With the 2021 tax year upon us, there are numerous questions about the tax implications of eligible dividends for both businesses and individuals. As a tax expert in Surrey British Columbia Canada, I would like to provide a comprehensive overview of eligible dividends, their advantages and disadvantages, and the tax benefits for both corporations who pay and individuals who receive these dividends.
Defining Eligible Dividends
Eligible dividends are distributions by a Canadian Controlled Private Corporation (CCPC) to its shareholders. These dividends differ from regular dividends, as they qualify for a lower amount of tax due to the refundable dividend tax on hand (RDTOH) account.
When Are Eligible Dividends Available to Pay?
Eligible dividends are available to pay when a corporation earns sufficient taxable income that is not subject to the small business deduction. The RDTOH account must have sufficient funds to pay the eligible dividend.
Who Can Eligible Dividends Be Paid To?
Eligible dividends can be paid to individuals, trusts, and corporations.
Pros and Cons of Paying Eligible Dividends
In general, the biggest advantage of paying eligible dividends to shareholders is that shareholders receive a tax credit, as well as a reduction of the amount of income tax they pay. On the other hand, the significant disadvantage of paying eligible dividends is that shareholders must declare the dividend as income, so the corporation will be taxed on the dividends with a lower rate than if regular dividends were paid. Additionally, the corporation must pay dividend withholding tax on the dividends paid.
What Are the Tax Benefits of Paying Eligible Dividends?
For corporations, eligible dividends provide the benefit of a lower effective tax rate on corporate income, which results in an increase in after-tax income. At the same time, the shareholder receives a tax credit that can be used to reduce the overall tax paid on the dividends.
For individuals, eligible dividends provide a tax credit that can be used to offset taxes owing on other income. Furthermore, the tax credit can be carried back and applied against the previous year’s taxes and any unused amount can be carried forward and applied to taxes due in the future.
In 2021, eligible dividends are subject to the personal dividend tax credit at a rate of 38.333%. This rate applies to any eligible dividends received in tax years from 2020 to 2023.
In conclusion, eligible dividends are an advantageous form of corporate income distribution for corporations and individuals if the company has sufficient taxable income and funds in their RDTOH account. By understanding the nuances and pros and cons of paying eligible dividends, small businesses in Surrey British Columbia Canada can ensure they make informed decisions in the years ahead.