Frederick Fence owned 300,000 shares of ABC Ltd., a publicly traded Canadian corporation. These shares, including brokerage fees, were acquired at a cost of $600,000. Based on current trading values, these shares are now worth $990,000.

The following four cases make different assumptions as to the identity of the purchaser, the circumstances of the sale, and the proceeds of disposition. In each case, assume that the purchaser immediately resold the shares for their fair market value of $990,000.

Case 1

Because Frederick needed funds to acquire a house for his father, he sold the shares to an arm’s length party for $990,000.

Case 2

Frederick gifted the shares to his 16-year-old daughter.

Case 3

Frederick sold the shares to his brother for $150,000 to create a loss, as Frederick had realized significant capital gains during the current year. Since his brother had no other source of income, Frederick’s brother would be taxed on the gain from the resale at the minimum federal rate.

Case 4

Frederick’s mother had realized a large amount of capital gains during the current year. To help his mother, Frederick sold the shares to her for $1,200,000. Frederick’s mother planned to use the loss on the immediate resale to offset her capital gains.

Required:

For each of the cases, advise Frederick of the tax consequences that will result from the disposition, and indicate the tax consequences to the purchaser of the shares when they are resold. In addition, in cases 3 and 4, indicate whether the stated tax planning objective was achieved.

Answer rating: 100% (QA)

The tax consequences on shares disposition would depend on its holding period from the acquisition d... View the full answer