Accounting Professor Andrew Bauer explained that in the integrated tax system in Canada, corporate and individual income are taxed only once. To accomplish tax integration, shareholders include their proportion of the corporation’s pre-tax income (also known as the dividend) in their individual taxable income as a dividend.
“In the new tax system without integration, income should be taxed twice as it transferred from corporation to shareholder. So, to maximize shareholder cash flows, the new incentive was to minimize the amount of corporate income that was initially taxed. ”
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