Ms. Wilhelmena Paul started Paul Ltd., a Canadian controlled private corporation, in 1973 with funds from the life insurance payout she received when her husband passed away. She purchased 10,000 shares of Paul Ltd. for $60 per share giving it $600,000 of paid up capital.

When she wanted to retire, her son Simon Paul bought 80% and her granddaughter (Simons

daughter), Janey Paul, bought the remaining 20% of the shares for $640,000 and $160,000 respectively. (Total proceeds to Simons mother on selling her shares were $800,000.) The company has thrived, and the current fair market value of all the shares of the company is $1,600,000.

In May, 2019, in preparation for retirement, Simon arranges to exchange his common shares for cash of $320,000 and redeemable preferred shares with a fair market value of $780,000. The legal stated capital of these preferred shares is also $780,000. On September 28, 2019, Paul Ltd. redeems the preferred shares.

Mr. Paul has fully utilized his lifetime capital gains deduction. The Company has a nil balance in its General Rate Income Pool (GRIP) account for all years under consideration.

Required:

A. With respect to this reorganization, calculate:

the amount of any gift that Mr. Paul has made to his daughter; the PUC of the new preferred shares; the adjusted cost base for the new preferred shares; the amount of any deemed dividends arising on the exchange; and any capital gain or loss resulting from the exchange of the common shares.

B. Calculate any deemed dividend and the taxable capital gain or allowable capital loss that would accrue to Mr. Paul on the redemption of his preferred shares for $780,000.

C. Show the overall tax consequences of the redemption of the shares.

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