Mrs. Diet owns all 100 common shares of Low-Cal Caterers Inc. (Low-Cal), a Canadian-controlled private corporation with a December 31 year-end. Low-Cal was incorporated in 1983 when Mrs. Diet invested $250,000 in common shares with a paid-up capital of the same amount. The Low-Cal shares are now valued at $2,000,000.
Mrs. Diet would like to freeze the present value of Low-Cal so that any future increase in value would accrue to her 20-year-old son, Slim. She proposes that Slim incorporate a new corporation, Slim Pickings Holdings Ltd. (Slim Pickings), with $100 of his own money by acquiring all the common shares of the new corporation.
Mrs. Diet would then transfer her common shares in Low-Cal to Slim Pickings using a section 85 election in order to defer the inherent gain on these shares. Mrs. Diet would like to receive as consideration a non-interest bearing note for $750,000 and the balance of the fair market value for 1,000 8% non-cumulative, voting preference shares with a retraction value, fair market value and paid-up capital of $1,250,000. Since she would also like to use all of her remaining capital gains exemption (of $500,000 for QSBC shares), she proposes that the elected amount under section 85 be $750,000. You have determined that both Low-Cal and Slim Pickings are small business corporations at the present time and that Low-Cal meets all the conditions for QSBC shares.
(A) Describe the tax consequences to Mrs. Diet of the proposed section 85 transfer of the Low-Cal common shares to Slim Pickings.
(B) How would you change the above proposed consideration package so that Mrs. Diet achieves her objectives as stated above?
(C) What would be the tax consequences if Mrs. Diet sold to Slim Pickings for cash or debt just enough of the 100 common shares of Low-Cal common shares to realize a capital gain of $500,000 in order to utilize her capital gains exemption as described above?
(D) Indicate the tax consequences for parts (A) and (B) if Mrs. Diet:
(i) redeems all the preference shares in Slim Pickings for their fair market value; or
(ii) sells all the preference shares in Slim Pickings to an arm's length party for their fair market value.
This question was answered on: Jul 11, 2017
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