Corporate Business Income

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 433-451

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 $