Hi there. Can someone please help me with the responses to questions one through five? (Questions are located on page one and are based on the information presented in the case. )

Any assistance received will be greatly appreciated.

BME 5003 Finance for Entrepreneurs Seaway Lumber Company Case Group Assignment Due Wednesday, December 7 at the beginning of class. Assignment This assignment is to be completed in groups of at least five and no more than six students. No individual assignments will be accepted. Each student may only be a member of one group. Please use a cover page that lists each group member's name and student number. Unless you indicate otherwise, each student in the group will receive an equal grade. The time is spring, 1997. Your group is Ms. Kelly Dodge from Scotia Bank. Prepare a recommendation in memo format to your immediate superior, Warren Thompson, on whether or not to make the requested loan and, if so, under what terms and conditions. Format Use the bank's standard recommendation memo format, shown below. Use complete sentences (not point form), present tense and active voice. Please ensure that your grammar and spelling are correct and that your writing is clear and concise. 1. Recommendations State what actions need to be taken. Each statement should be numbered, in logical sequence. 2. Rationale State why the recommended actions are necessary and what will be accomplished. Each statement should be numbered and in an order corresponding to the recommendation(s) that it is associated with. 3. Situation, Analysis \& Discussion Fully explain the situation and present the analysis and logic that supports the recommendations. Include subsections if required for clarity. All exhibits included must be referenced here. 4. Exhibits Each exhibit must be on a separate page and must be sequentially numbered in order of reference in the previous section. All assumptions must be stated and explained in notes at the bottom of each exhibit. Each exhibit that is included must be referenced in section 3 . For this assignment, all pages must be typed, single-space, in 10 to 12-point font, with 1-inch margins on all sides. Sections 1,2 and 3 combined must not exceed four typewritten pages. Sections 1 and 2 combined must not exceed one typewritten page. You may include as many exhibits as required to support your arguments; however, every exhibit must be referenced in section 3. Exhibits that are included but not referenced in section 3 will be ignored. Content In your recommendation address the following questions (note: bracketed items are analyses that you should complete to support your answers). 1. What are Seaway's financial characteristics? (Sources \& Uses of Funds; Common Size, Trend and Ratio analyses). 2. If Seaway's sales continue to grow as rapidly as they have been lately ( +38% p.a.) and there are no changes in the way the business is operated, what will be the size of the line of credit at the end of 1997 and the end of 1998 ? Is a $200,000 line of credit sufficient? Are the funds needed short term in nature? (Pro Forma statements based on historical performance and case data. Note: Please state your assumptions for each line of the Pro Forma statements. You may assume that COGS will be 72.5% in 1997 and 1998 ). 3. What will happen in 1997 and 1998 to Seaway's line of credit, liquidity, profitability and efficiency if Cook takes the 2% trade discount? (Revised Pro Forma statements based on revised assumptions). 4. Should the bank grant the loan, and if so, under what conditions? 5. What other actions do you recommend that Cook takes? SEAWAY LUMBER COMPANY After a rapid growth in its business during recent years, the Seaway Lumber Company, in the spring of 1997 , anticipated a further substantial increase in sales. Despite good profits, which were largely retained in the business, the Company had experienced a shortage of cash and had found it necessary to increase its borrowing from the National Trust to $99,000 in the spring of 1997. The maximum loan that National Trust would make to any one borrower was $100,000 and Seaway had been able to stay within this limit in the spring of 1997 only by relying very heavily on trade credit. Mr. Roger Cook, proprietor of the Seaway Lumber Company, was therefore actively looking elsewhere for a new banking relationship where he would be able to negotiate a larger loan. Mr. Cook had recently been introduced by a personal friend to Ms. Kelly Dodge, an officer of a much larger bank, the Scotia Bank. Mr. Cook and Ms. Dodge had tentatively discussed the possibility that the Scotia Bank might extend a line of credit to Seaway up to a maximum amount of $200,000. Mr. Cook thought that a loan of this size would more than meet his foreseeable needs, but he was eager for the flexibility that a line of credit of this size would provide. Subsequent to this discussion, Ms. Dodge arranged for the credit department of the Scotia Bank to investigate Mr. Cook and his Company. The Seaway Lumber Company had been founded in 1987 as a partnership by Mr. Cook and his brother-in-law, Mr. Macintosh. In 1994 Mr. Cook bought out Mr. Macintosh's interest for $50,000 and continued the business as a sole proprietorship. Mr. Macintosh had taken a note for $50,000, to be paid off in 1995, in order to give Mr. Cook time to arrange for the financing necessary to make the payment of $50,000 to him. The major portion of the funds needed for this payment was raised by a mortgage, negotiated in late 1994 , carried an interest rate of 8%, and was repayable in quarterly instalments at the rate of $3,000 a year over the next 10 years. The business was located in a growing suburb of a large city in southern Ontario. The Company owned land with access to a railroad siding, and two large storage buildings had been erected on this land. The Company's operations were limited to the wholesale distribution of lumber products in the local area. Typical products included plywood, mouldings and sash and door products. Quantity discounts and credit terms of net 30 days on open account were usually offered to customers. Seaway had built up its sales volume largely on the basis of successful price competition made possible by careful control of operating expenses and by quantity purchases of materials at substantial discounts. Much of the mouldings and sash and door products which constituted significant items of sales were used for repair work. About 55\% of total sales were made in the six months from March through August. No sales representatives were employed, orders being taken exclusively over the telephone. Annual sales of $314,000 in 1992 and $476,000 in 1993 gave profits of $40,000 and $49,000, respectively. 1 Comparative operating statements for the years 1994 through 1996 and for three months ending March 31, 1997 are given in Exhibit 1. Mr. Cook was an energetic man, 39 years of age, who worked long hours on the job, not only handling management matters but also performing part of the clerical work. He was helped by an assistant who, in the words of the investigator of the Scotia Bank, "has been doing and can do about everything that Mr. Cook does in the organization". Other employees numbered 12 in early 1997, 10 who worked in the yard and drove trucks and 2 who assisted in the office. As a part of its customary investigation of prospective borrowers, the Scotia Bank sent inquiries concerning Mr. Cook to a number of firms that had business dealings with him. The manager of one of his large suppliers, the B.C. Timber Company, wrote in answer: The conservative operation of his business appeals to us. He has not wasted his money in disproportionate plant investment. His operating expenses are as low as they could possibly be. He has personal control over every feature of his business, and he possesses sound judgement and a willingness to work harder than anyone I have ever known. This, with a good personality, gives him an excellent turnover; and from my personal experience in wotching him work, I know that he keeps close check on his own credits. All of the other trade letters received by the bank bore out the statements quoted above. 1 The profit figures for 1992 and 1993 are not comparable with those shown in Exhibit 1 for 1994-96. The 1992 and 1993 figures do not reflect the payment of salaries to either Mr. Cook or Mr. Macintosh. Their remuneration would constitute a "drawing by proprietors" rather than an operating expense. When Mr. Macintosh withdrew from the business in 1993, the employee who took his place was paid a salary, which is shown in Exhibit 1 as a component of the operating expense account, not as a drawing by a proprietor. In addition to the ownership of his lumber business, which was his major source of income, Mr. Cook held jointly with his wife an equity in their home. The house cost $70,000 to build in 1988 and was mortgaged for $50,000. He also held a $100,000 life insurance policy payable to Mrs. Cook. Mrs. Cook owned independently a half interest in a home worth about $90,000. Otherwise, they had no sizeable personal investments. The bank gave particular attention to the debt position and current ratio of the business. It noted the ready market for the Company's products at all times and the fact that sales prospects were favourable. The bank's investigator reported: "Sales are expected to reach $1,600,000 in 1997 and may exceed this level if prices of lumber should rise substantially in the near future." On the other hand, it was recognized that a general economic downturn or a return to the very tight credit conditions of 1994-95 with the resultant shortage of funds for residential mortgages might slow down the rate of increase in sales. Seaway's sales, however, were protected to some degree from fluctuations in new housing construction because of the relatively high proportion of its repair business. Projections beyond 1997 were difficult to make, but the prospects appeared good for a continued growth in the volume of Seaway's business over the foreseeable future. The bank also noted the rapid increase in Seaway's accounts and notes payable in the recent past, especially in the spring of 1997. The usual terms of purchase in the trade provided for a discount of 2% for payments made within 10 days of the invoice date. Accounts were due in 30 days at the invoice price but suppliers ordinarily did not object if payments lagged somewhat behind the due date. During the last two years Mr. Cook had taken very few purchase discounts because of the shortage of funds arising from his purchase of Mr. Macintosh's interest in the business and the additional investments in working capital associated with the Company's increasing sales volume. Trade credit was badly extended in the spring of 1997 as Mr. Cook strove to hold his bank borrowing within the $100,000 ceiling imposed by the National Trust. Comparative balance sheets as of December 31, 1994-96 are presented in Exhibit 2. A detailed balance sheet drawn up for the bank as of March 31, 1997 and the change in proprietorship for the first quarter of 1997 appear as Exhibits 3 and 4. The tentative discussions between Ms. Dodge and Mr. Cook had been in terms of a revolving, unsecured 90 -day note not to exceed $200,000 in amount. The specific details of the loan had not been worked out, but Ms. Dodge had explained that the loan agreement would involve the standard covenants applying to such a loan. She cited as illustrative provisions the requirement that restrictions on additional borrowing would be imposed, that net working capital would have to be maintained at an agreed level, that additional investments in fixed assets could be made only with the prior approval of the bank, and that limitations would be placed on withdrawals of funds from the business by Mr. Cook. Interest would be set on a floating-rate basis at 3 percentage points above the lowest rate charged by the bank on short-term loans. Ms. Dodge indicated that the initial rate to be paid would be approximately 10% under conditions in effect in early 1997. Both also understood that Mr. Cook would sever his relationship with the National Trust if he entered into a loan agreement with the Scotia Bank. In addition to working out arrangements for increased bank credit, a second issue of concern to Mr. Cook was whether he should continue to operate as a proprietorship or whether it would be better for him to incorporate his business. As a proprietorship he paid taxes on the full amount earned by the business, the item shown as "net profit before taxes" in Exhibit 1. As explained in Exhibit 1, this figure was computed without any allowance for a salary for Mr. Cook. As the business became increasingly profitable, Mr. Cook was subject to increasingly severe individual income taxes. Mr. Cook understood that if he were to incorporate his business he would be able to deduct a reasonable salary in computing his net profits subject to the corporation income tax. The salary so dedicated would be taxable to him as an individual. Profits retained in the business would not be subject to the individual income tax if the business were incorporated. On the other hand, any dividends paid to Mr. Cook would be taxed twice, first as income to the corporation and then as personal income to the stockholder. Exhibit 5 summarizes briefly the tax rates applicable to individuals and to corporations as of 1997. EXHIBIT 1 SEAWAY LUMBER COMPANY OPERATING STATEMENTS FOR THE YEARS ENDING DECEMBER 31, 1994 THROUGH 1996 AND FOR THE THREE MONTHS ENDING MARCH 31, 1997 (\$000s) 2 In the first quarter of 1996 sales were $252,000 and net profit was $13,000. b No allowance for a salary for Mr. Cook is included in either of these items. For a discussion of the tax treatment of a proprietorship see Exhibit 5. "Drawings to cover living expenses and provision for payment of income taxes. Tax Rates Applicable to Individuals and Proprietorships As noted in the text of the case, the income of a sole proprietorship or a partnership is taxable to the owner(s) rather than to the business as such. Thus, the income of the Seaway Lumber Company would be taxable in its entirety to Mr. Cook. It is probably reasonable to assume that the taxable income attributable to Mr. Cook from his Company would be approximately equal to the amount shown as "net profit before taxes" in Exhibit 1. Since the case indicates that Mr. Cook and his wife have little or no income from sources other than his business, the figures shown in Exhibit 1 can be assumed to be Mr. Cook's sole (or principal) source of taxable income. In interpreting the following table, it should be recognized that the tax brackets and tax rates shown refer to "taxable income" in the legal sense. Mr. Cook, of course, would be entitled to any deductions and personal exemptions authorized by Revenue Canada. The following table presents the tax brackets and corresponding tax liabilities applying to individual taxpayers filing a return for the tax brackets in which Mr. Cook's income might fall: "These rates are stated as a percentage of the basic federal tax, 'The small business tax rate applies to the first $200,000 of annual income for corporations that are CanadianControlled Private Corporations throughout a taxation year. percent for income of more than $100,000 Tax Rates Applicable to a Corporation If the Seaway Lumber Company were incorporated, Mr. Cook could, of course, deduct as an expense a reasonable salary for himself. This salary would then be taxable to him as personal income. Since Mr. Cook and his wife had little or no income other than his salary, he would not be subject to the top brackets of the individual income tax on his salary. The corporation income tax rates to which the Seaway Lumber Company would be subject are as follows: In 1997, after the deduction of a reasonable allowance for a salary, a large fraction of the income of Seaway Lumber Company, if organized as a corporation, would be subject to the 25% tax rate. Any dividends paid by the Company would, of course, be taxable as ordinary income to its stockholders. BME 5003 Finance for Entrepreneurs Seaway Lumber Company Case Group Assignment Due Wednesday, December 7 at the beginning of class. Assignment This assignment is to be completed in groups of at least five and no more than six students. No individual assignments will be accepted. Each student may only be a member of one group. Please use a cover page that lists each group member's name and student number. Unless you indicate otherwise, each student in the group will receive an equal grade. The time is spring, 1997. Your group is Ms. Kelly Dodge from Scotia Bank. Prepare a recommendation in memo format to your immediate superior, Warren Thompson, on whether or not to make the requested loan and, if so, under what terms and conditions. Format Use the bank's standard recommendation memo format, shown below. Use complete sentences (not point form), present tense and active voice. Please ensure that your grammar and spelling are correct and that your writing is clear and concise. 1. Recommendations State what actions need to be taken. Each statement should be numbered, in logical sequence. 2. Rationale State why the recommended actions are necessary and what will be accomplished. Each statement should be numbered and in an order corresponding to the recommendation(s) that it is associated with. 3. Situation, Analysis \& Discussion Fully explain the situation and present the analysis and logic that supports the recommendations. Include subsections if required for clarity. All exhibits included must be referenced here. 4. Exhibits Each exhibit must be on a separate page and must be sequentially numbered in order of reference in the previous section. All assumptions must be stated and explained in notes at the bottom of each exhibit. Each exhibit that is included must be referenced in section 3 . For this assignment, all pages must be typed, single-space, in 10 to 12-point font, with 1-inch margins on all sides. Sections 1,2 and 3 combined must not exceed four typewritten pages. Sections 1 and 2 combined must not exceed one typewritten page. You may include as many exhibits as required to support your arguments; however, every exhibit must be referenced in section 3. Exhibits that are included but not referenced in section 3 will be ignored. Content In your recommendation address the following questions (note: bracketed items are analyses that you should complete to support your answers). 1. What are Seaway's financial characteristics? (Sources \& Uses of Funds; Common Size, Trend and Ratio analyses). 2. If Seaway's sales continue to grow as rapidly as they have been lately ( +38% p.a.) and there are no changes in the way the business is operated, what will be the size of the line of credit at the end of 1997 and the end of 1998 ? Is a $200,000 line of credit sufficient? Are the funds needed short term in nature? (Pro Forma statements based on historical performance and case data. Note: Please state your assumptions for each line of the Pro Forma statements. You may assume that COGS will be 72.5% in 1997 and 1998 ). 3. What will happen in 1997 and 1998 to Seaway's line of credit, liquidity, profitability and efficiency if Cook takes the 2% trade discount? (Revised Pro Forma statements based on revised assumptions). 4. Should the bank grant the loan, and if so, under what conditions? 5. What other actions do you recommend that Cook takes? SEAWAY LUMBER COMPANY After a rapid growth in its business during recent years, the Seaway Lumber Company, in the spring of 1997 , anticipated a further substantial increase in sales. Despite good profits, which were largely retained in the business, the Company had experienced a shortage of cash and had found it necessary to increase its borrowing from the National Trust to $99,000 in the spring of 1997. The maximum loan that National Trust would make to any one borrower was $100,000 and Seaway had been able to stay within this limit in the spring of 1997 only by relying very heavily on trade credit. Mr. Roger Cook, proprietor of the Seaway Lumber Company, was therefore actively looking elsewhere for a new banking relationship where he would be able to negotiate a larger loan. Mr. Cook had recently been introduced by a personal friend to Ms. Kelly Dodge, an officer of a much larger bank, the Scotia Bank. Mr. Cook and Ms. Dodge had tentatively discussed the possibility that the Scotia Bank might extend a line of credit to Seaway up to a maximum amount of $200,000. Mr. Cook thought that a loan of this size would more than meet his foreseeable needs, but he was eager for the flexibility that a line of credit of this size would provide. Subsequent to this discussion, Ms. Dodge arranged for the credit department of the Scotia Bank to investigate Mr. Cook and his Company. The Seaway Lumber Company had been founded in 1987 as a partnership by Mr. Cook and his brother-in-law, Mr. Macintosh. In 1994 Mr. Cook bought out Mr. Macintosh's interest for $50,000 and continued the business as a sole proprietorship. Mr. Macintosh had taken a note for $50,000, to be paid off in 1995, in order to give Mr. Cook time to arrange for the financing necessary to make the payment of $50,000 to him. The major portion of the funds needed for this payment was raised by a mortgage, negotiated in late 1994 , carried an interest rate of 8%, and was repayable in quarterly instalments at the rate of $3,000 a year over the next 10 years. The business was located in a growing suburb of a large city in southern Ontario. The Company owned land with access to a railroad siding, and two large storage buildings had been erected on this land. The Company's operations were limited to the wholesale distribution of lumber products in the local area. Typical products included plywood, mouldings and sash and door products. Quantity discounts and credit terms of net 30 days on open account were usually offered to customers. Seaway had built up its sales volume largely on the basis of successful price competition made possible by careful control of operating expenses and by quantity purchases of materials at substantial discounts. Much of the mouldings and sash and door products which constituted significant items of sales were used for repair work. About 55\% of total sales were made in the six months from March through August. No sales representatives were employed, orders being taken exclusively over the telephone. Annual sales of $314,000 in 1992 and $476,000 in 1993 gave profits of $40,000 and $49,000, respectively. 1 Comparative operating statements for the years 1994 through 1996 and for three months ending March 31, 1997 are given in Exhibit 1. Mr. Cook was an energetic man, 39 years of age, who worked long hours on the job, not only handling management matters but also performing part of the clerical work. He was helped by an assistant who, in the words of the investigator of the Scotia Bank, "has been doing and can do about everything that Mr. Cook does in the organization". Other employees numbered 12 in early 1997, 10 who worked in the yard and drove trucks and 2 who assisted in the office. As a part of its customary investigation of prospective borrowers, the Scotia Bank sent inquiries concerning Mr. Cook to a number of firms that had business dealings with him. The manager of one of his large suppliers, the B.C. Timber Company, wrote in answer: The conservative operation of his business appeals to us. He has not wasted his money in disproportionate plant investment. His operating expenses are as low as they could possibly be. He has personal control over every feature of his business, and he possesses sound judgement and a willingness to work harder than anyone I have ever known. This, with a good personality, gives him an excellent turnover; and from my personal experience in wotching him work, I know that he keeps close check on his own credits. All of the other trade letters received by the bank bore out the statements quoted above. 1 The profit figures for 1992 and 1993 are not comparable with those shown in Exhibit 1 for 1994-96. The 1992 and 1993 figures do not reflect the payment of salaries to either Mr. Cook or Mr. Macintosh. Their remuneration would constitute a "drawing by proprietors" rather than an operating expense. When Mr. Macintosh withdrew from the business in 1993, the employee who took his place was paid a salary, which is shown in Exhibit 1 as a component of the operating expense account, not as a drawing by a proprietor. In addition to the ownership of his lumber business, which was his major source of income, Mr. Cook held jointly with his wife an equity in their home. The house cost $70,000 to build in 1988 and was mortgaged for $50,000. He also held a $100,000 life insurance policy payable to Mrs. Cook. Mrs. Cook owned independently a half interest in a home worth about $90,000. Otherwise, they had no sizeable personal investments. The bank gave particular attention to the debt position and current ratio of the business. It noted the ready market for the Company's products at all times and the fact that sales prospects were favourable. The bank's investigator reported: "Sales are expected to reach $1,600,000 in 1997 and may exceed this level if prices of lumber should rise substantially in the near future." On the other hand, it was recognized that a general economic downturn or a return to the very tight credit conditions of 1994-95 with the resultant shortage of funds for residential mortgages might slow down the rate of increase in sales. Seaway's sales, however, were protected to some degree from fluctuations in new housing construction because of the relatively high proportion of its repair business. Projections beyond 1997 were difficult to make, but the prospects appeared good for a continued growth in the volume of Seaway's business over the foreseeable future. The bank also noted the rapid increase in Seaway's accounts and notes payable in the recent past, especially in the spring of 1997. The usual terms of purchase in the trade provided for a discount of 2% for payments made within 10 days of the invoice date. Accounts were due in 30 days at the invoice price but suppliers ordinarily did not object if payments lagged somewhat behind the due date. During the last two years Mr. Cook had taken very few purchase discounts because of the shortage of funds arising from his purchase of Mr. Macintosh's interest in the business and the additional investments in working capital associated with the Company's increasing sales volume. Trade credit was badly extended in the spring of 1997 as Mr. Cook strove to hold his bank borrowing within the $100,000 ceiling imposed by the National Trust. Comparative balance sheets as of December 31, 1994-96 are presented in Exhibit 2. A detailed balance sheet drawn up for the bank as of March 31, 1997 and the change in proprietorship for the first quarter of 1997 appear as Exhibits 3 and 4. The tentative discussions between Ms. Dodge and Mr. Cook had been in terms of a revolving, unsecured 90 -day note not to exceed $200,000 in amount. The specific details of the loan had not been worked out, but Ms. Dodge had explained that the loan agreement would involve the standard covenants applying to such a loan. She cited as illustrative provisions the requirement that restrictions on additional borrowing would be imposed, that net working capital would have to be maintained at an agreed level, that additional investments in fixed assets could be made only with the prior approval of the bank, and that limitations would be placed on withdrawals of funds from the business by Mr. Cook. Interest would be set on a floating-rate basis at 3 percentage points above the lowest rate charged by the bank on short-term loans. Ms. Dodge indicated that the initial rate to be paid would be approximately 10% under conditions in effect in early 1997. Both also understood that Mr. Cook would sever his relationship with the National Trust if he entered into a loan agreement with the Scotia Bank. In addition to working out arrangements for increased bank credit, a second issue of concern to Mr. Cook was whether he should continue to operate as a proprietorship or whether it would be better for him to incorporate his business. As a proprietorship he paid taxes on the full amount earned by the business, the item shown as "net profit before taxes" in Exhibit 1. As explained in Exhibit 1, this figure was computed without any allowance for a salary for Mr. Cook. As the business became increasingly profitable, Mr. Cook was subject to increasingly severe individual income taxes. Mr. Cook understood that if he were to incorporate his business he would be able to deduct a reasonable salary in computing his net profits subject to the corporation income tax. The salary so dedicated would be taxable to him as an individual. Profits retained in the business would not be subject to the individual income tax if the business were incorporated. On the other hand, any dividends paid to Mr. Cook would be taxed twice, first as income to the corporation and then as personal income to the stockholder. Exhibit 5 summarizes briefly the tax rates applicable to individuals and to corporations as of 1997. EXHIBIT 1 SEAWAY LUMBER COMPANY OPERATING STATEMENTS FOR THE YEARS ENDING DECEMBER 31, 1994 THROUGH 1996 AND FOR THE THREE MONTHS ENDING MARCH 31, 1997 (\$000s) 2 In the first quarter of 1996 sales were $252,000 and net profit was $13,000. b No allowance for a salary for Mr. Cook is included in either of these items. For a discussion of the tax treatment of a proprietorship see Exhibit 5. "Drawings to cover living expenses and provision for payment of income taxes. Tax Rates Applicable to Individuals and Proprietorships As noted in the text of the case, the income of a sole proprietorship or a partnership is taxable to the owner(s) rather than to the business as such. Thus, the income of the Seaway Lumber Company would be taxable in its entirety to Mr. Cook. It is probably reasonable to assume that the taxable income attributable to Mr. Cook from his Company would be approximately equal to the amount shown as "net profit before taxes" in Exhibit 1. Since the case indicates that Mr. Cook and his wife have little or no income from sources other than his business, the figures shown in Exhibit 1 can be assumed to be Mr. Cook's sole (or principal) source of taxable income. In interpreting the following table, it should be recognized that the tax brackets and tax rates shown refer to "taxable income" in the legal sense. Mr. Cook, of course, would be entitled to any deductions and personal exemptions authorized by Revenue Canada. The following table presents the tax brackets and corresponding tax liabilities applying to individual taxpayers filing a return for the tax brackets in which Mr. Cook's income might fall: "These rates are stated as a percentage of the basic federal tax, 'The small business tax rate applies to the first $200,000 of annual income for corporations that are CanadianControlled Private Corporations throughout a taxation year. percent for income of more than $100,000 Tax Rates Applicable to a Corporation If the Seaway Lumber Company were incorporated, Mr. Cook could, of course, deduct as an expense a reasonable salary for himself. This salary would then be taxable to him as personal income. Since Mr. Cook and his wife had little or no income other than his salary, he would not be subject to the top brackets of the individual income tax on his salary. The corporation income tax rates to which the Seaway Lumber Company would be subject are as follows: In 1997, after the deduction of a reasonable allowance for a salary, a large fraction of the income of Seaway Lumber Company, if organized as a corporation, would be subject to the 25% tax rate. Any dividends paid by the Company would, of course, be taxable as ordinary income to its stockholders