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Integration Of The Corporate Income Tax System In Canada

Integration of the Corporate Income Tax System in Canada

By: Nizam Shajani, CPA, CA, MBA

Theoretically the total tax paid by a corporation and its shareholders should be the same. There should be no tax advantage if an individual earns their income via a corporation or is paid a salary. This is the theory of integration. When the tax system is not perfectly integrated, this may provide a tax planning opportunity or arbitrage.[1]

The integration of the corporate and personal income taxes was a focus of the 1969 Royal Commission on Taxation, chaired by Kenneth Carter and often referred to as the Carter Commission.[2] The Carter Commission included six volumes of tax reforms that were the basis of four years of political debate and included one series on surplus stripping[3]. The recommendations and debates were carried through in the 1972 tax reforms and continue in the current income tax act (the Act).

Tax rates in Canada are progressive for individuals. Table 1 illustrates the progression as individuals who earn higher incomes pay higher rates of tax. Corporations however pay a flat rate of tax depending on the type of corporation and amount of taxable income earned as illustrated in Table 2. Integration of the tax system attempts to tax individuals, including individual shareholders at the progressive rates regardless of the income being earned via their corporation or personally.

In a perfectly integrated system, the amount of tax paid would be the same despite the vehicle from which the remuneration was received. This is not the case, specifically underlining the tax savings by renaming the vehicle to one that is most advantageous under the circumstances.

Shajani LLP offers tax planning Integration Worksheets which determines whether it is more tax efficient to earn different types of income through a corporation, or personally. Each solution is precisely calibrated to our client’s personal income. This service includes key average tax rates, the tax savings (cost) using a corporation, and potential tax deferrals. Contact Shajani LLP for your professional tax planning.

Table 1 – 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%

Table 2 – Combined Federal and Alberta Effective Corporate Tax Rates 2020[1]

Small Business General
Business
Investment Income
11.00% 25.00% 48.70%
[1] This paper includes excerpts from a paper written by Nizam Shajani for York University, Faculty of Law ‘A critical analysis of surplus stripping rules within the Canadian Income Tax Act and the related impact on integration of corporate and personal taxes’ (2020)
[2] Canada, Report for the Royal Commission on Taxation, 1966
[3] Canada, Report for the Royal Commission on Taxation, Number 15, Stripping of Corporate Surplus, 1963
Canada, Canada Revenue Agency, Canadian income tax rates for individuals – current and previous years https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#provincial
Canada, Canada Revenue Agency, Corporation tax rates https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html

 

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