Ontario Barrister and Solicitor Practice Exam

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What is the income tax impact on a purchaser for the redemption of 25 shares at $10 per share, with a PUC of $4 per share and an ACB of $5 per share?

  1. Deemed dividend of $150 and capital gain of $25

  2. Deemed dividend of $150 and capital loss of $25

  3. No income tax impact

  4. Deemed dividend of $250 and no capital loss

The correct answer is: Deemed dividend of $150 and capital loss of $25

The redemption of 25 shares at $10 per share is equivalent to receiving $250 in total. Since the shares have a PUC of $4 per share, the PUC portion of the redemption is $100 (25 shares x $4 per share). This portion is not subject to tax. However, since the ACB of the shares is $5 per share, the total ACB upon redemption is $125 (25 shares x $5 per share). This means that $125 is not subject to tax, leaving the remaining $125 as a deemed dividend. Since the ACB is less than the PUC, there is a deemed dividend of $150 ($250 total - $100 PUC = $150) that is subject to tax. As for the capital gain/loss, there is a capital loss of $25 ($125 ACB - $100 PUC = $

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