Tx2 Assignment 2

In: Other Topics

Submitted By Natatti82
Words 2170
Pages 9
Question 2
A.

15th April, 2013

Canada Revenue Agency

Dear Sir,

I am writing this letter in response to details requested from Lea Lazarus concerning the details of transactions carried out in 2011 and 2012 as well as the tax treatment that was used for those transactions in the said same years.

2011 and 2012 Transactions

Transaction details:
2011: Lea Lazarus owned 2,000 Class Z shares of Private Ltd. a CCPC at January 1, 2011. Lea had purchased these shares for $10 each in the year 1998 when the PUC was $5 per shares. Each of the shares was convertible into one Class Y share. Lea exercised her option on January 8, 2011 and converted 1,000 of the Class Z shares to 1,000 Class Y shares which had a FMV of $20 per share and a legal PUC of $8 per share.

2012: There was a mutual agreement conducted on June 28, 2012 where Private Ltd. redeemed 500 Class Y shares for $25 per share. Lea is the sole shareholder of the Class Z shares and also became the sole shareholder of the Class Y shares, which are not voting shares.

Tax consequences:

Under subsection 51(1), there is no disposition of shares. The ACB of the Class Y shares will be the same as the ACB of the Class Z shares, which is $10 per share. The 1,000 Class Z shares that have an ACB of $10,000 are converted to 1,000 Class Y shares that will have an ACB of $10,000. As a result of the conversion, the capital increased which resulted in a reduction in the PUC as per paragraph 51(3)(a). See details below.

PUC reduction
(A – B) x C/A = (8,000 – 5,000) * 8,000/ 8,000 $3,000

PUC of the 1000 Class Y Shares
Legal PUC ($8 x 1,000) 8,000
Reduction in PUC (3,000)
PUC for tax purposes 5,000

PUC per share: $5,000 / 1,000 shares = $5

As a result of the redemption / purchase by mutual consent of the 500 Class Y Shares, this results in a deemed dividend of…...

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