|Active business income up to $500K||Active business income exceeding $500K||Investment income|
The foregoing table is for 2015. See below commentary on changes for 2016
For 2015, investment income may be subject to refundable tax of 26.67% of investment income. Portfolio dividends may be subject to Part IV tax of 33.33%. Part IV tax is added to the refundable dividend tax account, refundable when taxable dividends are paid at a rate of one-third times taxable dividends that are paid. Investment income includes net rental income, taxable capital gains.
The concept of tax integration in Canada is that one should be indifferent in earning income directly or indirectly through a Canadian corporation. Generally this concept is not always perfect due to differences in provincial tax rates. Generally there is a tax deferral as there is a positive difference in the personal tax on income realized directly as opposed to the corporate tax on the same income earned by the corporation prior to distributing the income to the shareholder. The personal tax depends on your marginal tax rate before earning that income. However when the income is distributed to the shareholder in the form of dividends, there may be an absolute tax cost of earning that particular income in the corporation over a number of years. The deferral or time from in leaving the income in the corporation will determine the cost versus benefit. Your individual cash flow requirements such as funds for RRSP contributions and personal expenditures will determine your renumeration mix.
For 2015, those at the top personal tax rate in Ontario, realized a tax deferral on active business income under $500K of about 34.03% and about 23.03% on ABI over $500K. The absolute tax savings (cost) was about .12% and -1.28% respectively. For investment income (other than Canadian portfolio dividends), the deferral was about 3.4% with an absolute tax cost of about 2.27%. For Canadian portfolio dividends, the deferral is about .5% for eligible dividends and about 6.8% for non-eligible. Eligible dividends comes from the GRIP account, generally dividends from Canadian public corporations. On distribution, there is no savings or absolute tax cost, thereby earning dividend income through a corporation as opposed to earning it personally is neutral.
On December 7, 2015, federal government announced changes to the the taxation of private corporations as a result of the changes in the 2016 personal tax rates. Changes to rates for taxation years ending in 2016 will be based on proration of days of the taxation year falling in 2016.
The federal small business rate on income below $500K of active business income will decrease from 11% to 9% over the period 2016-2019 with an annual reduction of .5%.
For 2016, a calendar year CCPC, the combined Federal and Ontario rate on active business income below $500K will be 15%. The February 25, 2016 Ontario Budget did not change Ontario corporate or personal tax rates. As a result, the combined Federal and Ontario rate on active business income will be 13.5% for 2019.
In order to preserve integration, due to the change in federal corporate and personal tax rates in 2016, investment income is now subject to refundable Part I tax of 30.67% of investment income, an increase from 26.67%. This forms the RDTOH (refundable tax on hand account). The Part I federal tax rate on investment income increases to 38.67% from 34.67% resulting in a combined 2016 Federal/Ontario tax rate of 50.2% from 46.2%. Portfolio dividends will be subject to Part IV tax of 38.33% from 33.33%. Part IV tax is added to the RDTOH account, refundable when taxable dividends are paid at a rate of 38.33% times taxable dividends that are paid. Previously the dividend refund was 33.33% of taxable dividends paid. Investment income includes net rental income, taxable capital gains.
With regards to integration, for 2016, on ABI up to $500K, the tax deferral is about 38.53% for one in the top marginal tax bracket earning personally more than $200K. On ABI over $500K, the deferral is about 27.03%. The absolute tax savings (cost) for 2016 is neutral for ABI up to $500K and an absolute tax cost of about 1.9% on ABI over $500K. With regards to investment income (other than Canadian portfolio dividends), the tax deferral is about 3.4%, the same as in 2015, but for 2016, with an increase in the absolute tax cost to about 2.4% from 2.27%. For Canadian portfolio dividends, the deferral is about 1% for eligible dividends and about 7% for non-eligible. Eligible dividends comes from the GRIP account, generally dividends from Canadian public corporations. On distribution, there is no savings or absolute tax cost, thereby earning dividend income through a corporation as opposed to earning it personally remains neutral.
For non-CCPCs, the tax rate is 26.5% on investment income and active business income. This rate applies to non-resident corporations carrying on business in Ontario or making a Section 216 election to be taxed on rental income on a net basis by filing a T2 corporation return as opposed to the flat non-resident withholding tax of 25% on gross rentals.
The budget reduces the Ontario Research and Development Tax Credit (“ORDTC”) to 3.5% from 4.5%. The Ontario Innovation Tax Credit (“OITC”) is reduced from 10% to 8%. Both changes are effective for eligible R&D expenditures incurred in taxation years ending on or after June 1, 2016.