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 41.5% × $346,000		$274,000 $143,590
Small business deduction: 18.5% 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% × 274,000 Deduct: Foreign tax credits: 1. Non-business - lesser of (a) $500		(27,400) (500)
(b)                   $6,000                 × $143,590
$346,000 - ($9,000 + $38,000) = $2,881 2. Business - lesser of: (a) $9,000		(9,000)
(b)                   $30,000               × ($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.