Robert has just received the financial statements that you prepared as at December 31, 2022 and wants to transfer the assets by January 1, 2023. He wants to transfer the assets of his unincorporated business to a newly incorporated company of which he is the only shareholder.

Robert's goal is to avoid triggering any income tax on the transfer. Liabilities of the proprietorship, except for the mortgage, are to be assumed by the corporation, first, in payment for assets transferred to the corporation other than under a subsection 85(1) election and, then, in payment for assets transferred to the corporation by a subsection 85(1) election. The mortgage is to be assumed by the corporation in partial payment for thee land and the building. New debt is to be issued (to the nearest $100) by the corporation to the maximum that will permit a full deferral of unrealized income on assets transferred. He will own only common shares after the transfer.

The following is the balance sheet, as at December 31, 2022, along with expected fair market values at that time. The proprietorship has used the same asset values and depreciation for accounting and tax purposes.

The fair market value of the business has been determined at $746,500 based on all the assets.

Required:

Analyze in technical detail the following issues in preparation of your advice to Robert.

(a) With respect to the assets described above consider:

(i) which assets should not be transferred to the corporation, with a very brief explanation of why;

(ii) which assets should be transferred to the corporation, but cannot or should not be transferred to the corporation under a subsection 85(1) election, with a very brief explanation and an indication of how these assets should be transferred and what amount of assumed and new (if any) debt consideration should be taken for each such asset; and

(iii) which assets should be transferred to the corporation under a subsection 85(1) election and the consideration that should be received for each asset so transferred.

(b) Compute the adjusted cost base (ACB) and the paid-up capital (PUC) for tax purposes of the common share consideration, showing the details of your calculation of these amounts.