Mr. Fresser, age 67, owns 80% of the common shares of Fresser Ltd., a CCPC. The other 20% is owned by his daughter, Elana, who has worked in the business with Mr. Fresser for the past 22 years.
When the business was incorporated and capitalized, the 1,000 common shares were issued to Mr. Fresser and his daughter for $62,500 in total. They now have a fair market value of $625,000. Mr. Fresser proposes a capital reorganization in which he would give up his common shares in return for $90,000 in cash and $300,000 in retractable voting preferred shares with a legal stated capital of $300,000 which he could redeem at his convenience. As a result, Elana could own all of the outstanding common shares.
REQUIRED
(A) What are the tax consequences to Mr. Fresser of section 86 on the proposed transaction?
(B) What are the tax consequences to Mr. Fresser of subsequently redeeming the preferred shares for their fair market value?