Dividend tax credit rate adjusted

Finance Minister and President of Treasury Board Joan Marie Aylward announced today an adjustment to the Income Tax Act which will result in the integration of the personal and corporate income tax systems related to the income of small Canadian Controlled Private Corporations. The adjustment will result in a decrease in the dividend tax credit rate from nine per cent to five per cent, effective immediately, resulting in dividend income from small corporations bearing approximately the same amount of tax as if the corporate income had accrued directly to the shareholder in the form of a salary.

One of the principles of the Canadian income tax system is integration between the personal income tax and corporate income tax systems. As part of the move to tax on income, the federal government encouraged provinces to integrate the tax on corporate and personal income. The dividend tax credit is one of the mechanisms used to achieve this integration. In theory, income tax integration should result in the same combined corporate income tax/personal income tax liability for small business owners, whether they take income as dividends or salary.

Currently, the provincial income tax system provides more favourable tax treatment to dividend income, rather than salary. This means that an owner/manager can arrange his/her affairs to pay less tax than an employed person who earns the same income. The new dividend tax credit rate will remove this tax preference, resulting in the integration of the provincial personal income tax system and the corporate income tax system.

"The decrease in the dividend tax credit rate will achieve greater fairness in the tax system," said Minister Aylward.

Since the dividend tax credit applies to all dividends from taxable Canadian corporations, not just small businesses, other taxpayers who receive dividend income may be impacted by this measure.

Approximately 80 per cent of affected taxpayers have an annual income of more than $50,000.

The new dividend tax credit rate applies to all dividends declared and paid on or after March 21, 2002. Dividends declared and paid prior to March 21 will be eligible for the nine per cent dividend tax credit.

Integration of the personal and corporate income tax systems will result in increased revenues for the province of approximately $3 million, annually.

Media contact: Tara Laing, Communications, (709) 729-0329.

2002 03 21                             3:00 p.m.