ABC Co. is a Canadian controlled private corporation that acquired 100% of the shares of XYZ Co. in Year 1 for $50000. New Co., an arm's length corporation, is now interested in purchasing ABC Co.'s investment in XYZ Co. XYZ Co.'s shares are currently worth $400000 and the retained earnings of the company are $100000. To reduce the fair market value of the shares, XYZ Co. will pay a dividend of $350000 to ABC Co. and ABC Co. will then sell the shares to New Co. for $50000. XYZ Co.'s RTDOH balances are nil. Applying the anti-avoidance rules of Subsection 55(2), what is the tax effect of the $350000 dividend?
a. Capital gain of $350000 and tax-free dividend of $50000.
b. Capital gain of $250000 and tax-free dividend of $100000
c. Tax-free dividend of $350000 and capital gain of $50000
d. Tax-free dividend of $250000 and capital gain of $100000