FMGT 4410Chapter 13: Taxation of Corporate Investment IncomeDesignation of Eligible DividendsIn order to achieve integration, dividends received by individuals are designated as either eligible or non-eligible, with the following objective in mind:a) If income has been taxed at a high rate at the corporate level, then the individual receiving dividends should be taxed at a low rate on those dividends received – this is the case with eligible dividends (which are eligible for enhanced gross-up/tax credit procedures)

FMGT 4410Chapter 13: Taxation of Corporate Investment IncomeDesignation of Eligible DividendsIn order to achieve integration, dividends received by individuals are designated as either eligible or non-eligible, with the following objective in mind:a) If income has been taxed at a high rate at the corporate level, then the individual receiving dividends should be taxed at a low rate on those dividends received – this is the case with eligible dividends (which are eligible for enhanced gross-up/tax credit procedures).b) If income is taxed at a low rate at the corporate level, then the individual receiving dividends should be taxed at a higher rate on those dividends received – this is the case with non-eligible dividends (which are not eligible for the enhanced gross-up/tax credit procedures).Up until this point, we have noted that eligible dividends are generally those from Public corporations, and non-eligible dividends are generally those from Private corporations. Recall that…Eligible dividends – Assumed to be paid out of “full rate taxable income”, which is taxed at a high corporate tax rate. Public companies often pay dividends out of “full rate taxable income”, so we say that dividends paid from Public companies are generally designated as Eligible. Eligible dividends have a gross-up of 38%, and a dividend tax credit of 6/11 of the gross-up.Non-eligible dividends – Assumed to be paid out of “active business income”, which is taxed at a low corporate tax rate (due to application of the small business deduction). CCPCs often pay dividends out of“active business income”, so we say that dividends paid from CCPCs are generally designated as Non-eligible. Non-eligible dividends have a gross-up of 16%, and a dividend tax credit of 8/11 of the gross-up.IssueIt may be the case that public corporations pay dividends out of income that was taxed at low rates, andprivate corporations pay dividends out of income that was taxed at higher rates. ? If a public corporation pays dividends out of income taxed at low rates, and the individual receives these dividends as eligible, both the corporation and individual are paying low tax rates and integration is not achieved. ? If a private corporation pays dividends out of income taxed at high rates, and the individual receives these dividends as non-eligible, both the corporation and the individual are paying high tax rates and integration is not achieved.

 SolutionThere is a system in place to track which income has been taxed at which rate in order to determine whether dividends paid out can be designated as eligible or not