Jeri Nardwal owns 80 percent of the common shares of Nardwal Ltd. Her son owns the other 20 percent. Her common shares have an adjusted cost base and PUC of $960,000. The fair market value of her shares is $4,800,000. She exchanges these shares for $500,000 in cash and preferred shares with a legal stated capital and fair market value of $3,840,000. What is the adjusted cost base of the preferred shares?

Question

Quizplus · Accepted Answer

When Jeri exchanges her common shares for preferred shares plus cash, there is no capital gain or loss as long as the fair market value of the preferred shares received is equal to the fair market value of the common shares given up. Since the fair market value of the preferred shares is $3,840,000 and the fair market value of the common shares is also $3,840,000 ($4,800,000 x 80%), there is no capital gain or loss. Therefore, the adjusted cost base of the preferred shares is nil.

Jeri Nardwal Owns 80 Percent of the Common Shares of Nardwal