What does integration mean with respect to Corporate Tax?
The Canadian tax system is based on the concept of integration. This concept tries to ensure that there is no difference in the total tax bill between income earned directly by an individual or earned first by a corporation and then paid to the same individual.
Below is a numeric example showing the total tax bill if income is earned directly by an individual through salary versus income earned through the corporation and then paid to the same individual through a dividend.
If a salary is paid by the corporation the tax burden falls directly on the individual because the salary is a deductible expense to the corporation. If a dividend is paid by the corporation the tax burden is split between the corporation and the individual. This is because the dividend is an after tax distribution of corporate profits. At the end of the day the actual dollar amount of tax is equal. The example assumes that the income earned is business income. There are other forms of income such as investment income which require additional mechanics to ensure integration is achieved such as Refundable Dividend Tax on Hand and Eligible Dividends.
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