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 established by Gil about 20 years ago to operate a tourist resort. Gil had originally contributed $100 for 100 shares of the company, which is now worth $2.4 million as a result of the increase in the value of lakefront property.

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.

The plan proposed by their lawyer has the following steps.

• Gil will exchange his common shares of Orillia Resorts Inc. for 2,400 non-voting 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%.
• Gil will then transfer the preference shares of Orillia Resorts Inc. to a holding company (Holdco) in exchange for 15,863 preference shares of Holdco plus cash of $813,700. On this transfer, he will elect under section 85 at a value of $813,700 to use up his capital gain exemption. The preference shares are redeemable and retractable at $100 each with a non-cumulative dividend rate of up to 7%.
• Ruth will pay $1,000 for 1,000 common shares of Holdco so she can receive dividends in their retirement years.

The plan is that Orillia Resorts Inc. 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 your advice on the following issues:

• Does the freeze work technically?
• Is there a better plan?