Is it time to pay a Dividend? >

    

September 2009

Is it time to pay a Dividend?

The good news is that corporate income tax rates are generally on the decline in Canada.
 
The bad news is that, as a consequence of the decline in corporate income tax rates, personal income taxes on dividends from Canadian corporations will be increasing. Phased-in reductions to the gross-up and dividend tax credit mechanisms will effectively raise personal income taxes on both eligible and ineligible dividends received from Canadian corporations.
 
The gross-up and dividend tax credit mechanisms are designed to minimize the double taxation effect on dividend income. In theory, the gross-up is intended to restore dividends to the amounts that would have been distributed had no corporate taxes been paid, and the dividend tax credit is intended to give individuals credit against their personal income taxes for the amount of underlying corporate income tax paid.
 
Eligible dividends are dividends that are designated by Canadian corporations to be eligible for an enhanced Federal gross-up of 45% and an enhanced dividend tax credit of 18.96%. The designations must be made at the time the dividends are paid.
 
To the extent that dividends are attributable to either corporate income subject to the high general corporate income tax rate, dividends received from foreign affiliates, or eligible dividends received from other Canadian corporations, they may be designated as eligible dividends.
 
Dividends attributable to corporate income subject to the low small business tax rate, investment income subject to the Federal refundable tax treatment or non-designated dividends received from other Canadian corporations may not be designated. Accordingly, such dividends are commonly referred to as ineligible dividends. The normal Federal gross-up of 25% and dividend tax credit of 13.33% will apply to ineligible dividends.
 
The top combined Federal and Ontario personal tax rates on eligible and ineligible dividends for the taxation years 2009 to 2013 are as follows:
 

 
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
Eligible Dividends
 
 
23.06%
 
26.57%
 
28.19%
 
29.54%
 
29.54%
 
Ineligible Dividends
 
 
31.34%
 
32.57%
 
 
32.57%
 
 
32.57%
 
 
32.57%
 

 
As illustrated in the table above, the top personal tax rate on ineligible dividends will increase by 1.23% in 2010 with no further increase in subsequent years. But the top rate personal tax rate on eligible dividends will change dramatically, with a total increase in the rate of 6.48% by 2012 (an effective tax increase of 28%).
 
As a result of the pending increases to the top personal tax rates on dividends and in particular, eligible dividends, Canadian corporations that may distribute dividends in the next few years should consider paying such dividends before the end of 2009. In the case of eligible dividends, there will still be an opportunity for significant tax savings on dividends paid in 2010.
 

For further information please contact a member of the Shimmerman Penn taxation team at 416 964 7200 or via email:

Doug Hartkorn, Tax Partner:

Mark McGinnis, Tax Partner:

Cara Orzech, Tax Manager:

Derek Wagar, Tax Manager:


© 2009 Shimmerman Penn LLP
The content of this bulletin is for general information purposes. Recipients and readers are advised that they should always seek professional advice in connection with their particular circumstances. Shimmerman Penn LLP and Shimmerman Penn Title & Associates Inc., their partners, shareholders and employees cannot accept responsibility for any loss incurred by an individual, company, entity or organization as a result of actions taken or not taken in relation to the content of this bulletin.