Question #20 - Section 85 Rollover (6 marks)

Ms. Debbie Gaudette has operated her unincorporated business for a number of years.The tangible assets of this business

have a FMV of $1,000,000 and a tax cost of $200,000.In addition, as the business has been extremely profitable, she

estimates that the business has goodwill of $75,000. The total liabilities of the business amount to $0. As she no longer

needs all of the income that the business is producing, she would like to transfer the business to a new CCPC and, in order

to defer taxation, she would like to use the provisions of ITA 85 for the transfer. She will make the transfer at an elected

value of $200,000.The corporation will issue a $25,000 cheque to Ms. Gaudette.Other consideration will be made up of

redeemable preferred shares with a fair market value of $50,000 and common shares with a fair market value of

$950,000.Any dividends will be eligible (38% gross-up).

Required: Determine all the following in the boxes provided:

A. The range of elected values (minimum and maximum would be: (1 mark)

B. How much of the elected value will be allocated to the ACB of the preferred shares and ACB of the common

shares: (2 marks)

C. Calculate the PUC of both the common shaes and preferred shares: (2 marks)

D. The tax consequences of the preferred stock redemption would be as follows: (2 marks)