Shawn Baker is the president and only shareholder of Baker Inc., a Canadian Controlled Private Corporation. The company's fiscal year ends on December 31. Mr. Baker established the company 15 years ago by investing $344,500 in cash. There have been no other shares issued since then.

Mr. Baker is considering selling the corporation and, in order to better evaluate this possibility, he has prepared a special Statement of Assets. In this special statement, comparative disclosure is provided for the values included in his accounting records, values that are relevant for tax purposes, and fair market values. This statement is as follows.

Baker Inc.

Statement of Assets

As At January 1, 2018

Accounting

Net Book Value Tax Value Fair Market

Value

Cash $70,850 $70,850

$70,850

Accounts Receivable

527,800 527,800 477,800

Inventories

1,130,675 1,130,675 1,268,675

Land

261,950 261,950 526,950

Building (Note One)

699,400 610,300 2,679,300

Equipment (Note Two)

564,200 382,200 222,200

Goodwill

Nil Nil 1,054,000

Totals

$3,254,875 $2,983,775 $6,299,775

Note OneMr. Baker built this building on the land for a total cost of $1,665,300.

Note TwoThe equipment had a cost of $1,049,750.

At the same time that this Statement of Assets was prepared, a similar Statement of Equities was drawn up. This latter statement contained the following accounting and tax values:

Accounting Book Value Tax Value

Current Liabilities

$906,100 $906,100

Loan from Shareholder

178,750 178,750

Future Income Tax Liability

704,600 N/A

Common Stock - No Par

344,500 344,500

Capital Dividend Account

N/A 213,850

Other Income Retained

N/A 1,340,300

Retained Earnings

1,120,925 N/A

Totals

$3,254,875 $2,983,500

In addition to the information included in the preceding statements, the following other information about the company is relevant:

The company has available non-capital loss carry forwards of $108,000.

The company has available a net capital loss carry forward of $168,500 ((1/2) ($337,000)].

Baker Inc. is subject to a provincial tax rate of 3 percent on income that qualifies for the federal small business deduction and 14 percent on income that does not qualify for this deduction.

On December 31, 2017, the company has no balance in either its RDTOH account or its General Rate Income Pool (GRIP) account.

Baker Inc. shares are not qualified small business corporation shares.

Mr. Baker has received two offers for his company, and he plans to accept one of them on January 2, 2018. The first offer involves a cash payment of $4,044,500 in return for all of the shares of the company. Alternatively, another investor has expressed a willingness to acquire all of the assets, including goodwill, at a price equal to their fair market values. This investor would assume all of the liabilities of the corporation and has agreed to file an ITA 22 election with respect to the Accounts Receivable. If the assets are sold, it is Mr. Baker's intention to wind up the corporation.

Mr. Baker will have over $300,000 in income from other sources and, as a consequence, any income that arises on the disposition of this business will be taxed at the maximum federal rate of 33 percent, combined with a provincial rate of 18 percent. He lives in a province where the provincial dividend tax credit on eligible dividends is 5/11 of the gross up, and on non-eligible dividends is equal to 3/11 of the gross up.

Required:

Determine which of the two offers Mr. Baker should accept. Ignore the possibility that Mr. Baker might be subject to the alternative minimum tax. Assume that appropriate elections or designations will be made to minimize the taxes Mr. Baker will be required to pay.