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Carla Armitage owns 100% of the common shares of Extra Ltd., a Canadian-controlled private corporation operating a wholesale business in eastern Canada. Extras fiscal year end is May 31, 2021. It is now April 15, 2021, and Carla has just signed a letter of intent to sell the wholesale business to Q Ltd. The initial discussions involved the sale of specific assets of Extra, but a sale of the shares of the company may also be considered. Carla has requested your assistance in estimating the tax liability to Extra if the business assets are sold. Information relating to the sale and to the current years operating income is provided below.

1. The balance sheet of Extra at May 31, 2021, is estimated as follows:

Accounts receivable	$	120,000
Inventory, at cost		400,000
Land, at cost		30,000
Building, at book value		280,000
Equipment, at book value		170,000
Licence, at book value		40,000
	$	1,040,000
Liabilities	$	500,000
Share capital		1,000
Retained earnings		539,000
	$	1,040,000

1. Net income before income tax and net gains from the sale of assets for the year ended May 31, 2021, are estimated as follows:

Income from wholesale operations	$	490,000
Dividend income		1,000
Net income before tax	$	491,000

The following additional information relates to the net income:

• The dividend income is eligible dividends received from a Canadian public corporation, the shares of which were sold during the year for proceeds equal to their original cost.
• Expenses deducted from revenues included the following items:

Legal fees for collection of bad debts	$	2,000
Donations to registered charities		3,000
Meals and beverages to entertain customers		4,000
Non-eligible dividend paid to Carla on March 31, 2021		20,000
Replacing a broken window in the building		2,400

1. The 2019 income tax return indicates the following tax account balances:

NERDTOH		NIL
Capital dividend account		NIL
GRIP		NIL
Undepreciated capital cost
Class 1	$	290,000
Class 8		140,000
Class 14		42,000
Class 14.1		0

1. The letter of intent regarding the sale of the business indicates that the closing date will be May 31, 2021.The letter included the following list of assets to be sold, together with each assets estimated market value. For information, the original cost of each asset is provided in the chart below.

		Market value		Cost
Accounts receivable	$	120,000		$	120,000
Inventory		510,000			400,000
Land		40,000			30,000
Building		600,000			320,000
Equipment		105,000			200,000
License		45,000			50,000
Goodwill		100,000			0
	$	1,520,000		$	1,120,000

Payment for the above assets would consist of cash plus the assumption of Extras liabilities.

1. You have suggested to Carla that she consider selling the common shares of Extra, rather than the specific assets. You have estimated the market value of the shares to be $900,000. The shares were acquired in 2014 for a cost of $100,000. In previous years, Carla had used the capital gain deduction to exempt from tax $120,000 of gains. Her cumulative net investment loss (CNIL) at the end of 2021 is estimated to be $40,000.

Required: 1. Determine the active business income, aggregate investment income, increase to the capital dividend account and increase to the non-eligible refundable dividend tax on hand resulting from the sale of the assets.

2. Disregard the amounts calculated in Part 1 and assume new information has come to light and that you have correctly updated your calculations to the following:

The total active business income created on the asset sale is	110,000
The total aggregate investment created on the asset sale	200,000
The increase to the capital dividend account resulting from the asset sale is	200,000
The increase to the non-eligible refundable dividend tax on hand from the asset sale is	61,340

All other information is unchanged. Determine the net income for tax purposes and taxable income.

3. Disregard the amounts you calculated in Part 2 and assume that the net income for tax purposes was 830,000 and the taxable income was 826,000. The amounts listed in Part 2 resulting from the asset sale are unchanged. Determine the total active business income from all sources.

4. Disregard the active business income calculated in Part 3 and assume it was actually 630,000. Also assume that the net income for tax purposes is still 830,000 and the taxable income is still 826,000. Determine the Part I tax, Part IV tax, and dividend refund. Enter reductions as negative amounts with a minus (-) sign. If an amount is zero, enter "0". Use 0.3833 when multiplying to represent 38 1/3%. Use 0.3067 when multiplying to represent 30 2/3%.

5. If Carla decides to sell the shares of Extra, what amount will be added to her net income for tax purposes in her 2021 taxation year?

Asset Aggregate Investment Income CDA Accounts receivable Inventory Land Building Equipment License Goodwill Active Proceeds business income $ 120,000 510,000 40,000 600,000 105,000 45,000 100,000 $ 1,520,000 $ 0 $ 0 $ 0 % Non-eligible RDTOH $ 0 Net income before tax (excluding asset sale) $ 491,000 Net income for tax purposes $ 491,000 Taxable income $ 491,000 Active business income Less: Less: Active business income 0 Part I tax 38% 10% $ $ 0 Small business deduction (SBD) - 19% x least of (0) (ii) (iii) General tax reduction - 13% of Less: Less: $ 0 Additional refundable tax on investment income 10 2/3% times the least of: PART I TAX $ 0 Part IV Tax Non-eligible RDTOH Less: Add: Add: refundable Part I tax - least of: () (ii) (III) Eligible RDTOH Less: Add: $ 0 Dividend Refund (0) Lessor of: (a) (b) Plus (ii) Lessor of: Share deal $ 0 $ 0 Capital gains deduction - least of (1) (ii) (iii) Cumulative gains limit $ 0 Least amount is: $ 0 Asset Aggregate Investment Income CDA Accounts receivable Inventory Land Building Equipment License Goodwill Active Proceeds business income $ 120,000 510,000 40,000 600,000 105,000 45,000 100,000 $ 1,520,000 $ 0 $ 0 $ 0 % Non-eligible RDTOH $ 0 Net income before tax (excluding asset sale) $ 491,000 Net income for tax purposes $ 491,000 Taxable income $ 491,000 Active business income Less: Less: Active business income 0 Part I tax 38% 10% $ $ 0 Small business deduction (SBD) - 19% x least of (0) (ii) (iii) General tax reduction - 13% of Less: Less: $ 0 Additional refundable tax on investment income 10 2/3% times the least of: PART I TAX $ 0 Part IV Tax Non-eligible RDTOH Less: Add: Add: refundable Part I tax - least of: () (ii) (III) Eligible RDTOH Less: Add: $ 0 Dividend Refund (0) Lessor of: (a) (b) Plus (ii) Lessor of: Share deal $ 0 $ 0 Capital gains deduction - least of (1) (ii) (iii) Cumulative gains limit $ 0 Least amount is: $ 0

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