Hello all. I have a somewhat complicated situation and I want to ensure I am doing this correctly.
Client divorced her husband who had a company (OriginalCo) with a large investment portfolio that originally had shareholdings of 46% to her and 54% to him. Client incorporated a new company (ClientCo) as part of a butterfly arrangement during divorce proceedings. I spoke with the lawyer that did the transaction and this is what I got from him.
- Client incorporated the company with $100 worth of common shares (dr cash, cr common shares $100)
- Client does a section 85 rollover to transfer her common shares in OriginalCo from her name personally to ClientCo. Elected value $343k, PUC $46. PUC equals what the client originally put in when OriginalCo was set up way back when with no assets. She takes back preferred shares with a redemption value of $343k and tax value of $46. (dr Shares in OriginalCo, cr Preferred Shares $343k). I have a copy of the T2057 - this apparently needs to be uploaded to the company CRA portal somehow by the due date of the tax return (June 30th). I note the lawyer filled out the form except for the client’s SIN. The client sent me photos from her phone of the pages from her kitchen table - is the CRA likely to reject it if I type in her SIN on the picture in the box on the form or should I get the client to handwrite it in and send me another picture so I can upload it. Client does not have a scanner and is in Calgary while I am in Kelowna.
- OriginalCo transfers over ownership of assets in the form of $292,770.45 cash, $45,719.88 in investments in kind at their original cost and $4,509.67 in set up fees for the butterfly paid by OriginalCo beforehand. OriginalCo takes back preferred shares with a redemption value of $343k. (dr cash $292,770.45, dr investments transferred in kind $45,719.88, dr incorporation costs $4,509.67 and cr preferred shares shares in OriginalCo $343k).
At this point the lawyer says ClientCo has 100 common shares worth $100 (point 1), 1000 preferred shares to Client acb of $100 redempt $343k (point 2). ClientCo has 50 common shares in OriginalCo with ACB $46 FMV $343k (point 2). I think I misunderstood or missed something here as I would have thought point 3 would then also give 1,000 preferred shares to OriginalCo with ACB and FMV of $343k.
He then went on to say Clientco redeems OriginalCo’s preferred shares $343k issues promissory note for $343 to Curtis’s company. Same thing happens in other direction so they cancel out. I take that to mean that the asset (the $46 of OriginalCo shares held by ClientCo as a result of point 2) is offset against the promissory note and the difference of $343k-$46 is an intercompany dividend - reported as income but not taxable on sch 3.
So the opening books read
dr cash $292,770.45 + $100
dr incorporation costs $4,509.67
dr investments transferred in kind $45,719.88
cr due to shareholder $46 (not sure where the $46 actually ends up when the preferred shares and OriginalCo share cancelling happens)
cr. Common shares $100
cr dividend income from OriginalCo $342,954
and on the tax return the dividend gets recorded on sch 3 as from a connected corporation, dividend amount in column G (taxable dividends deductible under section 112) and flagged as exempt under 112 (interco dividends) but not Column E (for Capital dividends), F (for foreign dividends) or H (for eligible Dividends) which then adds it back on line 320 of the T2 making it not taxable.
Have I missed anything?