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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
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