Question

Mr. Bike is the long time proprietor of an unincorporated business he calls “Get with Bike” that sells and repairs bicycles. Since his children have moved out, his spouse has been a little cranky and feels she needs to change gears. She would like to be more involved in the business and feels that she can do a better job to inflate the profits of the business, starting with the next business cycle.

Mr. Bike, being older than his spouse, has started to think about the high income taxes he pays, his pending mortality and believes that now is the best time to fully retire from the business. He is ready to hang up his slinky shinny spandex bicycle pants and let the missus take over the full ownership and management of the business. He spoke to his CPA who came up with the following plan.

1. The spouse will incorporate a new company, Get with Bike Ltd. (GWB) and will subscribe for all of the voting common shares.

2. Mr. Bike will transfer the assets of his proprietorship business to GWB utilizing ITA 85(1)

3. GWB will pay Mr. Bike for the transfer of the proprietorship assets by assuming all of the existing proprietorship liabilities and issuing promissory notes and non-voting preferred shares for the balance of the agreed sale price.

Mr. Bike informed his CPA that in respect to the transfer of his business assets and liabilities to GWB, there must be no immediate adverse tax consequences to him, which means the continued deferral of all unrealized gains of any type, while at the same time, he wants to maximize the amount of non-share consideration payable to him for the business.

Although unincorporated, there are accounting records that are kept in order to separate his personal records from the business. These records show that the book value and corresponding fair market value of the specific assets and liabilities that Mr.Bike intends to transfer, as at December 31, 2019, are as follows:

Assets	Book value	Fair market value
Cash	$30,000	$30,000
Accounts receivable	100,000	85,000
Prepaid real estate taxes	10,000	10,000
Inventory	86,000	92,000
Shares in bicycle public companies	100,000	80,000
Vacant land	10,000	20,000
Building	115,000	275,000
Land (under the building)	200,000	339,000
Equipment	40,000	5,000
	$691,000
Liabilities
Bank loan	$80,000
Accounts payable	53,000
Mortgage on building	47,000
	$180,000

Mr. Bike has provided the following additional information:

1. Mr.Bike recently received an unsolicited offer to buy his bicycle business for book value plus $95,000

2. The $100,000 accounts receivable values listed above are net of a tax reserve for doubtful accounts of $6,000.

3. The $10,000 book value of the vacant land is its original cost. This land was held for an expansion of the business that will start right after the business is transferred.

4. The $200,000 book value of the land under the building is its original cost

5. The $115,000 building book value and $40,000 equipment value is the original cost less accumulated accounting depreciation.

6. Dividends are received on a regular basis from the bicycle public company shares.

7. The tax information related to the building and equipment is as follows:

	Original Cost	UCC
Building	$ 215,000	$ 100,000
Equipment	$ 80,000	$ 35,000

Required:

Part A. In respect to the assets that Mr. Bike intends to transfer, list those specific asset(s) that are not eligible for transfer under ITA 85(1) ; and those assets that are eligible, but are not recommended to be transferred. For these 2 lists, with specific amounts, briefly describe the tax consequences, if they were in fact transferred under ITA 85(1) and where appropriate, suggest a better alternative that is a more tax-efficient way to transfer the assets that are needed but should not be transferred via ITA 85(1). (10 marks) Note: No marks will be given without a correct explanation.

Part B. Provide a concise schedule, as per the T2057 format, listing all those assets that are appropriately transferred to GWB under ITA 85(1), and for each asset, indicate all the relevant values, including the elected value, the consideration received, including assumed debt and Promissory Note payable, as well as the value of the preferred shares that should be received by Mr. Bike. (10 marks)

Part C. Determine Mr.Bike’s ACB and the PUC of the preferred shares received for the transfer of his assets under ITA 85(1). Show all calculations. (3 marks)

Part D. Just before the transfer was about to take place, and feeling guilty about how much unpaid services his spouse provided the business over the years, he informs his CPA that he will take the normal amount for the non-share consideration but he will take 50% less in the legal stated capital of the preferred shares. In point form, explain to Mr.Bike, the tax consequences of such a decision. (3 marks)

Part E. Mr. Bike changes his mind and decides not to take 50% less in preferred shares. Instead, shortly after the assets were transferred, he requests that GWB redeems 50% of the outstanding preferred shares for their legal stated capital. Determine the tax implications to Mr. Bike and show all calculations including those whose results are nil. (2 marks)