Jimmy Divine owns five of the 100 issued common shares of Poultry Products Ltd. The remaining shares are owned by six other individuals, some of whom are employed by the corporation. The others are passive investors. Divine has informed the shareholders that he wants to dispose of his shares for their market value, which is $60,000.The shares have a paid-up capital of $50, but Divine had purchased the shares a number of years ago from one of the other shareholders for $10,000. None of the other shareholders has funds to purchase Divine’s shares.

Unfortunately, the corporation is also temporarily short of cash. The other shareholders have agreed that the corporation will buy back Divine’s five shares at the rate of one share per year over the next five years but that the total price will remain at $60,000. Divine realizes that the value of the unredeemed shares will grow in the next five years as the company continues to earn profits. He is prepared to forgo these profits, provided that the company pays him a fixed dividend on the unredeemed shares of 8% per annum. The company normally pays non-eligible dividends. In addition, he does not want to pay tax on the share sales until he actually receives the cash for them.

Required:

1. What can the company do to buy back Divine’s shares at the rate of one share per year so that any unredeemed shares will not change in value before they are redeemed?

2. What amount of net income for tax purposes will Divine earn from the share buyback in each of the five years?