Garth Garson, your client, is a successful business owner. Garth isthe sole shareholder of Never Give Up Inc. ("NGU"), a Canadian corporation. NGU earns $500,000 of business income each year that qualifies for the small business deduction. Garth has plans to acquire new businesses and make other investments.

NGU has recently acquired 100% of the shares of Chain Inc. ("Chain"), a taxable Canadian corporation, from a third-party seller. Chain has a minority shareholding in Pajaro Inc. ("Pajaro"), representing 9% of votes and 18% of value in Pajaro. Garth would like to understand the tax treatment of following items:

a)      What is the tax treatment of future dividends paid by Pajaro to Chain? Why?  

b)     What is the tax treatment of future dividends paid by Chain to NGU? Why?
 
c)      Whether the business income earned by Chain is eligible for a small business deduction. Why?