5 Explain the tax concept of “integration”

The concept of integration is intended to eliminate any advantages and disadvantages in the application of tax between individuals and corporations. Thus, the after-tax cash received by an individual should be the same regardless if it was generated directly (as salary) or paid out as dividends from a corporation.  Note that dividends are a distribution of after tax profit thus the corporation paid tax on the income distributed as a dividend and the individual taxpayer pays tax on the dividend received (double taxation as taxed at corporate and individual levels).

To achieve integration and to avoid double taxation on dividends individual must:

• gross-up dividends received to reflect the corporate pre-tax income.  The individual pays tax on an amount that approximates the pre-tax amount the corporation earned to pay the dividend.

• receive a dividend tax credit (DTC) to approximate the amount of tax the corporation paid on the on profit distributed as dividend.

The DTC is the sum of federal and provincial dividend tax credits, and the calculation varies depending on whether the corporation is issuing eligible or non-eligible dividends.  Eligible dividends are paid from income on which tax was paid at a high rate and are thus `eligible’ for a higher tax credit (more favourable tax treatment).  Non-eligible dividends are paid from income on which tax was paid at a low rate (primarily because of the small business deduction) and receives a lower tax credit (non-eligible for higher credit).  Typically, public corporations issue eligible dividends while Canadian-Controlled Private Corporations (CCPCs) issue non-eligible dividends.

Here is an illustration showing how integration works for both types of dividends. Notice that the tax paid by the corporation is equal to the DTC that can be claimed by the individual shareholder. The computed tax payable amount and the total after tax cash is the same irrespective of whether it is paid through eligible dividends, non-eligible dividends or received directly as salary.

References and Resources:

• Video – “Integration” (Authors: Abjeet Khatra and Gursimran Kohli) – uses 2017 rates
• Competency map: 6.1.1

March 2019