Adam owns all of the Class A common shares of BJay Ltd. His son, Stieb, owns all of the Class B common shares and is active in the management of the corporation. Adam is now prepared to pass all of the future growth in the corporation to his son. To do so, Adam will give up all of his Class A common shares which have a fair market value of $500,000, an adjusted cost base of $100,000 and a paid-up capital value of $100,000. In return, he will receive $100,000 in cash and preferred shares with a fair market value of $350,000 and a legal stated capital of $350,000. Stieb will then own all of the only class of common shares outstanding and, thereby, will receive all of the future growth of BJay Ltd.

REQUIRED

What are the income tax consequences under the capital reorganization rollover to Adam on the proposed transaction?