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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 2014 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

(4.0%)

(3.1%)

(3.9%)

(6.2%)

(2.3%)

Capital gains

(2.0)

(1.5)

(2.0)

(3.1)

(1.1)

Dividends—Eligible

0.0

Dividends—Non-eligible

0.0

ABI eligible for SBD

(0.6)

(0.3)

0.6

(0.9)

0.1

ABI in excess of SBD

(1.4)

(0.5)

(1.1)

(4.2)

(1.8)

Tax deferral (pre-payment) from incorporation

Investment income

0.1%

(5.7%)

(2.7%)

(0.3%)

3.4%

Capital gains

0.1

(2.8)

(1.3)

(0.1)

1.7

Dividends—Eligible

(4.7)

(14.0)

(8.5)

(1.1)

0.5

Dividends—Non-eligible

4.7

(4.0)

1.6

7.4

6.8

ABI eligible for SBD

32.3

25.0

31.0

35.4

34.0

ABI in excess of SBD

19.8

14.0

17.0

19.4

23.0