Brad Pits started a small business, Aniston Hair Products, in 2021 as a proprietorship. The company distributes hair products and styling equipment to hair salons. Given the level of profits he is realizing, he would like to incorporate in January 2023. The revenues for the business for 2022 were $50,000 and as a result Brad registered the business for HST during the year. He is expecting revenues to increase in 2023 to $90,000. The latest balance sheet of his proprietorship as of December 31, 2022 with the estimated values of the assets of the business is as follows. The company’s first taxation year end will be December 31, 2023. Brad and his wife Jennifer will each own 50% of the 100 common shares of the new corporation to be issued to them on incorporation for $50 each. Brad plans to take back preferred shares on the transfer of the business assets to his new corporation. Brad wants to receive the maximum possible non-share consideration on the transfer, without any adverse tax consequences, by assuming existing debt of the business and issuing new debt as a note receivable.
Aniston Hair Products
Balance Sheet December 31, 2022
Assets FMV Cash 5,000

Accounts Receivable 15,00014,000

Leasehold Improvements (Cost)9,0007,000

Office Equipment (Cost)10,0009,50039,000

Liabilities Bank loan 4,000

Accounts payable 5,0009,000

Equity 30,00039,000

UCCLeasehold Improvements (Class 13)6,000

Office Equipment (Class 8)9,000
Brad advises you that the current value of the goodwill is $20,000. Brad does not want to pay any tax on the transfer of his business to the corporation. Once incorporated, he would like to use the future taxes method of reporting for income taxes.
Assume a provincial corporate tax rate of 4% applicable to income eligible for the small business deduction and 12% on all other income.
Required:
1. Determine the elected amounts, and optimal share and non-share consideration for the properties that can be transferred using a Section 85 election. Your election should eliminate any tax on the transfer for Brad and allow him to easily access cash from the company in the future.
2. Determine the amount and type of consideration for the properties that cannot be transferred using Section 85.
3. Determine adjusted cost base (ACB), capital cost (CC) and undepreciated capital cost (UCC) amounts for the assets owned by the corporation following the transfer.
4. Determine Brad’s adjusted cost base and paid up capital (PUC) of the preferred shares he will take back on the transfer of the properties to the corporation.