 500 shares were acquired by a person who is not related to King.

On June 30, 2007 the depreciable assets reflected the following values:

FMV UCC

Machinery and equipment $15,000 $14,000

Buildings 48,000 40,000

Dividends received by King on its shares in Jack were as follows:

2005 $ Nil

2006 1,000

2007 3,000

2008 5,000 (including $3,500, ssec. 83(2) dividends)

2009 5,000

2010 6,000

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Problem 17-6 (Cont.)

On January 2, 2015, Jack Ltd. was wound up under ssec. 88(1). Its balance sheet immediately before the wind-up reflected the following tax values:

Assets

Accounts receivable $ 7,500

Inventory 10,000

Marketable securities 5,000

Machinery and equipment 33,000

Buildings 56,000

Land 11,000

Indefinite-life franchise 4,500

$127,000

Liabilities

Accounts payable $ 26,500

Reserves

Allowance for doubtful accounts receivable 500

Shareholder's Equity

Paid-up capital $20,000

Retained earnings 80,000 100,000

$127,000

Required:

(a) Compute King's deemed proceeds of disposition on the shares it owned in Jack.

(b) Compute the amount of "step-up" that may be available under par. 88(1)(d) and identify the assets to which any "step-up" may be allocated.

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Problem 17-6S SOLUTION

(a) Deemed proceeds of disposition:

Greater of:

(i) ACB of sub's shares (9,500 × $14) = $133,000 (X)

(ii) Lesser of:

- PUC of sub's shares (95% × $20,000) = $ 19,000

- Tax value of sub's net assets on winding-

up ($127,000 - (26,500 + 500)) = $100,000

$ 19,000 (Y)

Deemed proceeds of disposition are the greater

of (X) and (Y) $133,000

(b) Computation of Paragraph 88(1)(d) "step-up":

ACB of sub's shares $133,000

Less: aggregate of:

(i) Tax cost of sub's assets before wind-up $127,000

Less:

Sub's debts before wind-up $26,500

Sub's reserves before wind-up 500 (27,000)

$100,000

(ii) Taxable dividends $16,500

Section 83(2) dividends 3,500 20,000 120,000

Maximum "step-up" limit $ 13,000 (P)

Non-depreciable capital property eligible for "step-up":

Land

Note: The indefinite-life franchise and inventory are not capital property; the marketable securities and accounts receivable on hand before the wind-up were not owned by the sub, when King acquired control on June 30, 2007.

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