Auntie Annie has prepared Note 1 which estimates SPS's Balance Sheet as of December

31, 2019 for her company De La Cruz Law Inc (DLC). Auntie Annie wants to incorporate it since she will pay fewer taxes.

Annie currently operates DLC in the unincorporated form and needs to know what issues she should

consider in deciding whether or not the business should be incorporated. She anticipates that the

business will earn $150,000 for the year ended December 31, 2019 and assumes that the same

income will be earned in 2020 within a corporation that will have a December 31 year-end.

If the assets of the business are transferred on January 1, 2020 (as per the information presented in

Exhibit 1), Annie wants to know how the transfer can be accomplished and the relevant tax

implications to ensure that the transfer will be tax-free. She has heard about the ITA 85(1) election.

She also needs to know what issues to consider in determining the value at which the assets

should be transferred for tax purposes and any other pertinent advice regarding his decision.

Finally, she needs you to recommend a great compensation package that would be mutually

beneficial from a tax point of view for his company and his family. They need about $60,000 cash per year.

ESTIMATED BALANCE SHEET

AS AT DECEMBER 31,2019

Bank $ 3,400

Accounts receivable (FMV $21,000) 25,000

Less allowance for doubtful accounts 3,000 22,000

Inventory at cost (FMV $5,000) 4,000

Shares of Public Co., at cost (FMV $2,000) 5,000

LandLot 1 at cost (FMV $45,000) 20,000

LandLot 2 at cost (FMV $80,000) 60,000

Truck at net book value (Cost $20,000; FMV $13,000) 12,000

Equipment at net book value (Cost $12,000; FMV $6,000) 8,600

$ 135 000

Accounts payable $ 6,000

Proprietor's equity 129,000

$ 135,000

Notes:

1.Annie acquired the lots of land in 2015. His intention is to sell Lot 1 as soon as the FMV exceeds

$50,000 and to erect a building for his business on Lot 2. She recently received the building

permit and plans to commence construction in the summer of 2020.

2.The undepreciated capital cost is the same as the net book value of the depreciable assets.

3.Annie was recently offered $200,000 for all the assets, including the cash, in her business and

believes that this is an acceptable value as at January 1, 2020.

4.Annie's pension and investment income is sufficient to ensure that any additional income will be

subject to the 29% federal tax rate. She also has a $2,000 net capital loss carried forward from

2015 which she would like to utilize as soon as possible.

Question:

For a tax-free transfer, list all the assets that should or should not be

transferred via ITA 85(1); recommend other tax-efficient ways to transfer the needed assets; the

tax consequences of the asset transfer, regardless of how they are transferred; the implications

of the legally stated capital, the PUC, ACB of the consideration that should be received, and

any other relevant issues associated with the transfer of the business assets to a corp.