Gil and Ruth George have been friends of yours for many years. They have come to you for advice

on their estate plan since they want a second opinion to make sure it is going to do what they hope.

Orillia Resorts Inc. (Resorts) is a company purchased by Gil about 20 years ago to operate a tourist

resort. Gil originally paid $200,000 for all of the 1,000 common shares of the company, which is now

worth $2.4 million as a result of the increase in the value of lakefront property. The common shares have a paid-up capital of $1,000.

They have found that they are no longer able to look after the resort, now that they are both 68

years old. Also, they feel that they would like to spend their summers travelling, instead of working 14

hours a day. They have had discussions with their lawyer and, on her recommendation, are now in the

process of transferring the business to their only child, their daughter, Gale, who has been working in

the business and is ready to take over.

Gil has never used his capital gains exemption. The only assets in Resorts are the property and

equipment used in the business. They have not accumulated any investments personally so they will still

be relying on the business for their retirement income. As a result, they would like to keep voting control as long as they have an investment in the company.

The plan proposed by their lawyer has the following steps.

(1) Gil will exchange his common shares of Resorts for 2,400 voting Class A preference shares.

Then Gale will purchase 1,000 common shares from the company for $1 per share. The preference shares are redeemable and retractable at $1,000 each with a non-cumulative dividend rate of up to 7%.

(2) Gil will then transfer the preference shares of Resorts to a holding company (Holdco) in

exchange for 13,331 Class B preference shares of Holdco plus a note for $1,066,900. On this

transfer, he will elect under section 85 at a value of $1,066,912 to use up his capital gains

exemption. The preference shares are redeemable and retractable at $100 each with a noncumulative dividend rate of up to 7%.

(3) Ruth will pay $1,000 of her own money for 1,000 common shares of Holdco so she can receive

dividends in their retirement years.

The plan is that Resorts will pay a 7% dividend each year to Holdco and then Gil and Ruth will

decide how much they will take out of Holdco to live on. This will give them some investment assets

outside of the business to provide some security for them in retirement.

Gil and Ruth would like advice on the following issues:

(1) Does the freeze work technically?

(2) How will they continue to receive income from the business in their retirement?

(3) Is there a better plan?

Required:

Before meeting with them :

(A) Assess the situation.

(B) Identify the issues.

(C) Analyze the issues.

(D) Advise/recommend