Mr. Schminkie, the sole proprietor of a small manufacturing business wishes to have his wife involved in the business on an equal basis. Mr. Schminkie's barber advised him that this is possible by incorporating a company and having Mr. and Mrs. Schminkie subscribe for all the common shares equally. Then, Mr. Schminkie could transfer all the assets of the business to the newly formed company, taking back Class A and Class B non-voting preference shares as consideration. Mr. Schminkie thought this was a wonderful idea and proceeded with incorporating the company.
The assets and liabilities of the proprietorship and certain additional information are provided as follows:

Notes to Balance Sheet
(1) The accounts receivable are net of a $6,000 reserve for doubtful accounts which represents the closing reserve for the previous fiscal period.
(2) Fixed assets are recorded at original cost less accumulated financial accounting depreciation. Tax data is as follows:

(3) Parcel I of land is the property upon which the building used in the business is sited.
(4) Parcel II of land was acquired in 2007. Mr. Schminkie purchased it with the intention to sell as soon as the fair market value exceeded $50,000. Mr. Schminkie speculates this will occur by April 19, 2009, at which point he will sell for the quick profit.
(5) Liabilities are to be assumed by the corporation.
REQUIRED
(A) Indicate which assets should not be transferred to the corporation at all.
(B) Indicate which assets should be transferred to the corporation, but cannot or should not be transferred under section 85 and briefly explain why.
(C) For the assets which can be transferred under section 85 to the corporation, indicate the maximum amount of debt in addition to the shares that can be taken as consideration to defer all possible capital gains, losses, other income and other available adverse tax consequences given the consideration to be taken. The corporation will issue a maximum of $200,000 Class A retractable non-voting preference shares with a dividend rate of 8% and the remainder of the share consideration will be Class B retractable, non-voting preference shares with no dividend entitlement.
(D) What is Mr. Schminkie's cost of the consideration and the PUC for tax purposes of the preferred shares that he receives for the transfer of assets?
(E) Compute the tax consequences of a redemption in 2009 of the preferred shares of the corporation at their fair market value after the transfer of assets to the corporation.
(F) What could be done to avoid a benefit problem, if the Class B consideration is limited to an authorized share capital amount of only $50,000 and the Class A consideration remains the same?

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Balance Fair market sheet value Assets Cash Accounts receivabl) Inventories Shares in Public Co. Land-Parcel I3) Building() Land-Parce Equipment2) Auto Dec. 31/08 Dec. 31/08 S 20,000 85,000 86,000 20,000 339,000 75,000 45.000 5,000 12,000 60.000 S20,000 90,000 86,000 50,000 200,000 15,000 20,000 35,000 10,000 $526.000 Liabilities(5) Bankloan S169,000 43,000 Mortgage on building 30.000 242,000 284.000 $526.000 Proprietor's equity. Original cost UCC Building Equipment Auto S60,000 S15,000 80,000 35,000 16,000 11,000