Lynn Davies, age 56 and a Canadian resident, has decided to retire and freeze the value of all of her common shares of Davies Inc. Davies Inc. is a small business corporation ("SBC") and the shares are qualified small business corporation ("QSBC") shares. Lynn owns 100% of the common shares of the company and the shares have a paid-up capital ("PUC" of $500 and an adjusted cost base ("ACB") of $1,000. Lynn has used all but $450,000 of her capital gains exemption. The company does not have a General Rate Income Pool ("GRIP") balance.

Lynn's son, Brad, age 35 is interested in taking over the Davies Inc. business operations. They have both agreed on the appraised value of $1,050,000 for Lynn's common shares of the company. 

Lynn would like to retain control of Davies Inc. while she is alive. She would also like the company to fund her retirement as she does not have a lot of retirement savings. On her death, Lynn would like her daughter Samantha, age 32, and Brad to benefit equally from any amount representing the remaining portion of the existing fair market value of Davies Inc.  Lynn wants Brad alone to benefit from all of the future growth of the business because Samantha will not be involved in the Davies Inc. business. Lynn wants to minimize conflict between Brad and Samantha.

Lynn is in the highest tax bracket. She does not have a cumulative net investment loss ("CNIL") balance and has not deducted allowable business investment losses in the past.

The following plans are being considered to transfer the future growth of the business to Brad.

Plan A

Brad will acquire the shares of Davies Inc. using a newly incorporated holding company (Holdco), in which he will own all of the common shares.  Lynn will transfer her shares of Davies Inc. to Holdco for consideration from HoldCo consisting of debt of $451,000 and shares with a fair market value of $599,000. Lynn and Holdco will elect under subsection 85(1) at an elected amount of $451,000, in order to use up Lynn's remaining capital gains exemption.

Plan B

The capital structure of Davies Inc. will be reorganized. Lynn will exchange her existing common shares of Davies Inc. for debt of $451,000 issued by Davies Inc. and shares of Davies Inc., with a fair market value of $599,000. Brad will be issued new common shares of Davies Inc. for a nominal amount.

 Required:

1. Review the steps in each of the above plans from a technical perspective. Identify and qualitatively analyze the applicable Income Tax Act legislation relevant to each step in the plan. Identify and analyze any potential risks and how they can be mitigated. Provide all related calculations using the templates provided.
2. Identify each of Lynn's objectives. Discuss if Lynn's objectives will be met by each of the above plans and what can be done to ensure that they are met.
3. Recommend one of the above plans. Recommend improvements that will minimize tax and/or meet Lynn's objectives.

Answer rating: 100% (QA)

Lynns Objectives Retain control of Davies Inc while alive Lynn wants to ensure she maintains control of the business during her lifetime Use the remai... View the full answer