Question

Beta is the sole shareholder of a corporation which was capitalized with $100,000 of common shares on incorporation. In 2017, Beta needed $30,000 and decided to reduce the paid-up capital of the corporation by that amount on withdrawing the $30,000 in cash. In 2018, when the shares were valued at $400,000, Beta caused the corporation to redeem 20% of the shares.

Which one of the following determines the tax consequences to Beta of the redemption of the common shares?

	A.	Beta will be deemed to realize a capital gain of $60,000.
	B.	Beta will be deemed to receive a dividend of $60,000. .
	C.	Beta will be deemed to receive a dividend of $66,000 and realize a capital gain of nil.
	D.	Beta will be deemed to receive a deemed dividend of $66,000 and realize a capital loss of $6,000.

10 points   

Answer 1

Solution: Option-d
Explanation:

Year-2017         
Reduction of paid up capital by withdrawing the $30,000 in cash   30,000     
         
Year-2018         
Value of shares   400,000     
Reduction in capital due to the withdrawal (100,000 - 30,000)   70,000     
Gain due to increase in share value (400,000 - 70,000)   330,000     
Amount of dividend (20%*330,000)   66,000     
Capital loss due to redemption (20%*30,000)   6,000