TSG (Tax Specialist Group) - Dividend Tax Rates Increasing (Dividend Tax Rate Increase for 2014)

Dividend Tax Rates Increasing

Subject: Dividend Tax Rate Increase for 2014
Number: 13-16R-2
Date: 10/18/2013

Consider paying planned dividends by the end of 2013

This Tax Tip replaces Tax Tip 13-16R by adding Manitoba rates and updating Ontario tax rates to reflect Ontario's November 2013 confirmation that it will adopt the changes to the dividend gross up and tax credit proposed in the 2013 Federal Budget.

With the scheduled increase in dividend tax rates, as highlighted for selected provinces in the table below, the need for tax planning before the end of 2013 becomes even more important, particularly for owners of private corporations^[1].

Province

2013 Top Marginal Rate on Eligible Dividends

2014 Top Marginal Rate on Eligible Dividends

2013 Top Marginal Rate on Non-Eligible Dividends

2014 Top Marginal Rate on Non-Eligible Dividends

BC

25.78%

28.68%

33.71%

37.98%

Alberta

19.29%

19.29%

27.71%

29.87%

Manitoba

32.26%

32.26%

39.15%

40.77%

Ontario

33.85%

33.85%

36.47%

40.13%

Profits earned within a corporation may be held in the corporation and incur tax at only the corporate level until they are distributed by the corporation to an individual shareholder. As such, tax deferral can be obtained by leaving the profits in the corporation or a holding company connected with the corporation.

Why would a private business owner pay a dividend and incur a second level of tax?

In order to recover refundable tax balances. For example, suppose you have a holding corporation with a refundable dividend tax on hand (RDTOH) balance of $100,000. Consider paying a dividend sufficient to obtain a $100,000 dividend refund (RDTOH x 3, or $300,000) in 2013 rather than waiting until 2014, so as to take advantage of the relatively lower tax rates in 2013 while recovering the refundable tax balances within the corporation.
If an “estate freeze” has been undertaken in the past so that the corporation has preferred shares outstanding, it may be better to redeem some of these preferred shares instead of paying a dividend on the common shares, in order to recover RDTOH balances. By redeeming the preferred shares the shareholder receives the added benefit of reducing the tax that would otherwise be payable on disposition of the shares (on death or otherwise).
If the shareholder anticipates a need for personal cash within the relatively near future, it may be preferable to extract such cash as dividends in 2013 rather than waiting until a later year when dividend tax rates will be higher.
If significant dividends are anticipated in order to recover refundable tax balances or extract cash from the corporation, a shareholder may wish to consider legitimate interprovincial tax planning opportunities (e.g., a genuine move to Alberta), so as to realize tax savings from relatively lower rate tax jurisdictions.

In order to save the increase in tax rates of 4.27%, 2.16%, 1.62 or 3.66% from 2013 to 2014 in BC, Alberta, Manitoba and Ontario, respectively, it may be worthwhile to consider paying dividends by the end of 2013.

If you have any questions regarding the scheduled increase in the tax rates on dividends, or would like to discuss tax planning opportunities that may exist prior to year end, please contact your TSG representative.

^[1]The rates apply to the actual amount of taxable dividends received from taxable Canadian corporations and are the maximum combined federal and provincial marginal tax rates for dividend income based on known rates at November 15, 2013.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.