Brian Snow owns all of the common shares of Treeline Boots Ltd., a Canadian-controlled private corporation. The shares have a fair market value of $150,000, an ACB of $30,000, and a PUC of $5,000. Brian would like to retire soon, so he has offered the company to his son, Walter. Walter is young and does not have a lot of disposable income, and as such, a Section 86(1) reorganization of share capital has been recommended to Brian. Brian's common shares will be converted to preferred shares, redeemable for $150,000. Walter will then purchase a new class of common shares at a nominal value.
Required:
Discuss the immediate tax consequences of the reorganization of share capital for Brian, indicating the ACB and the PUC of the new preferred shares.

Question

Quizplus · Accepted Answer

The Answer is Income tax reference: ITA 86(1) Section 86(1) allows for a deferral on the accrued gain of the common shares through the exchange of the shares. The common shares are deemed to have been disposed of at their ACB of $30,000, which then becomes the ACB of the new preferred shares. As there is no non-share consideration, a deemed dividend does not arise. Since the non-share consideration is NIL, the PUC of the new shares is equal to the $5,000 PUC of the old shares.

Brian Snow Owns All of the Common Shares of Treeline