An “assessable dividend ” is an amount received by a corporation as, on account of, in lieu of payment of or in satisfaction of, a taxable dividend to the extent that amount is deductible from taxable income under section 112. It is relevant to the tax integration mechanism and refundable dividends.
Under Section 125(7) of the Income Tax Act, Active Business Income refers to income of a corporation from any business activity other than a Specified Investment Business or a Personal Services Business. This includes income from an adventure or concern in the nature of trade.
Income that is incidental or related to a corporation’s active business also qualifies as Active Business Income.
The definition of Active Business Income is intended to capture income generated through direct involvement of the taxpayer in the operation of the business, as opposed to income generated from passive sources, such as interest, royalties, etc. which require little or no active participation.
A Canadian-Controlled Private Corporation (CCPC) earning Active Business Income of $500,000 or less annually, qualifies as a small business and is eligible for a tax credit commonly referred to as the ‘small business deduction’. While widely known as a deduction, it is technically a tax credit. This incentive reflects the government’s effort to support small business corporations.
The full tax credit remains available for the corporation, until its taxable capital employed in Canada exceeds $10 million. The credit is then gradually reduced and is fully eliminated when that capital reaches $50 million. It is also eliminated where the corporation’s Adjusted Aggregate Investment Income (a term, which mostly refers to passive income) exceeds $50,000, and reaches $150,000.
A Canadian-Controlled Private Corporation (CCPC) is defined under Section 125(7) of the Income Tax Act as a private corporation that is resident in Canada and is not controlled by:
- a non-resident,
- a public corporation (other than a prescribed venture capital corporation),
- a Canadian resident corporation whose shares are listed on a designated stock exchange, or
- any combination of the above.
Despite its name, a CCPC does not need to be controlled by Canadian residents. For example, a Canadian resident may own 50% of the corporation, while the remaining 50% may be owned—either individually or collectively—by one or more of the prohibited persons listed above. Even in such a case, the corporation would still qualify as a CCPC, provided it is not controlled by those prohibited persons.
Additional provisions in the Income Tax Act support and refine the definition of a CCPC, particularly in situations involving complex ownership structures.
CRA Form T2054, titled ‘Election for a Capital Dividend Under Subsection 83(2) of the Income Tax Act’, is a form filed by a private corporation, in order to elect to pay a Capital Dividend. It is compulsory to make this election, before the corporation can distribute capital dividends.
A corporation must file this form on or before the earlier of:
- The date the capital dividend becomes payable, or
- The date any portion of the capital dividend is actually paid.
Capital Dividends are distributed from a corporation’s Capital Dividend Account (CDA) and are tax-free to Canadian resident shareholders. The form must be accompanied by a certified copy of the resolution declaring the dividend.
The Capital Dividend Account includes:
- The non-taxable (allowable) portion of capital gains, minus allowable capital losses,
- Life insurance proceeds received by the corporation (as beneficiary), less the policy’s adjusted cost base (ACB),
- Capital dividends received from other private corporations,
- Certain trust distributions.
Tax integration mechanisms are income tax act provisions which ensure that income earned through a corporation is not subject to double taxation and the net tax is the same as if the income was earned directly by the individual. These mechanisms aim to ensure that the combined corporate and personal tax paid on income distributed from a corporation is roughly equal to the tax that would be paid if the income were earned directly by the individual.
The aim of these mechanisms is to ensure that all Canadians within the same tax bracket contribute equally to public finances, regardless of whether they earn income personally or through a corporate structure.
While integration primarily targets corporations, it also extends to other legal entities such as trusts and partnerships, maintaining the same foundational principle of tax neutrality.
CRA Form T2091 is the form used to report the disposition of a taxpayer’s principal residence.
Capital gains arising from the disposition of your principal residence are tax-exempt for all the years during which the property qualified as your principal residence. If the property was your principal residence for the entire duration of ownership, the entire capital gain will be exempt from taxation. These exemptions are commonly referred to as the ‘Principal Residence Exemption’.
Failure to file CRA Form T2091 may result in the denial of your Principal Residence Exemption, making you liable for capital gains tax on the disposition. Additionally, late filing can lead to penalties, even if the disposition would have otherwise qualified for the Principal Residence Exemption.
Specified Investment Business or SIB is defined in Canadian Income Tax Act subsection 125(7) and ties into and provides an exclusion from the definition of Active Business Income. In other words specified investment business income earned by a corporation is not considered to be active business income and is not eligible for the small business deduction (SBD) tax credit. Specified Investment Business is income from property such as interest, rent ( including leasing income from land or buildings), dividends or royalties. There is an exclusion from the definition of SIB if the corporation employs more than 5 full time employees so property income earned by a corporation with more than 5 full time employees will meet the active business income.
Disclaimer:
“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.”
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Pro Tip
Tax Audits in Ontario
There are over 350,000 tax audit and review actions conducted by the Canada Revenue Agency on a yearly basis. Around 15,000 of these tax audits deal with “cash only” businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits.
Frequently Asked Questions
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