Marian Soft opened an unincorporated software business in 2008. The business, known as Home Software, operated successfully for a number of years, becoming sufficiently profitable that Marian no longer needed all of the income that was being produced by the business. Given this, she was advised that she could defer a significant amount of the taxes by incorporating her business and that she could avoid taxation at the time of the incorporation by using ITA 85 (1).
On January 1, 2013, the assets of the business have tax values totalling $1,373,000 and fair market values estimated to total $1,650,000. On this date the assets are transferred to a new corporation, Home Software Inc., at an elected value of $1,373,000. As consideration, Marian takes back a note payable for $1,000,000 and common shares with a fair market value of $650,000. The new Company will have a December 31 year end.
The business continues to operate very successfully and, on January 1, 2018, the assets of the business have tax values of $5,263,000. The fair market value of these assets is $6,406,000.
In recent years, Marians adult son Jeff has been actively involved in the running of the business. This fact, along with the desire to retire from the business in a few years, has led her to decide to transfer the future growth of the business to Jeff. After consultation with her tax adviser, she is going to exchange her common shares in Home Software Inc. for $906,000 in cash and redeemable preferred shares with a fair market value of $5,500,000. Subsequent to this exchange, her son Jeff will invest 410,000 for new common shares in Home Software Inc.
Home Software Inc. does not have a GRIP balance or an RDTOH balance in January 1, 2018.
Required:
A. Determine the tax consequences for Marian that will result from her exchange of shares. As part of your answer, you should indicate both the adjusted cost base and the PUC of her preferred shares.
B. Determine the tax consequences for Marian that would result from the redemption of her preferred shares on February 1, 2018 for their fair market value of $5,500,000.
