Question $1(18$ marks$)$

The following tax calculations have been prepared by the senior accountant and the bookkeeper. The senior accountant has correctly determined the income for tax purposes for the various sources of the corporate revenue and deductions. However, the computation of taxable income and income tax have been done incorrectly by the bookkeeper.

Greenwich Multi$-$National Ltd$.($A Canadian$-$controlled Private Corporation$)$Income for Tax Purposes for the fiscal year ended December $31,2020$

Canadian manufacturing profits

$$100,000$

Canadian wholesaling profits

$35,000$

United Kingdom wholesaling profits $-$ Note $1$

$30,000$

Sale of wholesaling business and equipment

$.$ taxable capital gains $($non active$)$

$45,000$

$.$ recapture

$15,000$

Profit from the sale of land held on a speculative basis

$55,000$

Rental income $-$ Note $2$

$22,000$

Interest $-$ U$.$S$.$ non$-$business income $-$ Note $3$

$6,000$

$-20-$year bonds of subsidiary corporation

$27,000$

Taxable dividends from taxable Canadian corporations:

$.$ controlled $(100\%)-$ Note $4$

$9,000$

$.$ non$-$controlled $(5\%)$

$2,000$

Income for tax purposes $-$ Division B

Notes to Statement of Income for Tax Purposes

$$346,000$

These profits arose from wholesaling operations in buildings located in London, England and Glasgow, Scotland. Income taxes paid to U$.$K$.$ governments totalled C$$9,000.($All amounts have been converted to Canadian dollars$).$

Rental income was derived from a warehouse no longer required by the manufacturing operation.

U$.$K$.$ withholding tax was C$$500.($All amounts are expressed in Canadian dollars$).$

The wholly owned corporation sells manufactured parts to its parent, Greenwich Multi$-$ National Ltd$.$

Other Information and Correct Data

During the year, the corporation paid the following selected amounts:

Charitable donations $ $12,000$

Manufacturing equipment

$.$ new $110,000$

$.$ used $162,000$

The balances in the tax accounts as at January $1,2020$ were:

Investment tax credits on hand

$ $1,000$

Unused foreign business tax credit

$1,600$

Non$-$capital losses

$13,000$

Net capital losses $($arising in $1999)$

$38,000$

Net income for tax purposes Deduct

Dividends from controlled corporations

$

$$346,000$

$9,000$

Charitable donations

$12,000$

Non$-$capital losses

$13,000$

Net capital losses

$38,000$

$72,000$

Taxable income

Part I tax calculation:

Basic federal tax $41\mathrm{.}5\%\backslash$times $$346,000$

$$274,000$

$$143,590$

Small business deduction: $18\mathrm{.}5\%$ of the least of

$($i$)$ Active business income

$$100,000$

$(18,500)$

$($ii$)$ Taxable income

$254,000$

$($iii$)$ Annual limit $$500,000$

$500,000$

Federal abatement: $10\%\backslash$times $274,000$ Deduct:

Foreign tax credits:

$1.$ Non$-$business $-$ lesser of $($a$)$ $$500$

$(27,400)$

$(500)$

$($b$)$ $$6,000\backslash$times $$143,590$

$$346,000-($$$9,000+$ $$38,000)$

$=$ $$2,881$

$2.$ Business $-$ lesser of:

$($a$)$ $$9,000$

$(9,000)$

$($b$)$ $$30,000\backslash$times $($$$143,590-27,400)$

$$346,000-($$$9,000+$ $$38,000)$

$=$ $$11,639$

The corporation has one permanent establishment in Canada, located in Dundas, Ontario. Incorrect Taxable Income and Part I Tax

Tax reduction

$(13\%$ of $$274,000)(35,620)$

Total Part I tax $ $52,570$

Required: Draft a memorandum to the bookkeeper indicating the errors made in the calculation of Part I tax and explain in your words, not by calculation, how the bookkeeper would proceed to do these calculations correctly. Note:

You are not required to recalculate Part I tax however you may provide calculations that support any correction of errors you have found.

Ignore subtotal, mechanical and carry forward errors arising from the original errors.

Assume that the foreign tax credits have been calculated correctly.