Holding Ltd., a Canadian-controlled private corporation, acquired 100% of the shares of Operating Ltd., on incorporation in

Question:

Holding Ltd., a Canadian-controlled private corporation, acquired 100% of the shares of Operating Ltd., on incorporation in 20X0 for $100,000. The shares of Operating Ltd. have appreciated in value since then. A large part of the share appreciation is attributed to land Operating Ltd owns which has doubled in value. The retained earnings of Operating Ltd. are currently $500,000.
An arm’s length company, Acquisition Corporation, has offered to purchase 100% of the shares of Operating Ltd. for $900,000. In the course of the acquisition discussions, Holding Ltd. causes Operating Ltd. to pay a of $500,000. Acquisition Ltd. then buys 100% of the Operating Ltd. shares for $400,000.
Required:
Explain the tax implications for Holding Ltd. on the sale of the shares of Operating Ltd.
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...