Mr. Senior owns all of the issued shares of X Ltd. These common shares have an ACB and PUC of $100 and are worth $1,200,000. Senior would like to freeze his interest in the company at today’s value so that future increases in value accrue to his son, Mark. To accomplish this, Senior exchanged his common shares for preferred shares of X in the course of a reorganization of share capital. The preferred shares are redeemable for $1,200,000. Mark then acquired newly issued common shares of X for $100.
Determine the tax implications for Mr. Senior. Income tax reference: ITA 84(3), 86(1), (2.1).