New 2014 tax rate on other than eligible dividends
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In the March 21, 2013 Federal Budget, Finance Canada announced changes to the dividend gross-up factor and tax credit rate on other than eligible dividends (“ordinary”) paid after 2013. The gross-up factor will decrease from 25% to 18% and the tax credit rate from 2/3 to 13/18 of the grossed-up amount.
In its Information Bulletin 2013-7, the Quebec government announced that it would harmonize its gross-up factor with the federal gross-up factor and adjust its dividend tax credit from 8% to 7.05% of the grossed-up dividend. In 2014, based on the top marginal rates for individuals residing in Quebec (49.97%), the dividend tax rates will be as follows:
Top marginal tax rates
|
|
Eligible dividends |
Ordinary dividends |
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|---|---|---|---|---|
| 2014 | 2013 | 2014 | 2013 | |
| Federal | 16.11% | 16.11% | 17.71% | 16.35% |
| Quebec | 19.11% | 19.11% | 22.07% | 22.19% |
| Total | 35.22% | 35.22% | 39.78% | 38.54% |
Tax on ordinary dividends will increase slightly for 2014 and subsequent years, despite a minor decrease in Quebec. The 18% gross-up factor will provide relief for some retired shareholders subject to the Old Age Security Pension and Guaranteed Income Supplement clawback rules by having less of an impact on net income.
The federal zero tax threshold in 2013 for an individual who only received income from ordinary dividends and who is only entitled to the basic personal tax credit is $43,431.Without indexation of the 2013 tax tables, this threshold will be reduced to $35,227 in 2014.
As regards integration for Quebec residents in 2014, i.e. business income earned personally vs. through a business corporation ("corporation"), near-perfect integration has almost been achieved, even if the tax savings, which favours income earned directly by individuals, has increased marginally from 0.25% to 1.26%. Observations on the benefits of incorporation will not change in 2014, in that the tax deferral rate is approximately 31% (($8,100 - $5,003)/$10,000) for retained corporate earnings below the $500,000 threshold that will not be distributed as dividends.
The final tax rate, after corporate taxes and taxes on dividends for shareholders, is now at a maximum of 51%. Income trusts and any other income splitting structure are and will remain more beneficial. Lastly, no changes were announced for eligible dividends.
2014 |
Income eligible for the small business deduction |
Active business income without the small business deduction |
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|---|---|---|---|---|
|
Business income earned by a corporation |
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| Income earned in 2014 | $10,000 | $10,000 | ||
| Corporate tax | - $1,900 | - $2,960 | ||
| $8,100 | $7,310 | |||
| 2014 shareholder tax on dividends (top marginal rates) | -$3,223 | - $2,575 | ||
| Net proceeds | $4,877 | $4,735 | ||
| 2014 overall tax rate (2013) | 51.22% (50.22%) | 52.64% (52.64%) | ||
|
Business income earned by an individual |
||||
| Income earned in 2014 | $10,000 | $10,000 | ||
| Personal tax (top marginal rate) | - $4,977 | - $4,977 | ||
| Net proceeds | $5,003 | $5,003 | ||
| Overall tax rate | 49.97% | 49.97% | ||
| 2014 tax saving in favour of a corporation (2013) | - $126 (- $25) | - $268 (- $268) | ||
Benoît Malboeuf, CPA, CGA, Demers Beaulne, LLP and the Technical Working Group on Taxation and Commodity Taxes