Tax Integration: Corporate and Personal Taxes

The Integration Concept

Canada's tax system is designed with tax integration in mind. The goal: whether you earn $100,000 through a corporation or personally, the total tax burden should be roughly equivalent.

Why This Matters: Understanding integration helps you make informed decisions about:

• Salary vs. dividends
• Corporate vs. personal investing
• When corporate deferral provides real benefits
• How dividend tax credits work

Part 1: How Integration Works (The Theory)

The Two-Layer System

When you earn income through a corporation, tax is paid in two layers:

1. Corporate Tax: The corporation pays tax on its income (~12-26% depending on income type and SBD eligibility)
2. Personal Tax: When you take money out (as dividends), you pay personal tax, but receive a credit for corporate tax already paid

The Dividend Tax Credit (DTC)

The dividend tax credit is the mechanism that achieves integration:

1. You receive a dividend from your corporation
2. You include a "grossed-up" amount in your personal income (e.g., $100 dividend becomes $138 in taxable income for eligible dividends)
3. You receive a tax credit that offsets the corporate tax already paid
4. Result: Total tax should be equivalent to earning the income personally

Part 2: Integration in Practice

Example: $100,000 of Active Business Income

Scenario A: Earn Personally

• Personal tax (50% bracket): $50,000
• Total Tax: $50,000

Scenario B: Earn Corporately, Then Dividend

• Corporate tax (12.2% SBD rate): $12,200
• Personal tax on dividend (with DTC): ~$37,800
• Total Tax: ~$50,000

Result: Integration works:total tax is roughly equivalent.

Part 3: When Integration Fails (The Gaps)

Integration is not perfect. There are gaps that create opportunities or costs:

Gap 1: Tax Deferral

If you don't take the money out of the corporation:

• You pay corporate tax (~12-26%)
• You defer personal tax (up to 53%)
• You keep 40%+ more capital working for you

This is the primary benefit of corporate investing: Deferral, not elimination.

Gap 2: Provincial Variations

Integration works differently by province:

• Ontario: Different dividend tax credit rates
• Quebec: Different integration mechanics
• Result: Total tax can vary by 2-5% depending on province

Gap 3: Income Type Differences

Different income types integrate differently:

• Active Business Income: Generally integrates well
• Investment Income: Integration gaps exist (this is why corporate investing strategies matter)
• Capital Gains: Different integration mechanics

Part 4: Eligible vs. Non-Eligible Dividends

Eligible Dividends

• Paid from General Rate Income Pool (GRIP)
• Higher gross-up (38% in 2025)
• Higher dividend tax credit
• Result: Better integration for high-income earners

Non-Eligible Dividends

• Paid from Small Business Deduction income
• Lower gross-up (15% in 2025)
• Lower dividend tax credit
• Result: Integration works, but at different rates

Planning Implication: Understanding RDTOH and GRIP helps you optimize dividend strategies.

Part 5: Salary vs. Dividends (Integration Perspective)

Salary

• Taxed immediately at personal rates (up to 53%)
• Creates RRSP room (18% of salary, up to $31,560)
• Creates CPP contributions
• No integration benefit (taxed once, at personal rate)

Dividends

• Corporate tax first (~12-26%), then personal tax (with DTC)
• No RRSP room created
• No CPP contributions
• Integration benefit (but may still pay more total tax in some brackets)

Decision Factor: Your personal tax bracket, RRSP needs, and CPP preferences.

Part 6: Integration and Corporate Investing

When you invest through your corporation, integration affects the strategy:

Active Business Income → Investment Income

1. You earn active business income (taxed at ~12% SBD rate)
2. You invest the after-tax amount corporately
3. Investment income is taxed at ~50% (top rate)
4. Integration gap: Investment income doesn't integrate as well as active income

This is why tax-efficient corporate investing matters: You want to minimize the integration gap on investment income.

Part 7: Common Questions

Q1: Is integration the same in all provinces?

No. Provincial dividend tax credits vary:

• Ontario: ~10% DTC on eligible dividends
• Quebec: ~11.9% DTC on eligible dividends
• Result: Total tax can differ by 2-3% between provinces

Q2: Does integration work for capital gains?

Capital gains integrate differently:

• 50% inclusion rate for personal tax
• Corporate tax on 50% of gains
• Result: Integration gaps exist, creating deferral opportunities

Q3: How does the $50K passive income threshold affect integration?

The $50K threshold increases corporate tax rates (from ~12% to ~26%), which affects integration:

• Higher corporate tax = larger dividend tax credit
• But the integration may still favor deferral (not taking money out)

Q4: Should I take salary or dividends for optimal integration?

This depends on:

• Your personal tax bracket
• Whether you need RRSP room
• Whether you want CPP contributions
• Your retirement income strategy

Work with your CPA to model both scenarios.

Part 8: Coordination with Other Strategies

Tax integration interacts with:

• RDTOH & GRIP: Refundable tax and eligible dividend pools
• CDA: Tax-free capital dividend account strategies
• Corporate vs. Personal Investing: When to invest in each account type
• Salary vs. Dividend Strategy: Optimal income mix

Resources & Recommended Reading

Related Articles

• RDTOH & GRIP for Owner-Managed Corporations : Refundable tax and eligible dividend mechanisms
• CDA 101: The Capital Dividend Account Explained : Tax-free dividend strategies
• Corporate vs. Personal: When to Invest in Each Account : Coordinated investment strategies
• Tax Optimization Services : How we help optimize corporate tax strategies

External Resources

• CRA: Dividend Tax Credit : Official documentation on DTC rates and calculations
• CRA: T2 Corporation Income Tax Guide : Corporate tax rates and integration mechanics
• Income Tax Act Section 121 : Legislative basis for dividend tax credits

Next Steps

Understanding tax integration helps you make informed decisions about corporate structure, income strategies, and investment allocation. The system is designed to be equivalent, but gaps create opportunities for strategic strategy.

Ready to optimize your tax strategy? Book a 15-minute consultation to discuss how tax integration affects your specific situation and what strategies might work for your corporation.