Tax integration is a concept that attempts to eliminate the differences in tax payable resulting from a choice in business or income-earning structure. There are many of these provisions in Canada’s Income Tax Act.
They aim to integrate the taxes across various structures to make sure that the total tax payable at the end of the day is the same or very similar to the amount that would be due if those structures did not exist.
Tax Integration in Private Companies
Here are two of the most common ways that tax integration principles are applied specifically to private company income.
Dividend Tax Credits
The most common tax integration mechanism is the dividend tax credit. When a corporation earns revenue, it must pay tax on that income. The rate of income tax is either a low rate for the active business of a CCPC below the threshold or the general rate.
Either way, what’s left of the income that a corporation pays out as dividends to shareholders is money on which some tax has already been paid. When the dividend is then received by shareholders, the amount of the dividend is considered income.
If no integration mechanism existed, then the dividend would be taxed again at the shareholder’s marginal rates. The dividend tax credit allows shareholders to claim a tax credit approximately equal to the amount of tax paid by the corporation on the dividend paid.
It is intended to ensure that shareholders pay the same amount of tax on their income, regardless of whether it is earned through a corporation or personally.
Refundable Dividend On Hand
This integration mechanism increases the tax payable by a corporation on passive income dividends and then refunds it when the dividend is ultimately paid to an individual, so that the tax payable on the dividend each year is the same or more than the tax payable by an individual receiving the same dividend.
Integration mechanisms are meant to help make the tax system neutral to methods of structuring income-earning activities.
