You, CPA, work for Smith and Barnes Consultants, a CPA firm. It is now March $15,2024$ and you have just finished meeting with Mr$.$ Martin, a new client of your firm, and a Canadian resident. Mr$.$ Martin owns $100\%$ of Martin$$s Sunglasses Emporium Inc. $($MSE$).$ MSE is a Canadian controlled private corporation $($CCPC$)$ operating an active business in Canada. MSE has a December $31$st year end. Additional information about your client is provided in Exhibit I.

Mr$.$ Martin isn$$t sure if he$$ll be able to file the corporate taxes on time, so he wants you to draft a memo to him describing and calculating an estimate of MSE$$s minimum net income for tax purposes, taxable income and federal income tax owing for $2023.$ He will use this estimate to make sure his payment is made on time, as he doesn$$t want to pay any interest or penalties. Mr$.$ Martin wants you to round your numbers to the nearest dollar. Additionally, he would like you to tell him when MSE$$s $2023$ income tax balance owing is due, and when is the T$2$ corporate tax return is due.

Your client wants to minimize his $2023$ taxable income and tax owing and wants to see all your detailed calculations. You can ignore HST$/$GST and provincial income tax. MSE$$s taxable capital is less than $$10$M and it has no investment income in the prior year. It is not associated with any other companies. You can ignore the tax on split income $($TOSI$).$

Mr$.$ Martin also tells you that he is planning to personally invest in a partnership $(50/50)$ with his best friend, Bill. He has provided you with a list of the partnership$$s expected $2024$ income and expenses in Exhibit II$,$ assuming he moves forward with this investment. Based on the information provided in the exhibit, please explain $($briefly$)$ to Mr$.$ Martin how partnership income is taxed to the individual partners, and how much partnership income he should expect to report on his personal tax return for $2024.$

Note: you will lose $1$ mark for each incorrect addition$/$subtraction from income$/$taxes owing.

Exhibit I$-$ Additional Information

Martin$$s Sunglasses Emporium Inc.

Income Statement

For the year ended December $31$st$,2023$

Sales revenue $($see note $1)$ $$425,000$

Cost of goods sold $100,000$

Salaries expense $($see note $2)150,000$

Warranty expense $($see note $3)33,000$

Rent expense $($see note $4)28,000$

Amortization expense $($see note $5)15,500$

Other expenses $($see note $6)6,600$

Provision for income taxes $15,000$

Net income $$76,900$

Note $1.$ Included in sales revenue is a $$5,000$ dividend received from a Canadian corporation whose shares are traded on the TSX$.$

Note $2.$ Included in salaries expense are salaries paid to Mr$.$ Martin of $$90,000$ and a salary paid to Mr$.$ Martin$$s wife $($Brenda$)$ of $$25,000.$ Brenda has a full$-$time job as a bank teller, and she sometimes makes bank deposits for MSE before her shift starts. She did not do any other work for MSE in the year.

Note $3.$ MSE advertises its sunglasses as $$Impossible to scratch!$$ however there was one rushed production run in $2021$ that didn$$t meet expectations and resulted in a significant number of returns and unhappy customers. Rather than risk something like that happening again, Mr$.$ Martin now offers a $2-$year, no questions asked, warranty on the lenses. The warranty expense of $$33,000$ relates to the addition to the warranty reserve for $2023.$ The actual cost of warranty claims in $2023$ was $$21,000.$

Note $4.$ MSE$$s sunglasses sales are done direct$-$to$-$consumer through online sales, however it has a warehouse for inventory storage that it rents for $$1,500/$month$.$ The remaining rent expense relates to a payment made to York University on behalf of Mr$.$ Martin$$s son, Alexander, who lives on campus while he attends school to become a geologist.

Note $5.$ As of January $1,2023,$ MSE had the following UCC balances; class $8(20\%)$ $$30,000.$ On December $1,2023,$ MSE purchased new manufacturing equipment costing $$17,000($purchased from an arm$$s length person$).$

Note $6.$ Included in other expenses is office supplies of $$2,600,$ convention expenses $(1$ per employee$)$ of $$3,000($the $$3,000$ includes $$500$ which was listed on the receipts as being for meals$),$ and a charitable donation of $$1,000$ to a Canadian registered charity.

Exhibit II$-$ New Partnership $(2024)$

$$ Mr$.$ Martin is hoping to invest in a partnership $($he will have $50\%$ ownership$)$ starting in $2024$ and is anticipating the following income and expenses in the partnership.

$$ Anticipated revenue: Sales $$20,500,$ Non$-$eligible dividends $$1,800$

$$ Anticipated expenses:

o Advertising $$3,000$

o Accounting and bookkeeping fees $$850$

o CCA on office furniture $$4,100$

o Charitable donations $$670$

o Insurance $($relating to business$)$ $$1,250$

o Meals $($relating to meetings with clients$)$ $$500$

o Office supplies $$4,250$

o Salaries $($part$-$time staff$)$ $$6,000$

o Partner draw $-$ Mr$.$ Martin $$5,000$

o Partner draw $$ Bill $$3,000$

$$ Net Income$/($Loss$)$ $$(6,320)$