You are a CPA and a tax senior at Roll Accounting Inc. (RAI), an accounting professional corporation in Canada. It is now March 31, 2014 and you have just finished meeting with Mike Dee, a partner at RAI. Mike has some tax issues that he wants you to assist him with. Mike has provided you with the information below and wants you to answer the following:

(1) Andy Tsai, a longtime client of RAI is considering doing an estate freeze. See the Exhibit for details. Mike wants you to draft a report describing and calculating the federal income tax consequences to Andy from the proposed estate freeze. You do not need to suggest any improvements to the proposed estate freeze at this time. You should give Income Tax Act (ITA) section, subsection and paragraph (where applicable) references in order to support your answer.

Exhibit

Additional information

• Andy currently owns all of the shares of Grand Inc., a CCPC with 1,000 common shares issued and outstanding. Grand Inc. operates an active business in Canada and is a small business corporation with a December 31st year-end. Andy's shares of Grand Inc. are qualified small business corporation (QSBC) shares
• Grand Inc. was incorporated in 1985 by Andy's aunt, Mary. In 1985 Mary subscribed for 1,000 common shares of Grand Inc. and paid $3,000, in aggregate, into the company to buy the shares. In 1999 Mary retired and sold all her 1,000 common shares to Andy for $220,000, in aggregate, which was their fair market value (FMV) at the time
• Some friends of Andy's have done estate freezes themselves and suggested that Andy do something similar. Andy thinks the value of Grand Inc. will increase over the next several years and after discussions with his friends Andy wants to do the following estate freeze in the near future:

1) Grand Inc. will undergo a reorganization of capital, where Andy's 1,000 common shares will be given up in return for 500 new non-voting preferred shares. Andy does not want to use subsection 85(1) of the Act when doing this reorganization of capital;

2) Andy's adult children, who are very mature and business savvy, will subscribe for 100 new common shares of Grand Inc. Hence, the children will have voting control of Grand Inc. which Andy is fine with;

3) Andy will sell his 500 non-voting preferred shares of Grand Inc. to Tsai Family Holding Company in return for $800,000 in cash. Tsai Family Holding Company is 50% owned by Andy and 50% owned by Andy's children and it has lots of cash and liquid assets. Since Andy has never used his capital gains exemption before

Andy's friends believe he can get the $800,000 tax-free. Grand Inc.'s most recent (December 31, 2013) balance sheet shows the following information (and these figures have remained stable for the past 24 months):

                                                                              ACB (original

                                                                               cost)                  UCC               FMV

Active business assets (excluding goodwill)                $700,000         $500,000         $600,000

Cumulative eligible capital (goodwill)                         $20,000           $10,000         $300,000

Long-term portfolio investments                                $40,000             n/a              $60,000

                                                                                                                         $960,000

• Grand Inc. has $160,000 of liabilities
• Grand Inc. is not associated with any other companies and its taxable capital has always been less than $10 million