Dividend Tax Credit - Nova Scotia

[Pages:3]Dividend Tax Credit - Nova Scotia

Background information December 1, 2006

Nova Scotia's dividend tax credit rate for public companies increases from 7.7 per cent to 8.85 per cent, effective January 1, 2006. This follows federal changes to the dividend gross up and credit rate, announced in November, 2005.

Under the new provincial tax credit rate, Nova Scotians will pay about the same amount of provincial tax on dividends received from public corporations as they did before the federal changes. Provincial revenues from dividend taxes will also remain neutral.

Nova Scotia will amend its Income Tax Act in the Spring of 2007 to implement the change. Policy decisions on the provincial dividend tax credit were part of the July 2006 Nova Scotia budget.

All Canadians will see lower federal taxes on dividends received from public corporations, as of January, 2006.

Dividend tax rates in Nova Scotia for 2006 - federal and provincial

1. Dividends from public corporations ? the federal gross up of dividends increases to 1.45 from the current 1.25. This

means $100 in cash dividends is reported as $145 of income for tax purposes C the federal dividend tax credit rate increases from 13.33% to 19%, C Nova Scotia's dividend tax credit rate increases from 7.7% to 8.85%

2. Dividends from Canadian Controlled Private Corporations C federal gross up remains at 1.25 C the dividend tax credit rate remains unchanged at 13.33%

3. Dividends from Canadian Controlled Private Corporations paid from the general rate income pool

C the federal gross up of dividends increases to 1.45 from the current 1.25. This means $100 in cash dividends is reported as $145 of income for tax purposes

C the federal dividend tax credit rate increases from 13.33% to 19% C Nova Scotia's dividend tax credit rate increases from 7.7% to 8.85%.

About the federal changes and taxation of dividends The revised federal dividend tax credit rate was designed to equalize the tax treatment of income trusts and corporations by 2010.

Corporations pay corporate income taxes and individuals receiving dividends from those corporations pay personal income taxes. This, in effect, creates double taxation on the income of the corporation. To compensate for this, there is a dividend tax credit on both federal and provincial personal income taxes to reduce the dividend's marginal rate of tax.

The dividend tax credit is calculated on a "grossed up" amount of dividends, now 1.45 times the actual dividend received by shareholders. The grossed up amount is included in taxable income, and federal and provincial tax credits are based on that amount.

The provincial dividend tax credit rates are determined by the provinces. Provinces are tied to the gross up amount as set by the federal government, which is included in the determination of taxable income.

The federal government announced more changes to treatment of income trusts in late October, 2006. They plan to tax existing trusts to the same extent as corporations by 2011 and tax new trusts at equivalent rates immediately.

Effect on individuals Nova Scotians who pay tax on dividend income: Individual Nova Scotians will pay lower combined federal and provincial taxes on dividend income for the 2006 taxation year.

The amount of the benefit will depend on the individual's income tax bracket. Lower income earners will get a larger benefit.

Taxable

Tax change /$100 of cash

Income

dividends

Provincal Federal Total

$20,000.00

-1.45 -7.84 -9.29

30,000.00

-0.22 -7.84 -8.06

40,000.00

-0.22 -6.49 -6.71

50,000.00

-0.22 -6.49 -6.71

60,000.00

0.13 -6.49 -6.36

70,000.00

0.13 -6.49 -6.36

80,000.00

0.13 -5.69 -5.56

90,000.00

0.13 -5.69 -5.56

100,000.00

0.29 -5.69 -5.40

110,000.00

0.29 -5.69 -5.40

120,000.00

0.29 -5.09 -4.80

Effect on Province of Nova Scotia finances In 2004, over 83,000 tax filers reported dividend income in Nova Scotia of over $600 million on a grossed up basis.

The revised dividend tax credit rate of 8.85% will mean that Nova Scotia's revenue from dividend taxes will remain about the same in 2006.

30 November 2006

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