Jean Hill, a Canadian resident, transfers 100 percent of the shares in Hill Inc. to a new company, Jean Ltd. The Hill Inc. shares have an adjusted cost base and PUC of $100,000, and a fair market value of $1,000,000. The transfer is made under the provisions of ITA 85 at an elected value of $850,000. Ms. Hill receives cash of $850,000 and retractable preferred shares with a fair market value of $150,000. What are the immediate tax consequences to Ms. Hill, resulting from this transfer?

Question

Quizplus · Accepted Answer

The transfer of shares at an elected value of $850,000 under ITA 85 triggers an ITA 84.1(1) deemed dividend of $750,000, which Ms. Hill will need to report as taxable income. There is no capital gain in this scenario as Ms. Hill received cash and preferred shares, which have a combined value of $1,000,000, equal to the fair market value of the shares transferred.

Jean Hill, a Canadian Resident, Transfers 100 Percent of the Shares