In 2012, Sandy O'Brien opened a business, Sandy's Frames, that specialized in providing frames for high end paintings and drawings. From 2012 through 2015, he operated the business as a proprietorship. He did not incorporate because he needed all of the income produced by the business to cover his living expenses. However, by 2015 his profits had increased to the point where he no longer needed all of the income produced by the business. Given this, he decided to incorporate. His accountant advised him that he could avoid current taxation by using the provisions of ITA 85(1) to transfer his business assets to the new corporation. To facilitate this, on January 1, 2016, the following values were established for the assets of the business:

Tax Values Of The Business Assets $1,820,000

Fair Market Value Of The Business Assets $3,140,000

On this date, the assets are transferred to a new corporation, Frames Ltd., at an elected value of $1,820,000.

As consideration, Sandy took back a note payable for $900,000, redeemable preferred shares with a fair market value of $920,000, and 6,950 common shares with a fair market value of $1,320,000. No other shares were issued during the years under consideration. Over the next few years, the business continues to expand and prosper and, on January 1, 2020, he receives an offer from Conglomerate Inc., a large public company, for all of the common shares. Under terms of this offer, Sandy will give up all of the common shares of Frames Ltd. in return for a separate class of shares issued by Conglomerate Inc. These shares have a fair market value of $1,970,000. In addition, subsequent to the exchange transaction, Sandy's preferred shares will be redeemed for $920,000. Frames Ltd. does not have GRIP balance or an RDTOH balance at this time. Sandy and the controlling shareholders of Conglomerate Inc. deal with each other at arm's length. While Sandy has been very successful with his business, he has made a number of very bad real estate investments. As a consequence, as of January 1, 2020, he has a $420,000 net capital loss carry forward. Assume that Frames Ltd. does not meet the criteria for qualification as a small business corporation.

Required:

A. Advise Sandy with respect to the tax consequences that would arise for him from the redemption of his preferred shares and the acceptance of the offer from the public company for the exchange of shares. Your answer should consider both the application of ITA 85.1 and opting out of this provision.

B. Indicate the adjusted cost base of the Frames Inc. common shares on the books of Conglomerate Ltd.

C. Advise Sandy as to the alternative approaches that could be used to utilize his net capital loss carry forward in conjunction with the share exchange.