The following tax calculations have been prepared by the senior accountant and the bookkeeper. The senior...

  
 
 
 

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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 Canadian wholesaling profits United Kingdom wholesaling profits - Note 1 Sale of wholesaling business and equipment . taxable capital gains (non active) . recapture Profit from the sale of land held on a speculative basis Rental income - Note 2 Interest - U.S. non-business income - Note 3 - 20-year bonds of subsidiary corporation Taxable dividends from taxable Canadian corporations: .controlled (100%) - Note 4 . non-controlled (5%) Income for tax purposes - Division B $100,000 35,000 30,000 45,000 15,000 55,000 22,000 6,000 27,000 9,000 2,000 $346.000 Notes to Statement of Income for Tax Purposes 1. 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). 2. Rental income was derived from a warehouse no longer required by the manufacturing operation. 3. U.K. withholding tax was C$500. (All amounts are expressed in Canadian dollars). 4. The wholly owned corporation sells manufactured parts to its parent, Greenwich Multi- National Ltd. Other Information and Correct Data (a) During the year, the corporation paid the following selected amounts: (i) Charitable donations (ii) Manufacturing equipment . new . used (b) The balances in the tax accounts as at January 1, 2020 were: Investment tax credits on hand Unused foreign business tax credit Non-capital losses Net capital losses (arising in 1999) Dividends from controlled corporations Charitable donations Non-capital losses Net capital losses Taxable income Part I tax calculation: Basic federal tax 41.5% × $346,000 $ 12,000 (c) The corporation has one permanent establishment in Canada, located in Dundas, Ontario. Incorrect Taxable Income and Part I Tax Net income for tax purposes Deduct 110,000 162,000 12,000 13,000 38,000 $1,000 1,600 13,000 38,000 $346,000 $ 9,000 72,000 $274,000 $143,590 Small business deduction: 18.5% of the least of (i) Active business income (ii) Taxable income (iii) Annual limit $500,000 Federal abatement: 10% × 274,000 Deduct: Foreign tax credits: 1. Non-business - lesser of $6,000 (a) $500 (b). $346,000-($9,000 + $38,000) = $2,881 2. Business lesser of: (a) $9,000 (b). Tax reduction * $143,590 $30,000 $346,000-($9,000 + $38,000) = $11,639 (13% of $274,000) Total Part I tax $100,000 (18,500) 254,000 500,000 x ($143,590-27,400) (27,400) (500) (9,000) (35,620) $ 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: 1. You are not required to recalculate Part I tax however you may provide calculations that support any correction of errors you have found. 2. Ignore subtotal, mechanical and carry forward errors arising from the original errors. 3. Assume that the foreign tax credits have been calculated correctly. 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 Canadian wholesaling profits United Kingdom wholesaling profits - Note 1 Sale of wholesaling business and equipment . taxable capital gains (non active) . recapture Profit from the sale of land held on a speculative basis Rental income - Note 2 Interest - U.S. non-business income - Note 3 - 20-year bonds of subsidiary corporation Taxable dividends from taxable Canadian corporations: .controlled (100%) - Note 4 . non-controlled (5%) Income for tax purposes - Division B $100,000 35,000 30,000 45,000 15,000 55,000 22,000 6,000 27,000 9,000 2,000 $346.000 Notes to Statement of Income for Tax Purposes 1. 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). 2. Rental income was derived from a warehouse no longer required by the manufacturing operation. 3. U.K. withholding tax was C$500. (All amounts are expressed in Canadian dollars). 4. The wholly owned corporation sells manufactured parts to its parent, Greenwich Multi- National Ltd. Other Information and Correct Data (a) During the year, the corporation paid the following selected amounts: (i) Charitable donations (ii) Manufacturing equipment . new . used (b) The balances in the tax accounts as at January 1, 2020 were: Investment tax credits on hand Unused foreign business tax credit Non-capital losses Net capital losses (arising in 1999) Dividends from controlled corporations Charitable donations Non-capital losses Net capital losses Taxable income Part I tax calculation: Basic federal tax 41.5% × $346,000 $ 12,000 (c) The corporation has one permanent establishment in Canada, located in Dundas, Ontario. Incorrect Taxable Income and Part I Tax Net income for tax purposes Deduct 110,000 162,000 12,000 13,000 38,000 $1,000 1,600 13,000 38,000 $346,000 $ 9,000 72,000 $274,000 $143,590 Small business deduction: 18.5% of the least of (i) Active business income (ii) Taxable income (iii) Annual limit $500,000 Federal abatement: 10% × 274,000 Deduct: Foreign tax credits: 1. Non-business - lesser of $6,000 (a) $500 (b). $346,000-($9,000 + $38,000) = $2,881 2. Business lesser of: (a) $9,000 (b). Tax reduction * $143,590 $30,000 $346,000-($9,000 + $38,000) = $11,639 (13% of $274,000) Total Part I tax $100,000 (18,500) 254,000 500,000 x ($143,590-27,400) (27,400) (500) (9,000) (35,620) $ 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: 1. You are not required to recalculate Part I tax however you may provide calculations that support any correction of errors you have found. 2. Ignore subtotal, mechanical and carry forward errors arising from the original errors. 3. Assume that the foreign tax credits have been calculated correctly.

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Answer Memorandum Date 04June2021 To Greenwich Multinational Ltd Subject Errors in pa... View the full answer