Dividend/Salary Mix (in Canada)

Introduction

Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the last fiscal year, the government collected roughly three times more personal income taxes than it did corporate income taxes(Easson 97-109). This paper discusses Even though Canadian income tax laws are different from other jurisdictions, some of the same principles of tax planning will still apply.

Discussion

Tax collection agreements enable different governments to levy taxes through a single administration and collection agency. The federal government collects personal income taxes on behalf of all provinces and territories except Quebec and collects corporate income taxes on behalf of all provinces and territories except Alberta, Ontario and Quebec. Canada's federal income tax system is administered by the Canada Revenue Agency (CRA). Quebec's income tax system is administered by Revenu Québec, formally Ministère du Revenu du Québec(Easson 78-82).

Canadian federal income taxes, both personal and corporate are levied under the provisions of the Income Tax Act. Provincial and territorial income taxes are levied under various provincial statutes.

The Canadian income tax system is a self-assessment regime. Taxpayers assess their tax liability by filing a return with the CRA by the required filing deadline. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial companies, correcting it for obvious errors. A taxpayer who disagrees with CRA's assessment of a particular return may appeal the assessment. The appeal process starts when a taxpayer formally objects to the CRA assessment. The objection must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of CRA. An appealed assessment may either be confirmed, vacated or varied by the CRA. If the assessment is confirmed or varied, the taxpayer may appeal the decision to the Tax Court of Canada and then to the Federal Court of Appeal(www.yenommarketinginc.com ).

Dividend and Salary Tax Consequence

The economist hopes for a tax system that is neutral—that is, a system that does not affect the way that economic decisions are made. Equally important, if the tax system is to be equitable for all, the tax burden should not change merely because of the form in which these decisions are implemented.

In most industrialized countries, however, compromises must be made. The taxation of business income often represents such a compromise. Profit earned by a corporation is taxed; then, when the after-tax profit is distributed in the form of dividends, it is taxed again in the hands of the shareholder(Jacks 16-17).

Consider, for example, a small incorporated Canadian business that makes a profit of $100.00 per year. The business pays federal and provincial corporate income tax of $23.12, as shown in example 1, and has $76.88 to distribute to its shareholders as dividends. The shareholders also have to pay personal income tax on those dividends, but the cash dividend received by shareholders is increased (grossed up) by ...