Integration of the Corporate Income Tax System

Integration of the corporate income tax system aims to prevent double taxation of corporate earnings. In Canada, this system allows income earned at the corporate level, which is then distributed as dividends to shareholders, to be taxed once at a combined corporate and personal level similar to how personal income would be taxed directly.

Step 1: Understanding Corporate Tax Rates

For corporations, income is taxed at both the federal and provincial levels. In 2023, federal and Ontario corporate income tax rates for A Canadian-controlled private corporation (CCPC) are:

• Federal general corporate tax rate: 15%
• Ontario general corporate tax rate: 11.5%
• Combined general corporate tax rate (Federal + Ontario): 26.5%

The calculations may change due to a lower rate (3.2% in Ontario) once the Small Business Deduction (SBD) is considered

Step 2: Understanding Personal Tax on Dividends

When a corporation distributes its after-tax profits to shareholders as dividends, the shareholders must pay personal income tax on those dividends. To integrate the corporate and personal income tax, dividends are "grossed up" and taxed at a rate that considers the taxes already paid at the corporate level. The shareholder then receives a dividend tax credit to offset the corporate taxes already paid.

In Ontario for eligible dividends:

• Federal gross-up: 38%
• Ontario gross-up: 38%
• Federal dividend tax credit: 15.02%
• Ontario dividend tax credit: 10%

Example Calculation

Let’s assume a corporation in Ontario earns $1,000 in profit. Here’s how tax integration would work:

Corporate Tax

• Total corporate tax: 26.5% of $1,000 = $265
• After-tax corporate income: $1,000 $265 = $735

Dividend Gross-Up

• Grossed-up dividend: $735 × 1.38 = $1,014.3
• This grossed-up amount is included in the shareholder’s taxable income.

Personal Tax Calculation on Dividends

Let’s say the shareholder’s combined federal and Ontario tax rate on eligible dividends is 39%.

• Personal tax on grossed-up dividend: $1,014.3 × 0.39 = $395.6

Dividend Tax Credit

• The shareholder receives a combined federal and Ontario dividend tax credit:
• Federal: 15.02% × $1,014.3 = $152.12
• Ontario: 10% × $1,014.3 = $101.43
• Total dividend tax credit = $152.12 + $101.43 = $253.55
• Net personal tax on dividend: $395.6 $253.55 = $142.05

Total Tax Paid (Corporate + Personal)

• The total tax paid by both the corporation and shareholder is:
• Corporate tax: $265
• Net personal tax: $142.05
• Total tax: $265 + $142.05 = $407.05

Effective Total Tax Rate

• Effective tax rate on the initial $1,000 income is:

407.05 / 1000 = approximately 40.7%

This effective rate is designed to approximate what the shareholder would pay if they earned the income personally, rather than through a corporation. The integration reduces double taxation and aligns the corporate and personal tax systems.

It is important that you proceed correctly when filing your tax return. Please contact our office to make sure there are no errors.