Patrick Innes has a business that he estimates will produce net business income of $130,000 per year. If he incorporates this business in 2019, all of the income would be eligible for the small business deduction and all dividends paid would be non-eligible (15% gross-up for non-eligible dividends in 2019). In the province where he lives, such corporate income is taxed at a combined federal/provincial rate of 14 percent. Mr. Innes has other income sources that place him in a combined federal/provincial tax bracket of 42 percent. Ignore personal tax brackets and assume that all the personal income is taxed at 42 percent. In Mr. McInnes' province, the provincial dividend tax credit for non-eligible dividends is equal to 20 percent of the gross up, while the Federal dividend tax credit is rounded to 9% of the gross up.

REQUIRED: Compare the after-tax cash Mr. Innes has in his pocket if he earns business income personally in his tax return in 2019, or if he earns the $130,000 in his corporation at the small business rate described above and pays a non-eligible dividend to himself from the corporation before the end of 2019 (reporting that dividend in his personal tax return for 2019).

[Ignore any tax items that will be similar whether Mr. Innes earns the income through the corporation or as personal business income, such as CPP, EI and so on. Also ignore any non-tax issues, such as additional administrative costs of owning a corporation. Remember this $130,000 is marginal personal income. You are NOT calculating all of Mr. McInnes' personal tax return for the year.]