Although there was no change to general personal tax rates in the federal budget this spring, there was one increase which may affect the owners of small businesses across the country.
Company earnings can be paid out to shareholders of a company, either as wages or as a dividend.
Increase chart
There have been no changes to the tax rates on wages paid out from a company, as these are taxed the same as a regular employee’s wages. On the other hand, there has been an increase in the tax rate on dividends paid.
The calculation of tax on dividends has always been complicated. Because a company has already paid tax on corporate income, the government has taxed dividends at a lower rate than wages.
When the taxes paid on dividends are added to the taxes which have already been paid by a company, the total tax paid will approximately equal the tax that would have been paid by a shareholder if they had received a company’s earnings as wages.
Efforts to make this total tax similar in both situations have led to the complexity in the calculation of this dividend tax rate.
As a result of these recent dividend changes, the tax rate on dividends from small corporations will be increasing from 33.71% to 35.37% for shareholders who are in the highest tax bracket in British Columbia. This increase will be in effect for dividends paid in 2014. Since BC is introducing a temporary tax increase for the highest tax brackets during 2014 and 2015, this high rate will actually be increased to 37.99% for these two years, falling to 35.37% in 2016. This may make small businesses reconsider whether they will pay out their earnings as wages or dividends for the near future.