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So I thought it would be neat to keep blogging about the small business tax rates for corporations in Ontario and let people know about how they could pay $0 (that’s right – NOTHING) in Federal personal income tax for fiscal 2009 up to a certain limit on certain kinds of dividends they received from a Canadian Controlled Private Corporation.
Don’t believe me? Just go here and enter $40,608 under “Cdn dividends eligible for small business div tax credit (CCPCs)“. If this is your only source of income for the year and you don’t get fancy with anything else (e.g. deductions, tax credits, etc.), then here’s what you’ll get:
+ Federal Tax owed before non-refundable tax credits = $8,316.
- Non-refundable tax credits from Basic Person Amount = $1,548.
- Small business dividend tax credit = $6,768.
Total Federal Tax = $0!!!
How is that possible? Here’s how (keep in mind that these figures change frequently, so be sure to do your own due diligence!):
- Hold shares in a Canadian Controlled Private Corporation or CCPC (as defined in the Canada Income Tax Act).
- Have the CCPC earn “active business income” (as defined in the Canada Income Tax Act).
- Have the CCPC pay income taxes at a rate of 16.5% on that active business income up to a limit of $500,000 (check out my previous blog about corporate tax rates).
- Have the CCPC declare and issue up to $40,608 to you as a shareholder and make sure the money comes from that specially low-taxed retained earnings.
- Earn no other taxable income for the fiscal year other than those dividends.
- The Federal Dividend Gross Up and Tax Credit kick in (for your personal income taxes) and you’re left with paying $0 in taxes on the $40,608 which you received as income in the form of dividends on your shares!
Here’s the detailed analysis of how the Dividend Gross Up and Tax Credit work to allow you to pay $0 in Federal personal income taxes:
When you receive a dividend from a Canadian Controlled Private Corporation (as defined in the ITA), that income is deemed non-eligible (because it received beneficial treatment from the small business tax rate for Ontario corporation – 16.5% for 2009), here’s what happens…
- The amount you received is grossed up by 25%. So if you received $40,608, then the amount of the Grossed Up Dividend is now $50,760.
- Apply the Federal Tax Rate (which is progressive) to the amount of the Grossed Up Dividend. This gives you a federal tax payable of $8,316 (here’s the simple breakdown: the difference between $0-$40,726*0.15% tax = $6,109 for the first level of tax + the difference between $40,726-$50,760*22% = $2,207 for the second level of tax).
- Deduct the Personal Tax Credit of $1,548 (which is 15% of $10,320).
- Deduct the Federal Dividend Tax Credit of $6,768, which is 13.33% of the Grossed Up amount of $50,760.
- Together, the Federal Personal Tax Credit and the Federal Dividend Tax Credit amount to $8,316.
- So the Personal Tax Credit and the Dividend Tax Credit combined equal the amount of tax owed, resulting in $0 taxes at the personal level!
Although $40,608 seems like it would be enough for someone to get by on in the year (especially considering that the CCPC only paid 16.5% tax on those dividends before they were distributed), remember that you’ll still need to pay some minimal Ontario personal income taxes on these dividends – but that’s another story