Hollymar Ltd Case Study
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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 SOLUTIONSince 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) $14,000PUC of MH Holdings Ltd. of the reduction ($14,000 – 14,000) NilDeemed 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) $65,000Less 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) 15,000Deemed dividend (A + D) – (E + F) $50,000Capital gain on transfer of Hollymar Ltd. shares:Elected amount $51,000Less: S.54(k) exclusion from proceeds for deemed dividend 50,000Proceeds of disposition $ 1,000ACB (1,000)Capital gain NilProblem 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 $ 100Accounts receivable (net) 2,000Inventory, at cost (FMV $8,000) 7,500Machinery and equipment, at cost $20,000Less accumulated depreciation 2,000 18,000Buildings, at cost $45,000Less accumulated depreciation 3,000 42,000Land, at cost (FMV $18,000) 11,000