(1) the individual earning the income directly without the use of a corporation and (2) earning the income through a corporation and distributing all of the after-tax corporate income as a non-eligible dividend to the sole individual shareholder. If integration is not working properly, briefly explain why
Byrd & Chen’s Canadian tax principles-2
Chapter # 13
AP 13-1 (Integration Example)
Assume the following with respect to an individual shareholder of a wholly owned CCPC:
• The corporation’s only income is active business income of $340,000, all of which qualifies for the small business deduction.
• The corporation has no GRIP and therefore all of the taxable dividends it pays will be non-eligible dividends.
• The individual’s marginal federal tax rate is 33% and his marginal provincial tax rate is 15%.
• The provincial dividend tax credit on non-eligible dividends is equal to 34% of the gross up.
• The combined federal and provincial corporate tax rate on business income is 12.0%.
Required: Indicate, using these assumptions, whether integration is working perfectly and
whether it is beneficial to use a corporation to earn the company’s active business income in
this instance. Show all supporting calculations, including both the income tax comparison and
after-tax return comparison of (1) the individual earning the income directly without the use of a
corporation and (2) earning the income through a corporation and distributing all of the after-tax
corporate income as a non-eligible dividend to the sole individual shareholder. If integration is
not working properly, briefly explain why.
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