Can Dividend Tax Credits Be Linked to Corporate Level Tax?

HEATHER I. KERR

ABSTRACT

The theoretical justification for providing credits to offset the tax payable on dividend income is to ensure that distributed corporate income is not subject to double taxation. Despite concerns about revenue shortfalls and growing federal budget deficits, Canada remains one of the few OECD countries to provide credits even when no underlying corporate tax has actually been paid. The following article explores the policy trade-offs involved in redesigning the Canadian tax system to ensure that dividend tax credits are not provided in the absence of corporate level tax. Two alternative tax structures are analyzed: a compensatory tax approach, modelled after the United Kingdom's advance corporation tax, and a qualifying dividend approach, following the recently adopted Australian tax rules. The analysis reveals not only the difficult issues which would surface in the course of making such a change, but also brings to light certain policy choices which are implicit in the existing Canadian rules.

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Citation: (1989) 47(Supp) U.T. Fac. L. Rev. 671.
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