Jerome Owen owns 70 percent of the common shares of Nexto Ltd. Jerome's shares have an adjusted cost base of $1,050,000. The Nexto common shares have a total PUC of $2,300,000 and a total fair market value of $2,500,000. Using the provisions of ITA 86, Jerome exchanged his shares for cash of $1,050,000 and preferred shares with a legal stated capital and fair market value of $700,000. What is the PUC of Jerome's preferred shares?

Question

Quizplus · Accepted Answer

Under ITA 86, when common shares are exchanged for preferred shares, the PUC of the preferred shares is calculated by multiplying the adjusted cost base of the common shares by the ratio of the fair market value of the preferred shares to the fair market value of the common shares.

In this case, the ratio is 700,000 / 2,500,000 = 0.28.

Therefore, the PUC of the preferred shares is $1,050,000 x 0.28 = $294,000.

However, since the preferred shares have a stated capital of $700,000, the PUC is limited to this amount.

Therefore, the PUC of Jerome's preferred shares is $560,000 (the lower of $294,000 and $700,000).

Jerome Owen Owns 70 Percent of the Common Shares of Nexto