Mr. Soppressata, age 60, is a retailer who incorporated his business in 2009 under the name of Salami Ltd. The common shares of Salami Ltd., held by Mr. Soppressata, have a paid-up capital (PUC) value and adjusted cost base (ACB) for tax purposes of $2,500 and were issued to Mr. Soppressata on incorporation. The present fair market value of the shares is $4,000,000. Mr. Soppressata wishes to incorporate a holding company, Mortadella Ltd., for estate planning purposes. His daughter, age 34, will invest $45,000 of her own money in 500 common shares with a total stated value of $10. His wife will invest $12,500 of her own money in 6% voting preferred shares with a total stated value of $100. He will take back as partial consideration for his shares of Salami Ltd. 3,500 voting, retractable 6% preferred shares with a total retraction value of $3,500,000. In addition, he will take back $500,000 in cash. He will elect with the corporation to transfer his shares of Salami Ltd. at $500,000 to use up the remainder of his capital gains exemption.

REQUIRED:

Outline the tax consequences of Mr. Soppressata’s plan supported by your computations assuming: an ultimate redemption of the 6% preferred shares at their fair market value; and an arm’s length sale of the 6% preferred shares. 

Indicate briefly your recommendations as to how Mr. Soppressata might rearrange his plan to avoid any problems arising from the plan presented.