Meadows Enterprises Ltd. is a Canadian corporation located in Regina. The company operates a retail business that has shown consistent profits for several years. Cash generated from those profits has been used to acquire investments. The company prefers two types of investments: real estate and shares in other corporations. Unfortunately, in 20X1 the investments resulted in some losses. A summary of the corporation€™s 20X1 financial results is given below.

The real estate investments include several small commercial buildings that are rented to retail tenants. In 20X1, one of those tenants ceased operations, and a replacement tenant could not be found until the current year. That is the main reason for the $22,000 loss in real estate rentals.
The net loss of $170,000 on shares of other corporations arose from two sale transactions in 20X1, which are summarized below.

Both investments, which were in public corporations, had been owned for several years.
An accountant has just completed Meadows€™ 20X1 tax return and has informed the president that Meadows owes $23,850 in income taxes for 20X1.The president is upset by this and exclaims, €œThat€™s impossible! Our company lost 11,000 dollars last year, so it can€™t owe $23,850 in income taxes! I know that the corporate tax rate for my company is 15%, and 15% of nothing is nothing.€
Required:
Briefly explain why the company owes $23,850 in income tax for 20X1. Show your calculations.

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S1,240,000 868,000 372,000 191,000 181,000 Retail sales Cost of sales Gross profit Retail administrative expenses Income from operations Other income (losses) Net loss from real estate rentals S (22,000) Net loss on the sale of shares of other corporations 170000) (192000) Net loss for the year S (11000) Sale 1 Sale 2 Selling price Original cost of shares Gain loss) S72,000 S 10,000 65.000 187.000 $ 7000 S177000)