Page 80

74 /

Integration—Cost and Benefit of Incorporation

Notes

(1) Earning income through a corporation involves two layers of taxation: taxation of the

income at the corporate level and the subsequent personal taxation upon distribution of the

corporation’s after-tax income as a dividend to the shareholder. Theoretically, the Canadian

income tax system is designed such that the total income tax (corporate and personal)

incurred by using a corporation to earn income should be the same as the personal tax

that would result if the income were earned directly by an individual who is taxable at the

top marginal rate (the principle of integration). However, as the top part of the above table

demonstrates, in practice this is not the case. This part of the table summarizes the 2013

income tax savings or cost of earning the following types of income through a corporation,

as opposed to an individual earning the income directly:

• Investment income other than capital gains and dividends (see the detailed

calculations in the table "Integration—Cost and Benefit of Incorporation for Investment

Income")

• Capital gains

• Dividend income from taxable Canadian corporations

• Active business income (ABI) eligible for the small business deduction (SBD)

• ABI not eligible for the SBD.

B.C.

Alta.

Sask.

Man.

Ont.

Tax savings (cost) of incorporation

Investment income

(2.4%)

(1.7%)

(2.7%)

(4.9%)

0.7%

Capital gains

(1.2)

(0.9)

(1.3)

(2.5)

0.3

Dividends—Eligible

0.0

Dividends—Non-eligible

0.0

ABI eligible for SBD

1.0

1.2

2.0

0.6

3.2

ABI in excess of SBD

(1.2)

(0.5)

(1.1)

(4.2)

(1.9)

Tax deferral (pre-payment) from incorporation

Investment income

(1.7%)

(5.7%)

(2.7%)

(0.3%)

3.4%

Capital gains

(0.8)

(2.8)

(1.3)

(0.1)

1.7

Dividends—Eligible

(7.6)

(14.0)

(8.5)

(1.1)

0.5

Dividends—Non-eligible

0.4

(5.6)

0.0

5.8

3.1

ABI eligible for SBD

30.2

25.0

31.0

35.4

34.0

ABI in excess of SBD

18.0

14.0

17.0

19.4

23.0

Current as of September 30, 2013