Archived - Explanatory Notes - Notice of Ways and Means Motion to amend the Income Tax Act

Clause 1

Taxable dividend

ITA
82(1)(b)

In general terms, subsection 82(1) of the Income Tax Act (the "Act") requires an individual who receives a taxable dividend from a corporation resident in Canada to include in income an amount equal to the total of the dividend received and a gross-up amount. Under this approach:

• An individual is first required to include the grossed-up amount of taxable dividends (i.e., a proxy for pre-tax profits) in income, and is subject to tax on the whole amount. The tax system in effect treats the individual as having directly earned the amount that the corporation is presumed to have earned in order to pay the dividend.
• The individual is then entitled to claim a dividend tax credit in respect of the amount under section 121 – the dividend tax credit compensates the individual for the amount of corporate-level tax presumed to have been paid on the grossed-up amount.

In the case of a taxable dividend that is a "non-eligible dividend" (i.e., a dividend that is paid out of corporate income eligible for the small business deduction), paragraph 82(1)(b) requires an individual who receives the non-eligible dividend to add to the dividend a gross-up amount equal to 17% of the dividend.

Paragraph 82(1)(b) is amended to provide the gross-up percentage for the 2018 and subsequent taxation years. New clauses (b)(i)(A) and (B) reduce the gross-up percentage to 16% for the 2018 taxation year and to 15% for the 2019 and subsequent taxation years.

This amendment is made in conjunction with the amendment to paragraph 121(a) to adjust the corresponding dividend tax credit for non-eligible dividends and the amendment to subsection 125(1.1) that increases the small business deduction rate (and therefore reduces the small business tax rate) for the 2018 and subsequent taxation years.

This amendment applies to the 2018 and subsequent taxation years.

Clause 2

Deduction for Taxable Dividends – Dividend Tax Credit

ITA
121

In general terms, section 121 of the Act allows an individual who receives a taxable dividend from a corporation resident in Canada to deduct a dividend tax credit from the tax otherwise payable for the year by the individual in respect of the amount of the dividend that is included in the individual’s income (this amount is determined under subsection 82(1)). The dividend tax credit (DTC), provided within the personal income tax system, is intended to compensate a taxable individual receiving dividends for corporate income taxes that are presumed to have been paid on the corporate income that funded those dividends. The DTC is generally meant to ensure that income earned by a corporation and paid out to an individual as a dividend will be subject to the same amount of tax as income earned directly by the individual.

Paragraph 121(a) provides the dividend tax credit that applies to a taxable dividend that is a "non-eligible dividend" (i.e., a dividend that is paid out of corporate income eligible for the small business deduction) received by an individual. In respect of a non-eligible dividend, the dividend tax credit is 21/29 of the gross-up amount of the dividend that is included in the individual’s income under paragraph 82(1)(b).

Paragraph 121(a) is amended to provide the dividend tax credit for the 2018 and subsequent taxation years. New subparagraphs (a)(i) and (ii) provide that the fraction of the dividend tax credit is 8/11 for the 2018 taxation year and 9/13 for the 2019 and subsequent taxation years. Expressed as a percentage of the grossed-up amount of a non-eligible dividend, the effective rate of the DTC in respect of such a dividend will be 10 per cent in 2018 and 9 per cent in 2019, in line with the reductions in the small business tax rate.

This amendment is made in conjunction with the amendment to paragraph 82(1)(b) to adjust the gross-up amount of a non-eligible dividend that must be included in the income of an individual and the amendment to subsection 125(1.1) that increases the small business deduction rate (and therefore reduces the small business tax rate) for the 2018 and subsequent taxation years.

This amendment applies to the 2018 and subsequent taxation years.

Clause 3

Annual adjustment

ITA
122.61(5)

Subsection 122.61(5) of the Act provides for the indexing of the various amounts used in the calculation of the Canada child benefit. Indexation of the Canada child benefit is currently legislated to begin July 1, 2020. Subsection 122.61(5) is amended to apply as of July 1, 2018.

Clause 4

Small Business Deduction

ITA
125

For the purpose of computing the small business deduction under section 125 of the Act, a corporation's small business deduction rate for a taxation year is determined under subsection 125(1.1). The small business deduction rate is 17.5% as of January 1, 2016.

Subsection 125(1.1) is amended to provide that the 17.5% deduction rate will be increased to 18% for the 2018 taxation year and to 19% for the 2019 and subsequent taxation years.

This amendment is made in conjunction with the amendment to paragraph 82(1)(b) to adjust the gross-up amount of taxable dividends that are not eligible dividends that must be included in the income of an individual and the amendment to paragraph 121(a) to adjust the corresponding dividend tax credit for such dividends.

This amendment applies to the 2018 and subsequent taxation years. The small business deduction rate is prorated for a taxation year of a corporation that overlaps 2017 and 2018.