Corporate Business Income

AuthorVern Krishna
ProfessionProfessor of Common Law, University of Ottawa Barrister at Law
Pages433-451
433
CH A PTE R 17
COR POR ATE BUSINESS
INCOME
A. GENER AL COMMENTS
There are various type s of corporations: private, public, exempt, con-
duit, investment, etc. The scheme of taxation in respe ct of each of these
types of corporations is different and takes into account their special
circumstances and policy considerations. We look at the rules for the
taxation of investment income that private corporations earn in Chap-
ter 18. In this chapter we look at the taxation of the business income of
private cor porations.
B. THE STATUTORY SCHEME
The scheme for the taxation of corporate business i ncome is different
from the taxation of investment i ncome because the underlying policies
of the two are quite different. The statutory scheme for private corpora-
tions ref‌lects three distinct policies:
1) High income taxpayers should not be able to defer tax on investment
income by holding their investments in personal holding corporations;
2) Corporate income should not be taxed more than once; and
3) We can use the income tax system to support “small businesses”
through tax incentives.
INCOME TAX L AW434
There are three factors that determine the taxation of corporate
business income:
1) The type of corporation;
2) The type of income; and
3) The source of the income.
C. TA X INTEGRATION
“Integration” means that the amount of tax t hat a taxpayer pays on
income should be the same, regardless whether he ear ns the income
through a proprietorship, partnership or a corporation. We integrate
corporate and shareholder taxes by cred iting corporate taxes against
personal shareholder taxe s. The shareholder receives a credit at the
personal level for taxes th at the corporation notionally paid at the cor-
porate level. These two features “integrate” the amount of tax payable
by corporations and their shareholders.
The theoretical tax integration model for business income implies
three assumptions:
• The combined federal and provincial corporate ta x is 20 percent on
business income;
• Dividends to individua l shareholders are taxable at a grossed-up
value to take into account the corporate tax prev iously paid; and
• Individual shareholders pay ta x at 40 percent and receive a tax credit
equal to the amount of the tax prev iously paid by the corporation.
If all of these as sumptions apply, the tax payable by the corporation
and its shareholder on its business income would be exactly equal to
the amount of tax that would have been paid by t he individual share-
holder if he had earned the income direct ly. In other words, the corpor-
ate tax would fully “integrate” with the individual’s tax. The following
example illustrates t he theoretical framework of tax integration.
Example: Theoretical Model of Integration
Assume:
Federal corporate tax rate %
Provincial corporate tax rate %
Combined federal/provincial tax rate %
Shareholder federal/provincial marginal rate %
Dividend gross-up %
Active business income $

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