Mr. Luke Skywalker, age 40 is the proprietor of a small manufacturing business that manufactures lightsabers. He would very much like to get Mrs. Luke Skywalker, age 42, involved in the business from an ownership perspective. To this end, Mr. Luke Skywalker has come up with the following plan. Mr. and Mrs. Luke Skywalker are both residents of Canada for tax purposes. 1. Mrs. Luke Skywalker will incorporate Use The Force Ltd. (UTF Ltd.) and subscribe for all of the common shares. 2. Mr. Luke Skywalker will transfer the assets of his current proprietorship to UTF Ltd. utilizing subsection 85(1) of the Income Tax Act. 3. UTF Ltd. will pay Mr. Luke Skywalker for the transfer of the proprietorship assets by assuming all of the existing proprietorship liabilities, issuing a note to Mr. Luke Skywalker for the maximum possible amount and issuing preferred shares to Mr. Luke Skywalker for the balance. Mr. Luke Skywalker has informed you that his objectives with respect to the transfer of his business are to defer all possible capital gains and other income and any other possible adverse tax consequences while at the same time maximizing the amount of non-share consideration payable to him. The assets and liabilities of the proprietorship, as at December 31, 2019, are as follows:

Assets Book value Fair market value

Cash $20,000 $20,000

Accounts receivable 90,000 85,000

Inventories 86,000 92,000

Land 200,000 339,000

Building 15,000 75,000

Equipment 35,000 5,000

Goodwill Nil 60,000

$446,000

Liabilities

Bank loan $69,000

Accounts payable 23,000

Mortgage on building 18,000

$110,000

Mr. Luke Skywalker has provided the following additional information: (1) The accounts receivable are net of a reserve for doubtful accounts of $6,000. This was the closing reserve for the previous fiscal period. (2) Mr. Luke Skywalker has never utilized any of his available capital gains deduction. (3) The book value of the land is its original cost. This land is the property upon which the building is situated and represents the only site of the business operations. (4) The book value of the building and equipment represents original cost less accumulated financial accounting depreciation. The tax data related to the building are as follows

Cost UCC

Building $60,000 $15,000

Equipment 80,000 35,000

Assume that Mr. Luke Skywalker does wish to transfer the bank balance from his proprietorship to UTF Ltd. in order to have some ready cash in the account of the new corporation. Required: a) Indicate to Mr. Luke Skywalker which asset(s) should be transferred to UTF Ltd. but cannot or should not be transferred under subsection 85(1) and briefly explain why. For these assets Luke will take a note payable. (3 marks) b) For the assets that should be transferred under a subsection 85(1) election to the corporation, indicate the maximum amount non-share consideration (to the nearest multiple of $100) that can be taken by Luke. Also, indicate the amount of the shares that can be taken as consideration to defer all possible capital gains, losses and other income and to avoid other adverse tax consequences