Mr. Jones owns 100% of the commons shares of JL

Mr. Jones owns 100% of the commons shares of JL Corp, a CCPC engaged in an active business. The FMV of these shares is $900,000 and they have an ACB and PUC of $100,000. Mr. Jones wishes to crystalize his capital gains deduction (he has never previously had a capital gain) because he is concerned that a new government in the near future might bring an end to the capital gains deduction. Mr. Jones is thinking about two possible transactions to achieve this goal:

1. Mr. Jones will do a section 86 reorganization, and exchange his old common shares for preferred shares with an FMV of $900,000. The legal stated capital of the preferred shares will be $900,000.

2. Mr. Jones will do a section 85 transfer of his old common shares to JL Corp, electing an amount of $900,000, and receiving in exchange new common shares with an FMV of $900,000. The legal stated capital of the new common shares will be $100,000.

Required:

What are the tax consequences of these two transactions? Will they achieve Mr. Jones’s goal of crystallizing his capital gains deduction?

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