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Integrated Tax Planning

Integrated Tax Planning

Integrated Tax Planning

By Nizam Shajani, CPA, CA, MBA

September 18, 2020

 

The perception of tax planning has often been misconceived as a simple choice between dividends and salary from an owner managed business. The decision should consider a number of variances – one such consideration being integration.

The Canadian tax system is designed to equalize the combined corporate and personal tax rate paid regardless of how this was earned. This attempt to equalize the tax treatment is called integration.

Integration often does not work perfectly and often leaves room for planning. With the recent tax changes– many are revising their tax planning to see if they are still optimized for minimizing their tax burden.

In Alberta, the combined federal and provincial corporate tax rate for small businesses has decreased – as has the rate for general corporate tax. The varying changes for small and medium sized business owners will impact bottom lines.

Personal rate changes on eligible and non-eligible dividends have also changed and left disintegration opportunities. At the top marginal rate in Alberta – eligible dividends (largely for dividends received from corporations that paid the large corporate tax rate) are taxed at 31.71% and non-eligible dividends (for dividends received from corporations that paid the small business rate) are taxed at 42.31%. However, dividend tax rates change progressively as individual taxable income changes and can be as low as -0.03% for income below $48,535 for eligible dividends and 15.86% for non-eligible dividends.

Cash flow considerations are also considered – where funds are not needed personally can be reinvested within the corporation to allow for a tax deferred growth that may find a more efficient way to take funds out in future years – such as reinvesting income earned at the small business rate into a large business that pays a dividend or capital gain and then withdrawing those funds at the lower tax rates. This should be considered along with other variances such as anticipated future cash flows and income splitting opportunities where available.

The changes necessitate small business owners to plan for remuneration in both the near and longer term. At Shajani, we are happy to provide you with a consultation on how to take money out of your corporation tax efficiently. Our integrated approach will go beyond what you may be used to at traditional firms by collaborating with financial planners, lawyers and other service providers in a unique team based approach to provide both a tax efficient plan and a means to implement the plan.

 

  Salary Only Small Business
Dividend Only
Large Business
Dividend Only
Revenue       200,000       200,000       200,000
             
Expenses       100,000       100,000       100,000
Salary       100,000                –                –
Income before tax                –       100,000       100,000
Corporate tax              – 11.00%     11,000 25.00%    25,000
Income available to distribute                –          89,000          75,000
Dividend                –          89,000          75,000
             
Personal Tax on Dividend                – 18.73%        16,673 1.99%        1,986
Personal Tax on Salary 27.99%     27,992                –                –
             
Cash in hand          72,008          72,327          73,013
Total Tax Paid        27,992        27,673        26,986

2020 Integration table for$100,000 in funds taken (Alberta Illustration Only)

 

 

Combined Federal and Alberta Effective Personal Tax Rates 2020

Income from   Income to Other
Income
Capital Gains Eligible
Dividends
Non-Eligible
Dividends
$                             – to $         48,535 25.00% 12.50% -0.03% 15.86%
$                     48,535 to $         97,069 30.50% 15.25% 7.56% 22.18%
$                     97,069 to $       131,220 36.00% 18.00% 15.15% 28.51%
$                 131,220 to $       150,473 38.00% 19.00% 17.91% 30.81%
$                 150,473 to $       157,464 41.22% 20.61% 22.35% 34.51%
$                 157,464 to $       209,952 42.22% 21.11% 23.73% 35.66%
$                 209,952 to $       214,368 43.22% 21.61% 25.11% 36.81%
$                 214,368 to $       314,928 47.00% 23.50% 30.33% 41.16%
$                 314,928 +   48.00% 24.00% 31.71% 42.31%

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2020 Shajani LLP