Cole and Barker each own 50% of the shares of NRS Ltd., a Canadian-controlled private corporation. NRS had conducted a small active business, which was closed down two years ago, in late 20X0.The corporation sold its assets at that time and used the resulting cash to purchase several commercial real estate properties. At present, the corporation owns three parcels of real estate (all purchased before March 19, 2007), as follows:

Barker has recently informed Cole that he intends to withdraw as a shareholder of the company and wants to convert his shares to cash. In addition, he wants to own outright all of the real estate known as Parcel 3.The shareholders€™ agreement calls for a wind-up of the corporation when one shareholder wishes to leave; however, Cole wants to keep NRS for himself. The shareholders have therefore agreed to the following:
1. Barker will dispose of his shares for cash at fair market value (transaction date: January 1, 20X3).
2. Immediately thereafter, Barker will purchase from NRS, for cash, the Parcel 3 real estate (transaction date: January 2, 20X3).
At December 31, 20X2, the year end of NRS, the corporate balance sheet is as follows:

Barker had acquired his shares for $5,000.The paid-up capital of his shares is $1,000, as indicated on the balance sheet (1„2 of $2,000). The corporation€™s retained earnings of $138,000 consist of a number of items from past years, as follows:

Barker€™s personal marginal tax rate is 28% on eligible dividends and 35% on non-eligible dividends received (net of the dividend tax credit) and 45% on other taxable income. He has already used up his capital gain deduction.
Required:
1.In view of the shareholders€™ agreement, determine the value of the common shares owned by Barker.
2. What action should NRS take before Barker disposes of his shares? What effect will this have on the value of those shares and on the related tax when the shares are sold?
3. Describe the two basic ways in which Barker can dispose of his NRS shares, and recommend the best alternative. Show calculations to support your recommendation.
4. What are the tax consequences to NRS in 20X3 as a result of the sale of the parcel 3 real estate?

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Current fair market value Cost Parcel 1 (acquired 20X0) Land Building $10,000 40,000 $16,000 60,000 Parcel 2 (acquired 20X0) Land Building 30,000 70,000 40,000 80,000 Parcel 3 (acquired 20X1) Land Building 15,000 30,000 23,000 42,000 Assets Cash Land (parcels 1, 2, 3) at cost Buildings (parcels 1, 2, 3) at cost Accounting depreciation $ 10,000 55,000 $140,000 (25.000) 115.000 $180 000 Liabilities and Shareholders' Equity Mortgage payable $ 40,000 Shareholders' equity Common shares (paid-up capital) S 2,000 Retained earnings 138000 140,000 $180 000 Income before Income after tax tax Tax $98,570 $15,770 Previous business operations Net rentals on real estate (16%) $ 82,800 (after capital cost allowance) Taxable capital gain Non-taxable portion of capital gain 2,200 33,000 20.000 $138.000 4,204 2,004 30,061 -0 (41%+623%) (41%+623%) 63,061 $185.835 $47.835