Bob Smith incorporated Smith Inc. 20 years ago and owns all of the shares himself. Smith Inc. is a "small business corporation" which carries on an active business in Victoria, B.C. Thirteen years ago, Bob felt that he would like to involve his wife Betty in the share ownership and, on the advice of his accountant, Holdco Inc. was incorporated with Bob and Betty each owning 50 common shares which they bought for $1 each with their own funds. Bob then transferred his common shares of Smith Inc., which were worth $600,000, to Holdco Inc. on a tax-free basis. As consideration for the transfer, Bob received 6% non-cumulative preference shares with a fair market value of $600,000.
On July 1, 2012, Smith Inc. sold some property that was used in the active business for net proceeds of $150,000. This amount was then paid as a dividend from Smith Inc. to Holdco Inc. on the same day. Bob and Betty plan to have the corporation invest this amount and use it as capital for their retirement. After the sale of the property and the payment of the dividend to Holdco Inc., Smith Inc. has a fair market value of $800,000 and is still a "small business corporation". Bob received $6,000 in dividends on his preferred shares of Holdco Inc.
REQUIRED
Determine the tax consequences of the 2012 transactions as they relate to the corporate attribution rules. Assume that the prescribed rate for 2012 was 4%.