For high-net-worth families at the helm of family-owned enterprises, retirement planning is a multifaceted challenge…
Not all dividends are created equal. Dividends from a small or medium-sized corporation have varying tax implications and it is important to note not all dividends are the same. It should also be noted that budget changes over the past few years to the dividend tax rate for ordinary and eligible dividends have altered traditional plans, making it important to be up to date on your tax plan. There is varying advantage to the distribution of dividends when planned and done correctly.
Dividend planning notes the combined personal and corporate impact on taxes where corporations distribute income to owner-operators and shareholders. One option is to pay out dividends called non-eligible dividends. These dividends consider the lower tax rate paid by businesses that earn less than $500,000 per year in taxable income (also need to consider the impact on accessing the small business deduction rate with the passive income rules that were introduced in 2018). These ordinary dividends are received from corporations that pay tax at the lower small business corporate tax rate (in Alberta 11.0%).
Ordinary dividends received from such corporations are taxed to the individual recipients at 15.86% to 42.31% (in Alberta) for 2023 (15.86% to 42.31% in 2024) based on the recipient’s personal marginal income tax rate. This is lower than the tax rates on salaries to account for the tax already paid by the corporation.
However, using the same rate would penalize corporations that pay a higher rate of tax on earnings of more than $500,000. As such, those corporations can designate to pay eligible dividends.
Corporations that pay tax at the higher corporate rate of tax (23% in Alberta for 2023 and 2024) can build up a general rate income pool (GRIP). Dividends can be distributed from this GRIP balance as eligible dividends. Eligible dividends received by individuals are taxed at 2.57% to 34.31% (for both 2023 and 2024) at the recipient’s personal marginal income tax rate (in Alberta) a rate lower than even the ordinary dividends to account for the higher corporate tax rate paid. The downside is eligible dividends are only distributable based on opening balances or the prior year’s closing balance.
While the Canadian government has traditionally had a path towards integration (taxing individuals the same regardless of how their income is generated (eligible vs. ineligible dividends or salary) – there are shifts in advantages to the recipient in receiving eligible dividends when compared to ordinary dividends from year to year. It is therefore important to plan each year.
Talk to Shajani CPA to plan your dividends.
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. ©2024 Shajani CPA.
Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.