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What are Tax Integration Mechanisms?

CRA T1135 Form

Tax Integrating is a concept that looks to removing the differences in tax payable because of a choice in business or income earning structure. There are many of these in the Income Tax Act. What they aim to do is 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.

The most common tax integration mechanism is the dividend tax credit. When a corporation earns income, it has to pay income 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 is left of the income of a corporation to be paid 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 the shareholder to claim a tax credit that about equals the amount of tax paid by the corporation on the amount of dividend paid. It is meant to ensure that the shareholder pays the same amount of tax on the income irrespective of whether it is earned through a corporation or personally.

Another integration mechanism is the Refundable Dividend On Hand mechanism discussed on our article HERE. The integration in this case 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 activity.

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