Canada - English

2014 Tax Hikes on Non-Eligible Dividends Shakes Up Ontario Integration Mechanism 

Canadian Tax Adviser


May 07, 2013


The proposed federal and Ontario personal tax rate hikes on non-eligible dividends beginning on January 1, 2014 will have an important effect on the Ontario integration mechanism in 2014 and Ontario residents. This article examines the effect on the integration mechanism in 2014 on the earning of active business income (ABI) eligible for the small business deduction (SBD) and on investment income, such as interest rents and royalties, through an Ontario corporation.

As a result of these increases, it may make sense to pay dividends out in 2013 (instead of 2014) to save up to 2.3% in taxes on non-eligible dividend income from investment income or active business income eligible for the small business deduction earned through a corporation.


Tax increase on non-eligible dividends in 2014
The federal budget increased the tax rate on non-eligible dividends by 1.64% beginning in 2014 (by reducing the gross up to 18% and lowering the dividend tax credit to 13%). In its 2013 provincial budget, Ontario has also effectively increased its tax rate on non-eligible dividends for 2014 by as much as 0.7%. Ontario did not announce any changes to the factor used in the formula to compute the Ontario dividend tax credit in the Ontario Taxation Act, such that there is an automatic increase in the tax rate on non-eligible dividends for 2014. Consequently, the combined federal/Ontario top marginal tax rate on non-eligible dividends for 2014 will increase by a combined amount of 2.3% and 2.1% respectively in the top two Ontario marginal tax brackets, as follows:


Overview - Summary of effect on integration

As a result of the rate increase on non-eligible dividend income in 2014, there will be a 1.8% reduction in the tax savings previously available to a top rate Ontario resident individual taxpayer (with income of more than $509,000) to earning ABI eligible for the SBD through a corporation (calculated at 3.2% in 2013 versus 1.4% in 2014.


In the case of investment income, there is now a tax cost of up to 1.0% to flowing investment income through a corporation in 2014 versus a small savings available in 2013, which represents a 1.7% reduction in the tax savings compared to 2013.


Summarized below are the results of our integration calculations on these two types of income, for a taxpayer who is in Ontario's top tax bracket (fourth bracket) with taxable income in excess of $509,000, and for a taxpayer who is in the third Ontario tax bracket (income between $139,000 and $509,000).



For more information, contact your KPMG adviser.





Information is current to May 07, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500



Canadian companies may be interested in these recent publications: