Jason is the owner-manager of Perfecto Cleaning ("PC"), a CCPC in the business of offering commercial cleaning services to hotels, office buildings and banquet halls. Jason has been in business for 35 years and is ready for retirement. Jason always saw his long-time employee Gary like the son he never had. As a result, the business succession plan is for Jason to sell his shares of PC to Gary for $1 million. Gary will purchase Jason's shares for $1,000,000 (consisting of $200,000 cash and a promissory note for $800,000 bearing interest at 5% per annum). The plan is to use $100,000 of PC's earnings less any applicable corporate taxes to pay a dividend to Gary each year. Gary will pay personal tax on the dividend and use whatever is left to gradually pay off the promissory note to Jason. Alternatively, this could also be structured so that the PC shares are owned 100% by a holding company and any promissory note owing to Jason is also paid by the holding company using dividends from PC, but Gary is not sure if there is any tax advantage to doing this and does not want to incur extra professional fees if there is no benefit. Other information: The corporate tax rate is 13% Gary's personal tax rate on non-eligible dividends is 47% PC does not have any eligible or non-eligible RDTOH and does not generate any aggregate investment income. The shares of PC qualify for the capital gains exemption. PC has safe income on hand in excess of any dividends contemplated in this plan Required: Should the holding company be used in the proposed transaction?

Explain why or why not. Hint: you do not need to explain how the holding company will be set up. You should focus on what the tax implications on the proposed repayment plan would be with or without the holding company.