Harvey Malon has decided to incorporate his proprietorship. Certain properties of the business have a current value that is greater than their cost amount for tax purposes.
These assets are as follows:

The original cost of the land and building was $175,000 (land, $25,000; building, $150,000).The building currently has an undepreciated capital cost of $120,000. The goodwill was purchased from the previous owner for $50,000, and the balance in the cumulative eligible capital account is $30,000. In addition, the business has some current assets (primarily inventory), which have not appreciated in value and have a cost of $90,000. The proprietorship€™s only liabilities are amounts payable to trade creditors totalling $70,000. The corporation will assume these liabilities as well as issue debt and preferred shares to Malon in exchange for the properties
Malon is aware that a shareholder can transfer assets to a corporation and defer tax on the transfer by using a special election of the Income Tax Act. He finds this option attractive, as his personal tax rate is very high and he needs all the cash flow he can get. Within the next year or two, Malon intends to sell the land and building and acquire larger premises for the business. At this point, he is uncertain whether he will buy or lease the proposed new premises.
Required:
1. Assuming that Malon will sell the assets to the corporation using the elective option for tax purposes, determine the elected amounts required for tax purposes to avoid recognition of taxable income.
2. Determine (a) the maximum amount of debt, and (b) the amount of preferred shares that would be issued.
3. What would be the tax consequences to Malon if the corporation later repaid the debt and bought back the preferred shares? Would the result be different if he sold the preferred shares to a third party?
4. Prepare a brief balance sheet for the corporation after the assets are acquired, showing the accounting value for each item. How do the values of the real estate and goodwill for accounting purposes compare with their tax values to the corporation?
5. Since Malon may sell the land and building to a third party within two years, he could choose to retain ownership for two years and lease it to the corporation, rather than transfer it to the corporation and then sell it to the third party. Briefly outline the tax factors to consider when making this decision.

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Fair market Land Building Goodwill S 40,000 180,000 忖