Reference no: EM132967012

Mr. Onit, age 60, is a retailer who incorporated his business in 2008 under the name of Onit Ltd. The common shares of Onit Ltd., held by Mr. Onit, have a paid-up capital (PUC) value and adjusted cost base (ACB) for tax purposes of $2,500 and were issued to Mr. Onit on incorporation. The present fair market value of the shares is $4,000,000. Mr. Onit wishes to incorporate a holding company, HoldOnitco Ltd., for estate planning purposes. His daughter, age 34, will invest $45,000 of her own money in 500 common shares with a total stated value of $10. His wife will invest $12,500 of her own money in 6% voting preferred shares with a total stated value of $100. He will take back as partial consideration for his shares of Onit Ltd. 3,500 voting, retractable 6% preferred shares with a total retraction value of $3,500,000. In addition, he will take back $500,000 in cash. He will elect with the corporation to transfer his shares of Onit Ltd. at $500,000 to use up the remainder of his capital gains exemption.

REQUIRED

Problem (A) Outline the tax consequences of Mr. Onit's plan supported by your computations assuming:

(i) an ultimate redemption of the 6% preferred shares at their fair market value; and
(ii) an arm's length sale of the 6% preferred shares.

Problem (B) Indicate briefly your recommendations as to how Mr. Onit might rearrange his plan to avoid any problems arising from the plan presented.