PRACTICE PROBLEM 9.3: S.84.1 DIVIDEND STRIPPING Nathan Kim, a Canadian resident, started The Finish Line ("TEL") many years ago with an initial investment of $10,000 in share capital. TEL operates a number of sporting supplies and equipment retail outlets that specialize in running and cycling race equipment. Over the years, TFL grew and the fair market value of the shares is currently $1,000,000 One day, whilst watching a triathlon championship race, Nathan was introduced to Marvin Shyster, a lawyer. Nathan told Marvin about TFL and what a success it was. He also commented that it was a pity he could not get some of the value out of the company without paying taxes. Marvin told Nathan that he could help him get most of the value of the company "tax free" using section 85(1) and Nathan's lifetime capital gains exemption. Nathan was interested so he asked Marvin what steps would be involved in this transaction. Marvin explained, "It would be quite easy to take $810,000 of cash out of TFL on a tax-free basis. Here is what I propose: 1. Create a new corporation (Holdco). 2. Using an election under Section 85 of the ITA, we roll your shares of TFL into Holdco. 3. We choose an elected transfer price of $810,000 on your shares of TFL. 4. You take back consideration consisting of cash of $810,000 plus one share of Holdco worth $190,000. Pg. 11 2021 Michelle Malin, MPACC, CPA-CA ACCT 428 Advanced Corporate Tax MacEwan University, School of Business After this is done, you will have $810,000 of cash in your pocket tax free! Pretty simple, eh? Just send me a cheque for $10,000 as a retainer and I will start the paperwork." Should Nathan hire Marvin to complete this transaction? Why or why not? If Nathan goes ahead with Marvin's plan, what are the tax consequences for Nathan? PRACTICE PROBLEM 9.3: S.84.1 DIVIDEND STRIPPING Nathan Kim, a Canadian resident, started The Finish Line ("TEL") many years ago with an initial investment of $10,000 in share capital. TEL operates a number of sporting supplies and equipment retail outlets that specialize in running and cycling race equipment. Over the years, TFL grew and the fair market value of the shares is currently $1,000,000 One day, whilst watching a triathlon championship race, Nathan was introduced to Marvin Shyster, a lawyer. Nathan told Marvin about TFL and what a success it was. He also commented that it was a pity he could not get some of the value out of the company without paying taxes. Marvin told Nathan that he could help him get most of the value of the company "tax free" using section 85(1) and Nathan's lifetime capital gains exemption. Nathan was interested so he asked Marvin what steps would be involved in this transaction. Marvin explained, "It would be quite easy to take $810,000 of cash out of TFL on a tax-free basis. Here is what I propose: 1. Create a new corporation (Holdco). 2. Using an election under Section 85 of the ITA, we roll your shares of TFL into Holdco. 3. We choose an elected transfer price of $810,000 on your shares of TFL. 4. You take back consideration consisting of cash of $810,000 plus one share of Holdco worth $190,000. Pg. 11 2021 Michelle Malin, MPACC, CPA-CA ACCT 428 Advanced Corporate Tax MacEwan University, School of Business After this is done, you will have $810,000 of cash in your pocket tax free! Pretty simple, eh? Just send me a cheque for $10,000 as a retainer and I will start the paperwork." Should Nathan hire Marvin to complete this transaction? Why or why not? If Nathan goes ahead with Marvin's plan, what are the tax consequences for Nathan