76 /
Integration—Cost and Benefit of Incorporation
Notes, continued
(2) In some circumstances, it is possible to defer the payment of tax at the individual level by
using a corporation to earn income that is not immediately paid out to the shareholder. The
lower part of the table above summarizes the 2013 tax deferral or pre-payment potential
of earning income through a corporation, based on the same types of income and on the
same assumptions outlined in note (1).
(3) Dividends (both eligible and non-eligible) received from taxable Canadian corporations
are deductible in computing Part I tax and are therefore treated differently from other
investment income.
Dividends received by CCPCs from unconnected corporations, or from connected
corporations that receive a dividend refund on the payment of the dividend, are subject to
Part IV tax, calculated at a rate of 33
1
/
3
% of the dividend amount. Part IV tax is a refundable
tax that is included in the corporation’s Refundable Dividend Tax on Hand (RDTOH)
account. When taxable dividends (either eligible or non-eligible) are subsequently paid by
the corporation to its shareholders, a dividend refund equal to the lesser of 33
1
/
3
% of the
dividends paid and the balance in the RDTOH account is refunded to the corporation.
Private corporations that are not CCPCs, and certain closely held public companies, must
also pay Part IV tax on dividends they receive from taxable Canadian corporations, and may
also receive a dividend refund when they subsequently pay dividends to their shareholders.
Other public companies and their subsidiaries are not subject to this tax and therefore do
not receive a dividend refund when they subsequently pay dividends to their shareholders.
There is no difference between earning Canadian dividend income (both eligible and non-
eligible) through a corporation as opposed to earning it directly, as all corporate level tax on
such income is refundable. However, there is a potential for a tax deferral or pre-payment
based on the difference between the top individual marginal rate applicable to dividend
income and the refundable Part IV tax rate of 33
1
/
3
%.
Current as of September 30, 2013
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