A public corporation earns $500,000 in pre-tax profits and pays out all of its after-tax earnings in dividends. The corporate tax rate is 27.5% and the sole shareholder is in a 50% tax bracket. The dividend gross-up rate is 1.38 and the total dividend tax credit (federal and provincial) is 27.5%. Required:

A) Calculate the tax liability for (1) the corporation and (2) the shareholder.

B) Briefly explain how this tax structure illustrates the theory of integration.