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Chapter 5 Part 1 Transferring Share Interest Notes

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Chapter 5 Part 1 Transferring Share Interest Revision

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MCL - Corporate Taxation

Chapter 5 Transferring Share Interest Abbreviation SH- shareholder MV- market value Divid - dividend A. INTRODUCTION

1. The duplicative nature of corporate assets and their reflection in the value of shares. How unrealised gains or losses may be duplicated on the contribution of assets to a corporation.

2. Topic: Issues caused by that duplication come to a head when shares are sold or otherwise realised. Issues arising on the transfer of shares are broader than the issue of duplication of unrealised gains and losses.

3. Gains on the disposal of shares arise from 3 sources: a. Where MV of assets held by a corporation has increased but the unrealised corporate gains have not been taxed. b. From profits or gains realised at the corporate level that have been taxed. (Appreciate that cash is an asset and that profits made that have been taxed and are reflected in a corporation bank account increase the value of shares, just as do unreaslised gains on the corporate assets). c. Perceived prospects of the corporation (corporate opportunities is positive) - increase value of shares (goodwill)

4. Different sources of gains on the disposal of shares give rise to different policy considerations when considering how to tax those gains.

5. Balance each sources of gains are 3 sources of potential loss on the disposal of shares: a. A corporate asset may have a market value that is less than the price paid by the corporation for the asset (i.e an un realised loss) b. A corporation may have actually realised a loss ( and perhaps obtained tax relief for it) (through trading activities) c. A Corporation have poor prospects despite its current asset value holding up

6. Transfer of share -> transfer of an intangible asset, despite the separate legal personality of the corporation and that it is the corporation, not the SHs, the is the legal owner of corporate assets. In closely held corporations, SHs do have an interest in corporate assets and the value of their shares depends on those assets. "Indirect ownership" of assets - ownership determined on the basis that corporation is transparent.

7. Tax systems ascribe many attributes to corporations that are carried forward from year to year (include the tax value of assets (and so unrealised gains and losses), the carry-forward of losses and the carry-forward of excess tax credits). The current SHs of a corporation have an interest in the tax attributes, and they are the indirect owners of them. Individuals are not permitted to sell or transfer tax attributes that are directly ascribed to them.

8. Commonly, indivs are not permitted to sell or transfer tax attributes that are directly ascribed to them. Eg. Individuals may not sell losses that they are carrying forward to another person or sell credits granted to them. Loss/credit belongs to the individual and only the individual may use it.

9. If corporate tax attributes are carried forward by a corporation irrespective of who owns the corporation, then the transfer of shares in the corporation will effect an indirect transfer of the tax attributes to the acquirer of the shares. a. Eg. If a corporation carries forward a loss, the sale of shares in corporation may affect an indirect transfer of the loss to a new owner. If this is permitted then it creates an inconsistency with the direct position of individuals. Why should an individual be permitted to do something indirectly (sell losses with a corporation) that he cannot directly?
b. Thus, countries have rules that restrict the carry-forward of tax attributes by a corporation if there has been a major change in who owns the corporation.

10. 2 choices: a. Controller sell business/assets directly, isolating any tax consequences at the corporate level b. Controller sell shares in the corporation, thereby sell corporation together with the business or assets. B. TRANSFERRING SHARES

1. The company makes $100 in profits and is taxed on those profits 30%, leaving $70 retained profits. Sam sells the shares for $70, making a capital gain of the same amount. Sam is taxed at 40% on this gain, i.e. $28.

2. Is this double taxation? Should something be done about it? How does this situation differ from dividend relief (i.e. relief from the classical system).

Fungibles: Identifying Shares

1. Shares of a corporation in particular class are identical. When a person acquired more than one share in particular class, the person holds identical assets. When the person comes to sell only part of the shares (if the person has paid different amounts for the shares/acquired them at different times), question arise.

2. One would want to sell the shares with highest cost, but if shares held for longer periods of time are subject to a lower rate of tax, it may be the shares held for the longest that one wishes to sell. (Treatment of losses on the disposal of shares create opposite effect).

3. A corporate tax system needs an explicit or implicit rule that identifies which of a set of identical shares a person is treated as selling. Country UK


Germany (G) Australia (A)

Fungibles: Identifying Shares
 Different approach - pool shares in a particular class as a single asset and treats disposals of shares from the pool as a part disposal of the pooled asset:

Any number of securities of the same class acquired by the same person in the same capacity shall for the purposes of this Act…be regarded as indistinguishable parts of a single asset growing or diminishing on the occasions on which additional securities of the same class are acquired or ..disposed of.

Reason: to spread the cost base of the shares evenly over the shares, it is only possible where the tax consequences on disposal do not depend on for how long the shares were held. If SH fails to 'adequately identify' which shares are disposed of, then the SH is treated as selling the shares held for the longest period before more recently acquired shares.

Do not "pool" the shares as tax rate applicable to gains on the disposal of shares is higher for shares held

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