On Oct. 16, 2017, Finance Minister Bill Morneau announced that the Liberal government intends to lower the small-business tax rate from 10.5 to 10 per cent, effective Jan. 1, 2018, and to nine per cent effective Jan. 1, 2019. Tax cuts are sure to be welcomed by many, as they often are, but it is important to keep in mind that the reduction in the small-business tax rate has implications that go well beyond tax savings for small businesses.
To understand some of the implications of the recent tax cut, it is important to first understand a fundamental concept in Canadian taxation known as “integration.” Integration is achieved when the treatment of income earned by a corporation and distributed to an individual shareholder in the form of a taxable dividend is comparable to the treatment of income earned directly by the individual. To achieve integration, corporations pay tax on the income they earn, and when a dividend is paid, the shareholder is required to include the dividend in the computation of his/her income plus a grossed-up amount. The shareholder is then entitled to a claim a credit (known as the “dividend tax credit”) to offset the corporate tax payable by the corporation and avoid double taxation.
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