Ethan Corporation Limited, a Canadian-controlled private corporation carrying on business in a province with a 4% corporate tax rate on its income (i.e., a total corporate tax rate of 14.5%), has earned $36,000 in its taxation year ended December 31 before a salary has been paid to the shareholder-manager. The shareholder-manager has federal personal tax credits of $2,500 and provincial personal tax credits of $1,600 and no income from other sources.

REQUIRED

(1) If the full $36,000 is to be distributed either by way of salary or dividends, which should be chosen? Use the 17% gross-up for dividends paid after 2015.

(2) Is there a combination of salary and dividends that is better?