ABC co. is a Canadian controlled private corporation that acquired 100% of the shares of XYZ Co. in Year 1 for $50,000. New Co., an arm's length corporation, is now interested in purchasing ABC Co.'s investment in XYZ Co.'s shares are currently worth $400,000 and the retained earnings of the company are $100,000. To reduce the fair market value of the shares, XYZ Co. will pay a dividend of $350,000 to ABC Co. and ABC Co. will then sell the shares to New Co. for $50,000 XYZ Co.'s RDTOH balances are nil. Applying the anti-avoidance rules of Subsection 55(2),

SWFT Corp Partner Estates Trusts
42nd Edition
ISBN:9780357161548
Author:Raabe
Publisher:Raabe
Chapter6: Corporations: Redemptions And Liquidations
Section: Chapter Questions
Problem 62P
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ABC co. is a Canadian controlled private corporation that acquired 100% of the shares of XYZ Co. in Year 1 for $50,000. New Co., an arm's length corporation, is now interested in purchasing ABC Co.'s investment in XYZ Co.'s shares are currently worth $400,000 and the retained earnings of the company are $100,000. To reduce the fair market value of the shares, XYZ Co. will pay a dividend of $350,000 to ABC Co. and ABC Co. will then sell the shares to New Co. for $50,000 XYZ Co.'s RDTOH balances are nil. Applying the anti-avoidance rules of Subsection 55(2), what is the tax effect of the $350,000 dividend?

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