ABC Limited is a Canadian-controlled private corporation acquired in 2000 by Mr

ABC Limited is a Canadian-controlled private corporation acquired in 2000 by Mr. A for $100,000.  The common shares acquired had a paid-up capital of $150,000.  Mr. A is the only shareholder of the company. He is considering several alternatives for the disposition of the business.  The year end of the company is December 31.

The corporation is taxable at a corporate rate of 15% on its active business income eligible for the small business deduction, 28% on active income not subject to the small business deduction, and 46 2/3 % on its investment income, which includes the ART.  The corporation has a nil GRIP balance.

The composition of the assets of ABC Limited has been constant over the last three years.  Mr. A has $400,000 ($800,000 of CG’s) of the capital gains exemption available.

The following is a balance sheet at the intended date of disposition. 

ABC LIMITED

Balance Sheet

As at December 31, 2019

Assets

Current assets

            Cash                                                                                                    $     47,000

            Marketable securities at cost (FMV: $35,000)                                             65,000

            Non eligible RDTOH                                                                                10,000

            Inventory at cost (FMV: $82,000)                                                           114,000

                                                                                                                             236,000

Capital assets

            Land at cost (FMV: $460,000)                                                                   220,000

            Building at UCC (FMV: $1,600,000: Cost: $1,300,000)                      1,120,000

                                                                                                                        $1,576,000

Liabilities and Shareholder’s Equity

Liabilities                                                                                                        $   134,000

Shareholder’s equity

            Paid-up capital                                                                                          150,000

            Capital dividend account                                                                          85,000

            Other surplus                                                                                        1,207,000

                                                                                                                        $1,576,000

Required:

1. If ABC Limited sells the assets on the open market and winds up the corporation in 2019, what would be the net amount available for distribution to Mr. A? (10 marks)

2. Determine the amount that Mr. A would retain from the above distribution, after both federal and provincial taxes.  Mr. A’s average marginal tax rate on taxable capital gains, both federal and provincial is 45%, it’s 30% on eligible dividends and 36% on non-eligible dividends (these dividend rates include the dividend tax credits) (14 marks)

3. Compare the after-tax retention computed in part 2 above, with the retention from a sale of the company shares for $1,700,000.  State your conclusion as to which is better for Mr. A. (9 marks)

Show all calculations including those that have a nil effect on income.