Norex Distributors Inc. is a small Canadian public corporation, located in Saskatchewan, that derives all of its business income from the wholesale distribution of floor coverings. Currently, Norex does not manufacture any of its products and purchases its entire inventory from manufacturers in eastern Canada. Norex has decided to acquire a small manufacturing plant in Saskatchewan. The following assets will be acquired:

Assets                                                                                     Cost

Land ……………………………………….                          $ 80,000

Building ……………………………………….                     300,000

Manufacturing equipment ………………………………      600,000

Goodwill ……………………………………….                    50,000

……………………………………….……………               $1,030,000

The planned acquisition date is July 1, 20X1, the day after the year-end of Norex. The company’s vice-president realizes that the manufacturing business can be purchased and operated through a newly created subsidiary corporation and that the subsidiary’s manufacturing profit of $240,000 (see below) can result in a federal manufacturing and processing deduction of $31,200 at the most. The province of Saskatchewan also offers a 2% rate reduction on manufacturing income.

As an alternative, Norex can purchase the assets and operate the manufacturing business as a division. The vice-president has asked you to determine, from a tax perspective, whether this alternative is preferable to the other. Norex has provided you with estimated results for the first year of operations after the acquisition (i.e., year ended June 30, 20X2).These results are summarized below.

Information relating to new manufacturing plant

1. Manufacturing activities take up 80% of the building’s space. The remaining space is used for storing finished products and for administrative offices.

2. Estimated net income for tax purposes is $240,000, after appropriate deductions for capital cost allowance, eligible capital property, and the following:

Direct labour	$ 320,000
Utilities	14,000
Property taxes	4,000
Raw materials	610,000
Administrative and office salaries allocated
From Norex (see below)	80,000
	$1,028,000

Information relating to Norex

(excluding new manufacturing plant)

1.      Estimated net income for tax purposes is $4,730,000, including:

Interest income on long-term bonds		$130, 000
Administrative salaries	630,000
Warehouse and sales salaries	340,000
	970,000
Salaries allocated to new plant	(80,000)	890,000
Rent for fleet of delivery trucks		80,000

2.      In estimating the net income of $4,730,000, an appropriate deduction for CCA was made on the following properties:

	Original cost  of assets in class	UCC  (after CCA)
Class 1	$1,340,000	$ 965,000
Class 8	190,000	75,000
Class 10	360,000	190,000
	$1,890,000	$1,230,000

Required:

Should Norex operate the proposed new manufacturing operation as a separate subsidiary corporation or as a division? Provide calculations to support your answer.