Byrd & Chens 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 corporations 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 individuals 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 companys 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.