Budget Addresses Dividend Rules

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    The federal government’s ‘Budget 2015’ proposes to address the gross-up and tax credit rules in the Income Tax Act applicable to dividends paid by corporations to individuals, says a Fasken Martineau ‘Bulletin.’ Very generally, the purpose of the gross-up and tax credit rules is to compensate an individual receiving dividends for corporate income tax which is presumed to have already been paid on the income of a corporation which funded the dividends paid to the individual. To achieve this, the ITA grosses up dividends paid by a corporation to an individual (theoretically, to the amount of pre-tax income which funded the dividends) and then permits the individual to claim a dividend tax credit (theoretically, equal to the income tax paid by the corporation on the funds used by the corporation to pay the dividends). However, to achieve this objective, the dividend gross-up and tax credit mechanisms address the fact that CCPCs are only subject to the small business tax rate on the first $500,000 of qualifying active business income.