Mr. Wealthy is 55 years old. He is the President and sole shareholder of Amazing Results Inc. ("Amazing"). Amazing was incorporated about 25 years ago. At the time of incorporation, Mr. Wealthy subscribed for 100 common shares without par value for subscription proceeds of $100. These are still the only shares that are issued and outstanding.
Amazing has been involved in the lobbying business and achieves results for its clients which are considered to be simply amazing. Amazing has just been involved in a very successful high-profile lobbying effort. Business is booming. Amazing has been a very profitable company. It is estimated that the fair market value of the shares is $1,000,000 today. Mr. Wealthy believes that the value of the shares of Amazing will increase dramatically over the next two years to about $3,000,000.
Included in Amazing's assets is land and building (the "real estate") which is located steps away from the provincial legislature. The real estate was purchased about 20 years ago for $200,000 and is estimated to be worth about $700,000 today. The cost and value of the real estate is allocated 50/50 between land and building. The undepreciated capital cost of the building as at today's date is $35,000. It is estimated that the property will be worth about $1,200,000 within five years.
Mr. Wealthy is divorced with three children. Wendy is 30 years old and very active in the business. Her intention is to make a career out of Amazing. Wayne, who is 25 years old, is an artist with no interest in Amazing. Winona, who is 15 years old, is a high school student with no income. She has stated her intention is to become a doctor. She attends a private school to which Mr. Wealthy pays $4,000 tuition annually.
Mr. Wealthy would like to retire from active involvement in Amazing within the next ten years. He estimates that he will continue to require an income of $50,000 per year thereafter. He wants to take action now so that, in the event of his death, he will not be taxed on the expected growth of Amazing in the next five years.
Mr. Wealthy has decided that a plan should be implemented to ensure that Wendy will benefit from the future growth of Amazing. At the same time, Mr. Wealthy wants to be fair to Wayne and Winona by providing them with some benefits from, the growth of his estate in the future. He wants to maintain sufficient control over Amazing during his life in the event that Wendy does not fulfil his expectations of her involvement in the business. Mr. Wealthy tells you that his neighbour has "frozen" everything in favour of his children as a means of saving taxes. Mr. Wealthy would like to freeze everything too. Mr. Wealthy has never claimed a capital gains exemption.
REQUIRED
(A) Advise Mr. Wealthy of the tax consequences and merits of the following proposals to achieve his objectives:
(i) Mr. Wealthy would transfer the shares of Amazing, using section 85, to a corporation (Holdco) of which Wendy holds the common shares. Mr. Wealthy would receive as consideration preferred shares with a PUC of $100 and a redemption value of $800,000.
(ii) The same as in (i); however, the consideration for the transfer would be a promissory note of Holdco for $750,000 and fixed-value preferred shares of Holdco with a redemption value and legal stated capital of $250,000.
(iii) Mr. Wealthy would exchange the shares of Amazing for a newly-created class of fixed-value preferred shares of Amazing. Mr. Wealthy has been advised that under corporate law the stated capital of the fixed-value preferred shares can be $1,000,000. He would like the paid-up capital to be $1,000,000 since he understands that paid-up capital can be returned to him tax free.
(iv) Mr. Wealthy would cause Amazing to transfer its land and building to a new corporation in exchange for preferred shares of the new corporation having a fair market value of $700,000 and then lease the real estate back from the new corporation. The common shares of the new corporation would be owned by Wayne and Winona.
(B) Suggest to Mr. Wealthy an alternative to his plans, taking into consideration his age and objectives.