Large Cois a Canadian Controlled Private Corporation That Acquired 100% of of the Shares

question 5

Essay

Large Co.is a Canadian controlled private corporation that acquired 100% of the shares of Small Co.in 2020.Large Co.paid $50,000 for the shares.Big Co., an arm's length corporation, is now interested in purchasing Large Co.'s investment in Small Co.Small Co.'s shares are currently worth $500,000 and the retained earnings of the company are $200,000.In order to reduce the fair market value of the shares, Small Co.will pay a dividend of $450,000 to Large Co.Large Co.will then sell the shares to Big Co.for $50,000.Small Co.'s RDTOH balances are nil.
Required:
A.Applying the anti-avoidance rules of Subsection 55(2), what are the tax implications resulting from these transactions? Identify 1) the capital gain on the sale of the shares to Big Co., and 2) the tax effects of the $450,000 dividend to Large Co.
B.What is the value of Small Co.'s safe income?

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