Provincial Taxation of Small Business Dividends in 2014

Because of the way that dividends are taxed, both at the federal level and the provincial level, the amount of tax payable on a given dividend depends of the taxpayer’s taxable income (as well as their province of residence).

With the change to the gross-up of small business dividends for 2014, the federal tax on such dividends has increased between 1.64% (in the highest tax bracket) to 2.62% (in the lowest tax bracket). 

As mentioned last week, the provincial credit rates are tied to either the taxable amount of the dividend, the gross-up, or the federal credit rate. Some provinces have seen fit to let the adjustment to the federal gross-up and credit rate affect their provincial rates while others have introduced legislative changes to adjust their rates. The table below shows the provincial tax rate on small business dividends when taxable income is $80,000.

Some provincial tax rates have increased, some stayed roughly the same, and some have decreased. As you can see, 2014 rates vary from 4.66% in Nunavut to 19.55% in Manitoba. However, as a small business owner, one has to take into account the taxation of the dividends, both at the corporate level and at the personal level. Although Manitoba’s tax rate on small business dividends is the highest, the tax levied on the business is the lowest in Canada (0%) thereby offsetting, at least to some degree, the large tax rate at the personal level.

If you’re jurisdiction shopping, the ideal situation is for the corporation to be situated in a low corporate tax province and the taxpayer to live in a low personal tax province, although this is seldom possible. Based on these numbers, the best combination would be for the corporation to reside in Manitoba (and thus pay no tax) but the shareholder to live in Nunavut.

Provinical Tax Rates on Other Than Eligible Dividends (at $80,000 income)