Wednesday, March 15, 2017
Michael Smart (Toronto) presents Why the Dividend Tax Credit? at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series:
In this paper, I discuss the tax treatment of personal dividend income in Canada. Incorporating the changing parameters of the dividend gross-up-and-credit system since 1972, including provincial credits, I estimate the effective tax rate on eligible and ordinary dividend income of taxable investors, and compare it to that applying to other income sources. The effective tax rate on dividend income has decreased substantially and, since the 2006 enhancement of the dividend tax credit, dividend taxes in Canada have been fully integrated or overintegrated for taxable investors. Based on a new methodology, I estimate the fiscal cost of the system to federal and provincial governments. The cost of the DTC has increased markedly since the 2006 reform and is large. About 70 per cent of the tax benefit accrues to taxpayers in the top 10 per cent of the income distribution and, for shareholders in this group, the impact on overall progressivity of the tax system is substantial.
I discuss the implications of the tax measures for corporate financial decisions and tax avoidance behavior. While there is an economic case for integrating corporate and personal taxes, the current approach in Canada creates certain economic costs as well. I review these costs and discuss options for reform.