“The 2006 Budget has clarified how eligible dividends will be defined.”
The Conservative Party has made good on their promise to implement the dividend tax rates that were proposed by the previous Liberal Government. This was included in the 2006 Budget that came out on Tuesday, May 2, 2006. There are a number of other budget proposals that will be dealt with separately.
As mentioned in the Tax Tip of December 2, 2005, the change in dividend rates will have a significant effect on investing in public companies or income trusts, owner/manager remuneration and estate planning. Included in the Notice of Ways and Means is a definition of eligible dividends upon which this reduced dividend tax rate will be applied. Eligible dividends are defined to be dividends paid after 2005 by:
- Public corporations resident in Canada;
- CCPC’s resident in Canada, to the extent that their income (other than investment income) is subject to tax at the general corporate rate; and
- Any other corporation resident in Canada subject to the general corporate tax rate.
Eligible dividends paid from Canadian corporation to Canadian corporation will have to be tracked. That is, if a Canadian corporation pays an eligible dividend to another Canadian corporation, that otherwise is not subject to paying eligible dividends, the recipient corporation will have an account that tracks the eligible dividends received from other corporations. The Notice of Ways and Means Motion also states that corporations who have received “ineligible dividends” from a corporation resident in Canada will be required first to pay the ineligible dividend to the extent that the ineligible dividend had been received. An example of this is where a CCPC has paid a dividend out of investment income to another Canadian corporation. The recipient corporation would have to pay out this ineligible dividend first even if there are eligible dividends available to be paid out.
These rules do not apply to dividends received from non-resident corporations. However, only a public corporation that receives dividends from a foreign corporation would be able to pay these amounts out as eligible dividends. It does not appear that a CCPC that receives dividends from a foreign corporation would be able to pay these amounts as eligible dividends since the income earned would not be subject to the high rate of income.
The area of owner/manager remuneration will now change as there will be far less incentive to pay out bonuses so that a CCPC’s income is below the small business tax rate.
One of the big issues is whether these federal rules will result in significant tax savings is dependent upon the provinces also accepting the reduced tax rates on dividends. As of now, certain governments such as Quebec have indicated they will enact correspondingchanges. Ontario has indicated that it is not yet prepared to commit to a corresponding change until further review.
This is an area of significant change that will affect all tax professionals and must be monitored in the future.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
