Brian Snow Owns All of the Common Shares of Treeline

question 1

Essay

Brian Snow owns all of the common shares of Treeline Boots Ltd., a Canadian-controlled private corporation. The shares have a fair market value of $150,000, an ACB of $30,000, and a PUC of $5,000. Brian would like to retire soon, so he has offered the company to his son, Walter. Walter is young and does not have a lot of disposable income, and as such, a Section 86(1) reorganization of share capital has been recommended to Brian. Brian's common shares will be converted to preferred shares, redeemable for $150,000. Walter will then purchase a new class of common shares at a nominal value.
Required:
Discuss the immediate tax consequences of the reorganization of share capital for Brian, indicating the ACB and the PUC of the new preferred shares.

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Definitions:

Variable Costs

Costs that vary directly with the level of production or sales volume, such as materials and labor.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance.

After-tax Profit

The net income of a company after all taxes have been deducted from revenues.

Industry Life Cycle

A concept describing the stages of growth and development that a sector or industry goes through, from emergence to decline.