No Flab Enterprises Limited is an incorporated company involved in the sale of muscle building and physical fitness equipment. For the fiscal year ended March 31, 2013, the company generated taxes payable of $1.86 million. In fiscal 2014, taxes payable were $1.9 million.

Mr. Fiennes, president and controlling shareholder of the company, planned a reduced sales effort on his part for the fiscal year ended March 31, 2015. As a result, he estimated the company’s taxes payable at $1,524 million for the year and paid 12 equal monthly instalments based on this amount. By March 2015, Mr. Fiennes had tabulated the profits and knew that the company’s taxes payable would be $2,154 million.

Since Mr. Fiennes had reinvested all of the profits for fiscal 2015, he did not have the cash to pay the additional $630,000 in tax, so he paid nothing further. He filed the corporation’s tax return on December 31, 2015, and, in order to avoid showing the further taxes payable, he did not report income for the corporation’s 2015 fiscal year, thereby reducing taxes for the year by the $630,000. He reasoned that he would declare this income in the following year and pay the taxes on that income then.

Furthermore, instead of using the corporate tax return form readily available at his local District Tax Services Office, he filed his corporation’s return on some accounting paper. As a result of filing in this way, however, his return did not contain all of the information required to be filed by the corporation.

In May 2016, the corporation’s file was randomly selected for a full-scale audit during which discussions with Mr. Fiennes revealed the omitted taxable income. He argued with the tax auditor that the added taxable income resulted from his forgetting to record the sales of 123,000 units in September 2015. He was forcefully requested to pay the added tax by June 30, 2016 which he planned to do by that date. In addition to the added tax and interest, the tax auditor decided to assess the corporation for appropriate penalties, in this case, based on the evidence on hand. These were included in the notice of assessment requiring payment by June 30, 2016.

REQUIRED

(1) Set out the basis on which the interest that the corporation must pay on June 30, 2016 would be computed, assuming it was not eligible for the small business deduction.

(2) Indicate which penalties would be imposed.