Ministry of Finance Enhanced Divident Tax Credit

Enhanced Dividend Tax Credit

Under both the federal and British Columbia income tax systems, income earned by corporations and subsequently transferred to individual investors as dividends are taxed twice -- once at the corporate level and a second time at the personal level. The personal income tax system provides a two-stage mechanism intended to reduce this double taxation. First, dividend income is reported at 125 per cent of the actual amount received and second, a dividend tax credit is provided to reduce the amount of personal income taxes payable.

As shown in Table 1, this system works well when the corporation pays tax at the small business rate, but results in a higher level of taxation when the corporation pays tax at the general corporate income tax rate.

Table 1 Federal and BC Taxes on Wages and Dividends - 2006 before changes
	Wages	Small Corporation	Large Corporation
Corporate Income	-	100.00	100.00
A. Corporate Tax	-	17.62	34.12
B. Dividend to Investor	-	82.38	65.88
C. Amount Included in Income (125% X B)	100.00	102.98	82.35
D. Personal Income Tax (43.7% X C) top rate	43.70	45.00	35.99
E. Dividend Tax Credit (18.43% X C)	-	(18.98)	(15.18)
F. Personal Income Tax (D – E)	43.70	26.02	20.81
Total Tax Paid (A+F)	43.70	43.64	54.93

Proposed Enhanced Dividend Tax Credit

Table 2 Federal and BC Taxes on Wages and Eligible Dividends – after changes
	2010
Corporate Income	100.00
A. Corporate Tax	31.00
B. Amount Distributed to Investor	69.00
C. Amount Included in Income (145% X B)	100.05
D. Personal Income Tax (43.7% X C)	43.72
E. Dividend Tax Credit (31% X C)	(31.01)
F. Net Personal Income Tax (D – E)	12.71
Total Tax Paid (A+F)	43.71

To reduce the double taxation of income from corporations subject to the general corporate income tax rate, the federal government is implementing a new enhanced dividend tax credit mechanism.

Under the new enhanced dividend tax credit mechanism for personal income tax:

eligible dividends will be determined under federal income tax rules;
dividends will be grossed up by 45 per cent and added to taxable income;
a new enhanced dividend tax credit will apply to the grossed up amount (federal rate is 19 per cent and B.C. rate of 12 per cent)

The proposed federal enhanced dividend tax credit rate of 19 per cent reflects the federal general corporate income tax rate for 2010 after all federal corporate income tax rate reductions are complete. Effective January 1, 2006, B.C.’s proposed enhanced dividend tax credit rate is 12 per cent, or 38⅔ per cent of the additional income included due to the gross up. B.C. will parallel the federal eligible dividend and gross up rules.

The existing B.C. dividend tax credit of 5.1 per cent is unchanged and will continue to apply to dividends that are subject to the existing federal gross up of 125 per cent.