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Purification Planning for Sole Proprietor - Case Study Example

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A number of factors come into play, and the owners rely heavily on the rules and regulations to make this decision. They may have tax-related questions but will also want to know the advantages and disadvantages to the business. The report analyzed and discussed alternative tax planning for Cell City, and recommended some simple solutions and complex methods for purification for sole proprietor…
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Purification Planning for Sole Proprietor
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Download file to see previous pages This way a company or a sole proprietor can reduce Paid-up Capital through a payment and the qualifying shares are subsequently sold to arm's length party.
This paper tries to answer the question as to whether Mr. Edward Lau, a Canadian Resident, who is the sole shareholder of Cell City is qualified to avail the CGD when he sells his shares. Mr. Edward wants to sell his shares and thus the tax implications have been examined.
An analysis of all the possible tax issues that will be raised, and how to overcome it is being discussed in this paper. It is vital to do this kind of planning by Cell City sooner rather than later. The planning becomes more complicated and risky, and probably, more expensive, if such planning is contemplated on the eve of a sale.
Mr. Edward Lau, a Canadian Resident, is the sole shareholder of Cell City and has been since its inception. Cell City owns 100% of common shares of Space, which consist of 100 shares with a Paid up Capital (PUC) and an Adjusted Cost Base (ACB) of $50,000. Edward has never claims a Capital Gain Deduction (CGD). Edward has received an offer for his shares in Cell City. Before making his decision, he requests our advice on all the tax consequences resulting from such a decision. He informs us that Cell City has exited since 1989 and that the balance sheet for both corporations has remained substantially the same for the last three years. The balance sheets as at August 31, 2009, are presented below:
Cell City:
FMV
Cost
Treasury Bills
150,000
150,000
Shares of public corporations
100,000
75,000
Shares-Space
1,000,000
50,000
1,250,000
275,000
Share Capital
100
Retained Earnings
1,249,900
1,250,000
Space:
FMV
Cost
Loan to Broke Ltd.
300,000
300,000
Land
100,000
75,000
Building
700,000
425,000
Equipment
400,000
600,000
Goodwill
150,000
0
1,650,000
1,400,000
Liabilities
50,000
Mortgage
600,000
Share Capital
50,000
Retained Earnings
950,000
1,650,000
The value of goodwill is reflected in the Fair Market Value (FMV) of retained earnings.
Broke Ltd. is not related to Space and the loan does not bear interest it is controlled by a friend of Edward Lau.
Edward Lau has asked us to explore the rules applicable to purification planning, identify situations that may come under the provisions of the rules, and determine the tax consequences. Then the provisions of the ITA that allow the Capital Gains Deduction (CGD) to be claimed on disposal of shares in a Canadian-Controlled Private Corporation (CCPC) and qualified assets are also analyzed. This is a significant benefit, since using the CGD serves to reduce Edward Lau's tax bill.
This paper will determine taxpayers' tax liability and regulatory requirements and exposure. Tax implications of proposed and completed transactions are evaluated and analyzed and tax-planning issues are discussed. Business decisions in their legal context, along with preparing and advising on contract structure and enforcement is discussed. The first section of this paper looks at the background of Cell City. ...Download file to see next pagesRead More
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