Hollymar Ltd Case Study

Problem 16-5

(Text: Ch. 16)

Ms. Hollymar owned common shares in an operating company, Hollymar Ltd. The shares had a cost and paid-up capital value of $1,000 in 1976. At the present time they are valued at $65,000. In order to crystallize $50,000 of her capital gains exemption, she incorporated a holding company, MH Holdings Ltd., and transferred her common shares in Hollymar Ltd. to MH Holdings Ltd., electing at $51,000 under s. 85(1). As consideration, Ms. Hollymar received a note for $51,000 and common shares valued at $14,000 from MH Holdings Ltd. The shares of Hollymar Ltd. are QSBC shares.

Required:

Determine the immediate tax consequences of the transfer.

Problem 16-5S        SOLUTION

Since the conditions for S.84.1 to apply are met, the following would result:

PUC reduction (S.84.1(1)(a)):

(1)  increase in legal PUC of MH Holdings Ltd.                                        $14,000 (A)

less

(2)  greater of:

       (a) PUC of Hollymar Ltd. shares                        $1,000

                                                                        $  1,000

       (b) Modified ACB of Hollymar Ltd. shares        $1,000

       less:  FMV of boot                                                  51,000

       excess, if any                                                                                Nil (B)

PUC reduction (A - B)                                                                $14,000

PUC of MH Holdings Ltd. of the reduction ($14,000 - 14,000)                                Nil

Deemed dividend (S.84.1(1)(b)):

Sum of:

(1) increase in legal PUC of MH Holdings Ltd. shares                                $14,000 (A)

(2) FMV of boot                                                                          51,000 (D)

(A + D)                                                                                $65,000

Less sum of:

(3) greater of:

       (a) PUC of Hollymar Ltd. shares                        $1,000

                                                                        $  1,000 (E)

       (b) Modified ACB of Hollymar shares                $1,000

(4) PUC reduction under S.84.1(1)(a)                                          14,000 (F)

(E + F)                                                                                          15,000

Deemed dividend (A + D) - (E + F)                                                        $50,000

Capital gain on transfer of Hollymar Ltd. shares:

Elected amount                                                                        $51,000

Less:  S.54(k) exclusion from proceeds for deemed dividend                           50,000

Proceeds of disposition                                                                $  1,000

ACB                                                                                          (1,000)

Capital gain                                                                                        Nil

Problem 17-6

(Text: Ch. 17)

On June 30, 2007, King Ltd. acquired an additional 5,000 of the 10,000 issued and outstanding voting shares in Jack Ltd. whose balance sheet on that date reported the following assets:

Cash                                                                                $     100

Accounts receivable (net)                                                            2,000

Inventory, at cost (FMV $8,000)                                                    7,500

Machinery and equipment, at cost                        $20,000

Less accumulated depreciation                            2,000                  18,000

Buildings, at cost                                        $45,000

Less accumulated depreciation                            3,000                  42,000

Land, at cost (FMV $18,000)                                                          11,000