Taylor North and Devin Star are unrelated individuals, and equal shareholders of Starlight Inc., a Canadian controlled private corporation (CCPC). Starlight was incorporated ten years ago by the former owners, with a total initial capital investment of $2,000 in return for shares. Taylor and Devin purchased the shares of Starlight for $50,000 ($25,000 each) five years ago. It is now 2020 and Taylor has decided to leave the company. Taylor’s shares are currently valued at $65,000. Devin sees great potential for Starlight, so plans to pursue new and exciting ideas. Taylor and Devin’s shareholder agreement states that their shares can be sold to either: 1) each other; 2) the corporate treasury; or 3) an arm’s-length shareholder upon the approval of the remaining shareholder. Devin is considering whether to agree to 1) the sale of Taylor’s shares to an arm’s-length individual (who has offered to buy the shares for $65,000), or 2) a sale back to the corporate treasury, and would prefer the second option in order to gain full control of Starlight to move forward with the expansion plans. (Devin does not currently have the $65,000 required to personally purchase Taylor’s shares, and the pre-tax income that would be required by Starlight for a purchase of the shares through corporate dividends is not feasible at this time.) Starlight’s year end is approaching. Devin has prepared an income statement for 2020 for the company (Exhibit I). Devin predicts that upon becoming the sole shareholder, an expansion of tours in 2021 will raise the company’s revenues and cost of tours by 20%. To achieve this, advertising costs will need to rise by 20% and staffing costs by 30%. Administrative costs and Devin’s salary will remain the same. Devin is not sure how these changes will impact Starlight’s future tax liability. Starlight has been operating out of the same rented space since the business began. With the planned expansion of the business, Devin feels that 2021 would be an appropriate time to purchase a fashionable old building in the heart of the city worth $400,000. Starlight’s lender has agreed to grant a mortgage to Starlight, provided that Devin purchases a life insurance policy for collateral on the mortgage. (See Exhibit II for more details relating to the proposed purchase, and other company information.) Required: A.Determine Starlight’s net income for tax purposes for 2020. B.Determine Starlight’s net income for tax purposes for 2021 based on Devin’s projections for the expansion that will take place if Devin is the sole owner/operator. C.Address the tax consequences for Taylor if the shares are sold to 1) the corporate treasury, or 2) an arm’s-length individual. D.Briefly address the issues Devin must consider regarding the two alternatives for Taylor’s share sale. (Support your answer for the share buy-back with calculations.) E.Identify whether or not Devin must consider any ‘association’ issues for tax purposes. (Work must be shown for marks to be awarded.) Exhibit I Exhibit II Additional information: •The depreciable assets currently on the balance sheet include a Class 10.1 van and Class 8 office furniture and equipment. The undepreciated capital cost (UCC) balances on December 31st, 2019 were $15,000 (Class10.1) and $8,000 (Class 8). •Mortgage payments on the new building would total $40,000 during 2021, with $26,000 of this amount allocated to interest. •The life insurance policy to be purchased by the company as collateral for the mortgage on the building will require monthly payments of $250. •The building will qualify as a Class 1 asset, with a CCA rate of 6%. •The 24 month rules for eligibility as a Qualified Small Business Corporation have been met by Starlight. •The corporation is taxed at a rate of 13% on income under $500,000. Taylor and Devin are both in a 45% tax bracket for regular income and they pay a marginal rate of 37% on non-eligible dividends. •Taylor recognized a capital gain of $100,000 from the sale of public corporation shares this year, and has never reported a capital loss on previous tax returns. •Taylor and Devin have both used all of their capital gains deduction. •If Devin becomes the sole shareholder of Starlight, Devin will personally invest $100,000 for 30% of the shares in a CCPC owned by an older sibling, Aiden. Aiden’s company, Moonlight Ltd., earns only active business income. Moonlight’s net income for tax purposes is $450,000 in 2020, and is predicted to steadily increase by at least $50,000 over each of the next several years.