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Changes to Alberta eligible dividend tax rates

by Faizal Valli CA and Jeff Hlynski CA, CFP, TEP

On June 4, 2009 the government of Alberta quietly passed Bill 40, which contained amendments to the Alberta Personal Income Tax Act. The amendments provided for decreases to eligible dividend tax rates for individuals resident in Alberta, for 2010 and later years.

Recall that the federal Department of Finance announced the “new” eligible dividend regime on November 23, 2005 — to take effect January 1, 2006 — in an effort to improve tax integration for corporations and their shareholders. Eligible dividends are generally dividends received from Canadian public corporations and Canadian private corporations whose income is subject to the general corporate tax rate. The table below provides an example of how integration works, based on $100 of active business income in 2009:

Small
Business
Rate

General
Corporate
Rate

Earned
Personally

Active business income

$100.00

$100.00

$100.00

2009 corporate tax rate

14%

29%

14.00

29.00

After-tax corporate earnings

86.00

71.00

100.00

– dividend to shareholder

Non-Eligible

Eligible

n/a

Personal tax rate – Alberta resident

27.71%

14.55%

39.00%

Personal tax

23.83

10.33

39.00

Total Taxes

37.83

39.33

39.00

Recall also that the general corporate tax rate is scheduled to decrease to 25% for Alberta-based corporations by 2012. As a result, the federal Department of Finance, as well as many other provinces, adjusted the federal and provincial dividend tax credit rates respectively to achieve appropriate integration.

The table below shows a comparison of the eligible dividend tax rates for Alberta residents:

Combined Federal-Alberta Eligible Dividend Tax Rates
2009 — 2012

2009

2010

2011

2012
and Later

Before Bill 40 enactment

14.55%

16.11%

18.62%

20.85%

After Bill 40 enactment

14.55%

15.88%

17.72%

19.29%

The table below illustrates the total corporate and personal taxes on active business income before Bill 40 was enacted:

Total Corporate and Personal Taxes on $100 of
Active Business Income Earned in Alberta Before Bill Enactment

Small
Business
Rate

General
Corporate
Rate

Earned
Personally

2009

$37.83

$39.33

$39.00

2010

$37.83

$39.60

$39.00

2011

$37.83

$40.19

$39.00

2012 and onward

$37.83

$40.64

$39.00

The table below illustrates the total corporate and personal taxes on active business income after Bill 40 was enacted:

Total Corporate and Personal Taxes on $100 of
Active Business Income Earned in Alberta After Bill Enactment

Small
Business
Rate

General
Corporate
Rate

Earned
Personally

2009

$37.83

$39.33

$39.00

2010

$37.83

$39.43

$39.00

2011

$37.83

$39.52

$39.00

2012 and onward

$37.83

$39.47

$39.00

As the total tax under the “General Corporate Rate” column decreases from $40.64 to $39.47 for 2012 onwards, this means that active business income earned by a corporation subject to the general corporate tax rate is now better integrated. Welcome news!

We have confirmed with the Department of Alberta Ministry of Finance and Enterprise that their current policy objective is to maintain integration with respect to active business income. Accordingly, if true, we can likely anticipate further adjustments to the Alberta dividend gross-up or tax rates if changes in Federal law are made in the future that would otherwise disturb integration.