Paul Legacy had spent 20 years building and managing a successful business in the oil and gas service industry when he decided that it was time to retire and to sell his company, Oil and Gas Services Ltd.  Under the advice of his tax accountant, Mr. Hamilton, he completed the sale in the following manner.

On April 15, 20X1 Paul entered into a sales agreement to sell his corporation shares.  The agreement was later amended so that the Barbados trust was the seller of the shares and the trustee signed the amended agreement.

On June 1, 20X1 Paul set up a trust in Barbados.  The trust was called Legacy Spousal Trust.  He was able to hire a former business partner of Mr. Hamilton, Ms. Moriarty, as the trustee.  Ms. Moriarty is a lawyer who moved to Barbados 4 years ago and has made it her permanent home.  Paul’s wife, Renee, is the only beneficiary to the trust.  Paul then transferred all of his shares in Oil and Gas Services Ltd to the trust in Barbados.

On June 4, 20X1 the trust sold the shares for $3,700,000 cash, $4,800,000 in the assumption of debt, and $1,500,000 for a non-compete agreement.  The tax cost of the shares was $2,000,000.  Barbados has no tax on capital gains.

On June 6, 20X1 the funds were distributed to Renee tax free.

Was this capital gain correctly treated as tax free in Canada?

Provide an explanation of the factors used in your consideration and why they are important.  Provide references that you relied on to make your decision and how they relate to the situation.  Please offer a paper between 3  pages in length in double spaced type.

Marks

Each factor considered                       .5         Max     2.0

Each different source of reference     .5         Max     2.0