Cathy owns equipment that originally cost $40,000 and that has an undepreciated capital cost of $25,000. She sells the equipment to a corporation at the fair market value price of $30,000 in exchange for a combination of preferred shares and debt. Cathy and the corporation will make a Section 85 election in order that Cathy can avoid paying tax on the sale.
Determine the appropriate transfer price under Section 85. Determine the amount of debt and share consideration that Cathy can accept without any adverse tax consequences. Determine the corporation’s ACB and UCC for the equipment acquired. Determine the ACB and PUC of the preferred shares received as consideration. Income tax reference: ITA 85(1), (2.1).