Twenty-five years ago, Angelo and Fred started their own consulting company, XYZ Co. Angelo, who is 55, retired from the business on December31, 2020. He and his wife plan to travel throughout Canada during retirement.

It is now January5, 2021. Fred would like to purchase Angelo's 50% share of XYZ.

Earnings have been stable over the past 10 years, and Fred and Angelo have agreed to a purchase price of three times the prior year's earnings after tax. Since Angelo's wife already has a trip booked for early February, both Fred and Angelo would like to have the transaction wrapped up as quickly as possible. They have asked you, CPA, to review the attached income statement and notes and provide an estimate of XYZ's federal income tax expense for 2020 and let them know if they need to pay any further instalments to the Canada Revenue Agency (CRA).

Fred does not anticipate having the cash resources to complete the purchase and is concerned about his ability to pay the debt service costs if he has to borrow money to purchase Angelo's shares. As the two men are friends, Fred would like to structure the purchase so that it provides the optimal tax advantage to Angelo.

Fred has heard about the capital gains exemption and wonders whether it could be applied to this transaction. Neither Angelo nor Fred has disposed of any capital properties in the past. XYZ only holds assets that are essential to the operation of the business.

They would like to have memo providing advice on how to structure this transaction.