Hal Lelulia is the sole shareholder of Microcosm Ltd

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Hal Lelulia is the sole shareholder of Microcosm Ltd., a corporation with an October 31 year-end. Microcosm Ltd. produces trivia games. Hal started the corporation with an initial capital investment of $30,000 for which he received 1,000 shares.

Hal has let it be known that he wants to sell his business to enable him to build up a new tax consulting business. As a result, Hal has received two separate offers, both from individuals and both effective November 1, 2011.

Offer One

Tu Taxed is willing to pay $1,000,000 for the shares of Microcosm Ltd.

Offer Two

Shel Ter is willing to buy the assets through an existing corporation that she owns. Shel’s offer is as follows:

Asset	Offer
Marketable securities	$       14,000
Accounts receivable	60,000
Inventory	254,000
Land	372,000
Building	330,000
Equipment	12,000
Goodwill	180,000
Total offer	$1,222,000

You have been given the following additional information.

1. Details of the assets and liabilities of Microcosm Ltd.

Assets                                                                                                  Tax Value

Cash                                                                                                        $ 15,000

Marketable securities adjusted cost base                                    26,000 Accounts receivable $62,000

Less: allowance       (6,000)                                                                  56,000

Inventory cost amount                                                                       230,000

Land adjusted cost base                                                                    144,000

Building UCC (capital cost is $235,000)                                          203,000

Equipment UCC (capital cost is $65,000)                                        22,000

Goodwill CEC (cost is $38,000)                                                           11,000 Liabilities

Trade payables                                                                                         47,000

Bank loan                                                                                                 118,000

2. The paid-up capital of the outstanding shares in Microcosm Ltd. is $30,000.

3. The capital dividend account of Microcosm Ltd. is $94,000 before regard to any sale of assets under the offer above.

4. The refundable dividend tax on hand balance of Microcosm Ltd. was $18,000 on October 31, 2011.

5. Hal and Shel have agreed to file an election under section 22 of the Income Tax Act for the transfer of the accounts receivable should they eventually agree to a deal.

6. Microcosm Ltd. has the following tax rates:
   1. 20% on active business income up to the small business deduction limit (there are no associated companies)
   2. 40% on other income (before the 6?% additional refundable tax on aggregate investment income and before the refundable Part I tax on investment income)

The corporation will have a nil GRIP balance at the time of a winding-up.

7. Hal pays tax at the top marginal combined federal and provincial rate of 31% on actual dividends from the low-rate income of a CCPC and 46% on all other income.

8. Hal utilized all of his $750,000 capital gains exemption on a previous sale of the shares of a qualified small business corporation.

Required:

Advise Hal as to which offer will provide him with the most after-tax funds.