Corporate Taxation & Dividends

In simple terms, Canadian corporations have access to two types of active business tax rates:

  1. The Small Business Deduction (SBD) – In AB the rate is 11% and you can elect to utilize this rate for the first $500,000 of income (2020)
  2. General Tax Rate – In AB the rate is 23% and mandatory after $500,000 of income (after June 30, 2020)

I emphasize elect because it’s a choice, you don’t have to utilize the SBD – you can also elect to pay the General Tax Rate for the first $500,000. Our financial advisors in Calgary can help explore options like this with you.

Now you may ask yourself why anyone would elect to pay a higher tax rate within their corporation.

Let me explain how non-eligible and eligible dividends work and you may understand.

Dividends are described as after-tax profits paid to shareholders from a corporation.

  • Non-eligible dividends are paid from profits where the SBD was utilized.
  • Eligible dividends are paid from profits where the General Tax Rate was utilized.

Your accountant should keep track of your available non-eligible and eligible dividends from two notional accounts called your Low Rate Income Pool (LRIP) and General Rate Income Pool (Grip) – respectively.

Now, let’s quickly dive into the basic taxation of dividends to shareholders in a simple manner!

Via a system known as integration, when you pay out a dividend from a corporation the taxes payable will roughly equal the same as if you had paid it out as a salary.

The CRA recognizes that you paid some taxes corporately so they essentially will tax you the difference.

Assuming you had no other income to declare, if you paid out a dividend from your corporation it could be tax free roughly up to the amounts below: (AB tax rates – 2020)

  • ~$20,000 on non-eligible dividends dividends
  • ~$60,000 on eligible dividends

The reason for this is they know you paid taxes corporately and they’re essentially trying to equalize the taxes exactly as if you had taken it out as a salary.

The system isn’t quite perfect but it’s definitely getting better.

If you have questions about financial planning in Calgary and wealth management in Calgary or would like to explore your options, connect with us to speak with a financial advisor in Calgary and get the answers you need to achieve your goals.

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