Shelter Tent Ltd. is a Canadian-controlled private corporation owned 50/50 by two individual shareholders. The corporation has consistently achieved annual profits of between $500,000 and $600,000.
Recently, the company has experienced a cash shortage as the result of an expansion of the tent and awning business. The bank offered some relief, but the shareholders will have to contribute additional capital to the corporation.
Although both shareholders have alternative uses for their personal capital, they are prepared to provide the funds necessary to alleviate the cash squeeze. The shareholders have approached you for advice on how they should contribute their capital to the corporation. Under its articles of incorporation, the company is permitted to issue both common shares and preferred shares. The preferred shares have a fixed non-cumulative dividend rate of 8%.
Required:
1. Identify three methods by which the shareholders can provide additional capital to the corporation.
2. Outline the tax factors that should be considered in evaluating the three alternatives.