Acetti Scarr Cohorts Inc. (ASCI) is a Canadian-controlled private corporation (CCPC) providing specialized project management services. ASCIs only client is Clean Chemicals (Clean), a large public company in the chemical and pharmaceutical manufacturing industry. Clean relies on the technical expertise of ASCI to analyze the environmental impacts to soil and ground water around its manufacturing sites. ASCI has one employee, Jacob, an engineer with 30 years of experience. Jacob is also the sole shareholder of ASCI. When the workload becomes too much for Jacob to manage on his own, ASCI will subcontract project work to various independent contractors.

ASCI invests its surplus cash into an investment portfolio. The company has correctly calculated its net income for tax purposes to be $710,000 for the year ending December 31, 2022, as shown below:

Consulting income net of deductible expenses $600,000

Taxable capital gains 52,000

Dividends from Canadian public companies 50,000

Interest on five-year bonds 8,000

Net income for tax purposes 710,000

Additional information:

One of the independent contractors that ASCI subcontracts to is Green Project Management Solutions (GPMS), a CCPC owned 100% by Jacobs son. ASCI paid GPMS $15,000 in fees for 2021. GPMS claimed the small business deduction on $125,000 of its own active business income during 2021.

ASCI made charitable donations of $10,000 during the year

ASCI had a balance in its eligible refundable dividend tax on hand (ERDTOH) account at the end of the previous year of $18,000. The balance in its noneligible refundable dividend tax on hand (NERDTOH) was zero.

ASCI calculated a dividend refund of $4,000 for the previous year, based on dividends paid in the previous year.

Eligible dividends of $160,000 and capital dividends of $50,000 were paid by ASCI on December 31, 2022. The company had sufficient GRIP to pay the eligible dividend.

The following information was retrieved from the tax return of the previous year (2021). Jacob is not sure if all this information is relevant for 2022.

o Dividends from Canadian public companies of $54,000 o Interest income of $9,500 o Net capital losses available for carryforward of $18,000

o Noncapital loss carryforwards are zero.

o Taxable capital is under $10 million.

REQUIRED:

1. Determine ASCIs Part I tax, Part IV tax, and dividend refund for 2022. Show all calculations, including a calculation of the NERDTOH/ERDTOH.

2. Could Canada Revenue Agency make an argument to deny ASCIs small business deduction? Briefly explain why there is a risk and what steps can be taken to reduce the exposure.