For the past 30 years, Janice Kalinsky has been the president and owner of JK Wholesale Ltd. In contemplation of retirement, she has entered into negotiations to sell the shares of JK to Kaplan Brothers Ltd., a company that has been her major competitor. Although Kalinsky’s planned retirement date is still five years away, she is prepared to sell now so that she can have a defined amount of capital available to provide a retirement income. Kaplan Brothers has offered to purchase her shares in JK for $700,000.The shares have a cost base of $200,000. Kalinsky intends to invest the proceeds from the sale in interest-bearing securities that yield a 10% return for five years. The accumulated funds will provide her with a retirement income at the end of five years. In the meantime, she will be employed as the executive director of a national trade association.
Kalinsky is concerned about the amount of tax payable on the sale and has had discussions with Kaplan Brothers about using the elective provisions of the Income Tax Act to defer her tax on the sale of shares. Kaplan Brothers has agreed to this and has presented her with two options:
1. Purchase of her shares for $700,000, payable immediately in cash.
2. Purchase of her shares for $700,000, using the elective provisions of the Income Tax Act to defer her tax liability. Payment would consist of debt with 10% interest and preferred shares with an annual cumulative dividend rate of 8%. Kaplan Brothers would repay the full amount of the debt and redeem the preferred shares at the end of five years.
Kalinsky’s personal marginal tax rate is 28% on eligible dividends and 35% on non-eligible dividends (net of the dividend tax credit) and 45% on other income. She used up her full capital gain exemption several years ago while selling a related business corporation.
JK Wholesale Ltd. has never claimed the small business deduction since the annual business limit is always allocated to an associated corporation.
Kaplan Brothers has earned profits of $400,000 before tax for the past two years.

Required:
1. Determine the amount of capital that Kalinsky will have for retirement purposes at the end of five years under each of the alternative buy-out methods.
2. What other factors must Kalinsky consider before she decides which option to accept?
3. What are the benefits and costs of option 2 for Kaplan Brothers?