Mrs. Andrews, a Canadian resident, set up VonTrapp Holdings Limited (VHL) to hold all of her shares in Plummer Enterprises Inc. (Plummer) in order to crystallize her remaining $400,000 capital gains exemption for qualified small business corporation shares.
Mrs. Andrews owns 100% of the outstanding common shares of Plummer. Plummer is a small business corporation and meets all the tests for the shares to be qualified small business corporation shares. Plummer and VHL are both Canadian resident corporations. She purchased the Plummer shares in 1986 from an unrelated third party for their then fair market value of $200,000.
The fair market value of the Plummer shares today is $1,000,000. The paid-up capital of these shares is $1,000.
Mrs. Andrews will jointly elect under section 85 with VHL and will take back the following consideration:
(a) non-interest bearing note for $200,000, and
(b) 6% voting preference shares with a retractable and fair market value equal to the balance of the fair market value of the Plummer common shares.
REQUIRED
Discuss the tax implications of the proposed transaction, supported by your computations.