Income taxation practice exam problem:

Remaining Time: 1 hour, 10 minutes, 41 seconds. Question Completion Status: QUESTION 2 Question 2 (40 marks, 70 minutes) Background Information Kathleen & George Breen have been the owners of Sunset Resorts Inc. ("Sunset") for 40 years. Sunset owns and rents idyllic properties in northern Ontario. Kathleen & George live on-site at the resort. George originally purchased the shares in Sunset for $50,000. The paid up capital of the shares is $1,000. Because of the increase in land values, the Sunset shares have been valued at $2,200,000. Throughout the years, their two children James and Margaret have helped run the resort, both year round and as summer employment. Upon graduating from high school, Margaret pursued a medical degree and now runs a medical practice in a town close to Sunset. James purused a program in Hospitality & Tourism and has contined to run the resort with George & Kathleen. He currently lives at the resort with his spouse and their 2 children. Kathleen & George are both turning 62 years old this summer and have decided to retire. They wish to spend the winter season in a warmer climate and spend time travelling. Margaret feels that her status as the elder child, and medical doctor, entitles her to input on the operations of the resort. James feels that his sister has no experience in the resort operation and he should make all business decisions. Kathleen & George feel that Margaret has a secure career and that James has the skills required to run the resort. Howeve, they want to provide for both children and just wish the children could co-operate. George has never used any of the capital gains exemption of $866,912 for small business corporations. Both children have consulted outside parties and presented estate plans to their parents. Part A (15 marks, 26 minutes) Margaret's proposal Margaret and James will incorporate a holding company (MAJ Inc.), in which they will each own 50% all of the common shares. George will transfer his shares of Resorts to MAJ, electing under sbsection 85(1) with an elected transfer price of $916,912. As consideration, George will receive MAJ debt of $916,912 and retractable, redeemable, 8% preferred shares with a legal stated capital and fair market value of $1,283,088. Required: 1. Identify the issue with Margaret's plan and explain why it is an issue. i.e., what is the negative consequence(s) of this plan why (This should be a three sentence answer) Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All AnswersQuestion Completion Status: Part A (15 marks, 26 minutes) Margaret's proposal Margaret and James will incorporate a holding company (MAJ Inc.), in which they will each own 50% all of the common shares. George will transfer his shares of Resorts to MAJ, electing under sbsection 85(1) with an elected transfer price of $916,912. As consideration, George will receive MAJ debt of $916,912 and retractable, redeemable, 8% preferred shares with a legal stated capital and fair market value of $1,283,088. Required: 1. Identify the issue with Margaret's plan and explain why it is an issue. i.e., what is the negative consequence(s) of this plan why (This should be a three sentence answer) 2. Propose changes to the plan to remedy the negative consequence(s) identified. Do not change the fundamental final structure of the proposal. Illustrate why your plan is superior through the calculation of income triggered and the ACB and PUC of shares issued. Show all technical details. 3. Evaluate whether the revised plan meets the objectives of the parties. Part B (15 marks, 26 minutes) James' proposal The capital structure of Resorts will be reorganized under section 86. George will exchange his common shares of Resorts for debt of $916,912 issued by Resorts and retractable, redeemeable 8% preferred shares of Resorts, with a legal stated capital and fair market value of $1,283,088. James and Margaret will subscribe for common shares in Resorts. Required: 1. Identify the issue with James' plan and explain why it is an issue. i.e., what is the negative consequence(s) of this plan and why (This should be a three sentence answer) 2 . Propose changes to the plan to remedy the negative consequence(s) identified. Do not change the fundamental final structure of the proposal. Illustrate why your plan is superior through the calculation of income triggered and the ACB and PUC of shares issued. Show all technical details. 3. Evaluate whether the revised plan meets the objectives of the parties. Part C. (10 marks, 18 minutes) Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers hp