The Theory of Integration

Income from your CCPC can be distributed to you as salary (or bonus) if you are an employee, or dividends as a shareholder.

If you receive salary, your corporation will receive a tax deduction for the salary paid so no corporate tax would be payable on the income. You would simply pay personal tax at the graduated personal tax rates on any salary you receive from your corporation.

If you don’t take out all your corporation’s net income as salary, the net income remaining will be subject to corporate tax and the after-tax income can then be distributed to you as a dividend, either immediately or in the future.

You would pay personal income tax on dividends you receive in the year, at your graduated marginal tax rates. The theory of tax integration looks at how closely the personal income tax you would pay on salary compares to the combined corporate and personal income tax that would be paid on dividends.

If there is perfect tax integration, you should be indifferent between earning salary or dividends because the same amount of total tax will be paid either way. There is no tax savings (or tax cost), which refers to the tax that is saved (or additional tax that is paid) if business income is earned in your corporation and distributed to you as a dividend, rather than salary.

There may, however, still be a significant tax deferral (or tax prepayment), which refers to the tax that is deferred (or paid in advance) if business income is distributed to you as a dividend in a later year, rather than salary in the current year.

This tax deferral (or tax prepayment) could be advantageous (or disadvantageous) if you defer payment of a dividend and the related personal tax to a future year

Tax deferral In 2021, the top personal marginal tax rate that you would pay on ordinary income, including salary or bonus, ranges from 44.5% in Nunavut to 54.0% in Nova Scotia.

The SBD is available if your CCPC earns active business income up to the annual small business limit (SBD Limit), which in 2021 is $500,000 federally and in most provinces and territories.

Income that is eligible for the small business deduction (SBD Income) is taxed inside your corporation at a lower, small business deduction tax rate (SBD Rate) that ranges from 9.0% in Manitoba, Saskatchewan and Yukon to 13.0% in Quebec in 2021 when federal and provincial or territorial taxes are combined.

Associated corporations must share the SBD. In 2021, if your corporation earns General Income, which includes active business income that is not eligible for the SBD, there is a higher, general corporate tax rate that ranges from 23.0% in Alberta to 31.0% in Prince Edward Island when federal and provincial or territorial taxes are combined.

In 2021, the top personal marginal tax rate that you would pay on ordinary income, including salary or bonus, ranges from 44.5% in Nunavut to 54.0% in Nova Scotia.

The SBD is available if your CCPC earns active business income up to the annual small business limit (SBD Limit), which in 2021 is $500,000 federally and in most provinces and territories.

Income that is eligible for the small business deduction (SBD Income) is taxed inside your corporation at a lower, small business deduction tax rate (SBD Rate) that ranges from 9.0% in Manitoba, Saskatchewan and Yukon to 13.0% in Quebec in 2021 when federal and provincial or territorial taxes are combined. Associated corporations must share the SBD.

In 2021, if your corporation earns General Income, which includes active business income that is not eligible for the SBD, there is a higher, general corporate tax rate that ranges from 23.0% in Alberta to 31.0% in Prince Edward Island when federal and provincial or territorial taxes are combined.