As a Canadian taxpayer, understanding the tax system can be overwhelming, especially when it comes to tax integration mechanisms. In this blog post, we’ll break down everything you need to know about tax integration mechanisms and how they impact your taxes.

What are Tax Integration Mechanisms?

Tax integration mechanisms are a set of rules that attempt to eliminate double taxation of corporate income by integrating the tax treatment of corporations and their shareholders. This means that the corporate income tax and personal income tax are treated as a single entity, with the goal of ensuring that income is taxed only once, either at the corporate level or the shareholder level, but not both.

There are two main tax integration mechanisms in Canada: the dividend tax credit (DTC) and the refundable dividend tax on hand (RDTOH).

Dividend Tax Credit (DTC)

The dividend tax credit (DTC) is a non-refundable tax credit that aims to reduce the tax liability of Canadian taxpayers who receive eligible dividends. Eligible dividends are those paid by Canadian corporations that have paid corporate income tax at the general corporate income tax rate.

The DTC reduces the effective tax rate on eligible dividends received by individual taxpayers. The amount of the credit varies depending on the province or territory of residence of the taxpayer.

Refundable Dividend Tax on Hand (RDTOH)

The refundable dividend tax on hand (RDTOH) is a mechanism that aims to prevent the double taxation of corporate income. It is a refundable tax that Canadian private corporations receive when they pay out eligible dividends to their shareholders. The RDTOH is calculated based on the difference between the general corporate income tax rate and the small business tax rate.

The RDTOH can be used by the corporation to reduce its own taxes, or it can be paid out as a dividend to shareholders. When paid out as a dividend, it is subject to personal income tax but is also eligible for the DTC.

How Do Tax Integration Mechanisms Affect Your Taxes?

Tax integration mechanisms play a significant role in determining the amount of tax you pay as a shareholder of a Canadian corporation. When you receive eligible dividends, you will benefit from the DTC, which will reduce your tax liability. However, you will also be subject to personal income tax on the dividends received.

Additionally, if you receive dividends from a corporation that has paid income tax at a lower rate, the amount of your DTC will be reduced, resulting in a higher tax liability.

On the other hand, if you are a Canadian private corporation that pays eligible dividends, you can benefit from the RDTOH, which can help to reduce your corporate taxes. However, if you do not pay eligible dividends, you will not be eligible for the RDTOH, resulting in a higher tax liability.

Conclusion

Tax integration mechanisms play a crucial role in the Canadian tax system, helping to ensure that corporate income is taxed only once, either at the corporate level or the shareholder level, but not both. The dividend tax credit (DTC) and the refundable dividend tax on hand (RDTOH) are the two main mechanisms that aim to prevent double taxation of corporate income.

Understanding these mechanisms can help you make informed decisions about your investments and taxes. Consult with a tax professional to determine the best strategy for your particular situation, and ensure that you take full advantage of these tax integration mechanisms.