At the time of its incorporation, Exotic Antiques Ltd. issued 176,000 common shares in return for $3,960,000 in cash ($22.50per share).
Currently Ms. Deveroux, the founder of the company, holds almost all of the originally issued shares, except for 30,000 shares that she sold to her son for $20.00 per share, the estimated fair market value of the shares at the time they were sold to the son.
Because Ms. Deveroux does not approve of her son’s current party lifestyle, she would prefer to sever all business ties with him. To facilitate this goal, Ms. Deveroux arranges to have Exotic Antiques Ltd. redeem all of the son’s 30,000 Exotic Antiques Ltd. shares at a price of $24.35 per share. If any dividends result from this redemption, they will be non-eligible.
1. Determine the tax consequence of this redemption to Ms. Deveroux.
2. Determine the tax consequence of this redemption to Ms. Deveroux’s son.
Show all your calculations to obtain full marks!
Solution to Question #2:
For Ms. Deveroux:
The redemption would have no tax consequences. 2 Marks
For Ms. Deveroux’s son:
Proceeds of Redemption (30,000 shares)($24.35) $730,500 1 Mark PUC (30,000)($22.50) ( 675,000) 1 Mark ITA 84(3) Deemed Dividend (1 Mark for calling it a dividend) $ 55,500