Taxation
Taxation
The Taxation Elective tests how well you apply the Income Tax Act (Canada) and Excise Tax Act to client facts. Questions are calculation-heavy and issue-driven: identify the provision, compute the consequence, and explain the planning result. Core areas include Division B net income and Division C taxable income, the CCPC small business deduction, integration of salary and dividends, GST/HST, and basic corporate reorganizations.
Core rules and concepts
- Section 3 requires ordering: employment, business, property, capital gains, then other deductions. A deduction is allowed only if expressly permitted.
- A CCPC’s small business deduction under s.125 gives a 9% federal rate on up to $500,000 of qualifying active business income. The limit is shared among associated corporations and reduced by passive income and taxable capital.
- Integration aims to make salary and dividends roughly equivalent. Salary is deductible to the corporation and taxed fully to the individual; dividends are paid from after-tax corporate income, grossed up, and offset by a dividend tax credit. Eligible dividends carry a 38% gross-up and a larger credit; non-eligible dividends carry a 15% gross-up and a smaller credit.
- GST/HST is a value-added tax: registrants charge the 5% federal component (plus the provincial component in participating provinces) and claim input tax credits on eligible inputs. Small suppliers under $30,000 in taxable supplies may not need to register.
Worked example
Assume a CCPC earns $200,000 of active business income eligible for the SBD. The combined corporate rate is 12.5%, the owner’s personal marginal rate is 50%, and the combined eligible dividend tax credit is 25% of the grossed-up dividend.
Salary: the corporation deducts $200,000, so corporate tax is nil. The owner pays $100,000 personal tax. Net cash is $100,000.
Dividend: corporate tax is $25,000, leaving $175,000. Gross-up at 38% gives $241,500. Personal tax at 50% is $120,750. The DTC is 25% × $241,500 = $60,375, leaving $60,375 personal tax. Net cash is $175,000 − $60,375 = $114,625. The dividend is better by $14,625 before considering RRSP room and other factors.
Traps
Do not use federal rates alone; provincial tax and the federal abatement change the result. Do not treat all dividends as eligible; GRIP and RDTOH determine characterization. Do not ignore the SBD grind from passive income. On share transfers, remember s.84(1) deemed dividends when non-share consideration exceeds PUC. On GST/HST, ITCs require valid documentation and must not be claimed on exempt supplies.