X Ltd. owns all of the shares of Y Ltd. The shares of Y have an adjusted cost base of $40,000 and a fair market value of $940,000. Y has retained earnings of $100,000 (earned after 1971) and an RDTOH balance of nil. Y plans to pay a dividend of $900,000 to X. Subsequently, X will sell the shares of Y Ltd. to an arm’s-length person for $40,000.
Determine the tax consequences to X Ltd. of these transactions. Income tax reference: ITA 55(2).