ITA 51

Charlie owns $10,000 of debentures of CCL, a large Canadian private corporation. The debentures were purchased several years ago at their face value and each $100 debenture is convertible at the option of the holder on July 1st of each year into either: (1) 16 Class B non-voting common shares of the corporation issued from treasury; or (2) Cash paid from the company equal to the value of 8 Class B common shares at the time of conversion and 8 Class B common shares of the corporation. The Class B common shares are valued each year and the valuation report has valued the shares at $115 each. Charlie plans to exercise his conversion privilege on July 1st but is unsure of which alternative to choose. Charlie is not related to any shareholders of the company. It is projected that the shares of CCL will increase in value by 25% within two years. Charlie would like to understand how a sale of the shares will be taxed in the future. Charlie is in the highest tax bracket and has all of his remaining capital gains exemption available. The shares of CCL will be QSBC shares to Charlie after he holds them for the two years. -REQUIRED (A) Assess the situation. (B) Identify the issues. (C) Analyze the issues.