Samantha is an architect, and she is also the sole shareholder of Sam's Shoes Inc. She wants to semi-retire from the shoe business soon and her three employees have all expressed great interest in taking over the company. However, they do
not have the financial resources necessary to make the purchase at this point in
time. Samantha is not in a hurry to receive the proceeds from the business as she will continue with her architectural work for another five years.
Samantha has heard about something called a 'share reorganization' and she has asked you to explain what it means and if it would apply to her situation.
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Question

Quizplus · Accepted Answer

The Answer is A) Subsection 86(1) of the Income Tax Act allows shareholders to
reorganize their shares by exchanging their common shares for preferred shares of the same value in the corporation. New common shares are then issued to the purchasers of the business, often for a nominal amount.
This method would satisfy Samantha's wish to semi-retire, as the
employees would become the new common shareholders and would then run the company. It would also satisfy the employees' desire to purchase the company with limited resources.
B) A significant risk factor involved with such a transaction is that
Samantha's ability to realize the value of her preferred shares rests with her employees' ability to run the shoe store once she is no longer in charge.

Samantha Is an Architect, and She Is Also the Sole