Pear Corporation earned $150,000 of pre-tax income. The tax rate for the company is 13%. The sole shareholder received all of the net earnings in the form of a non-eligible dividend during the year. The shareholder has a personal tax rate of 50%. Supposing the shareholder is entitled to a total (federal + provincial) dividend tax credit equal to $20,000, what is the net personal tax owing on the dividend (ignoring all other tax implications)? (Round all numbers to zero decimal places. Assume the year is 2019.)

Question

Quizplus · Accepted Answer

First, we need to calculate the taxes paid by the corporation on its pre-tax income. The tax payable would be $150,000 x 13% = $19,500.

Next, we need to calculate the amount of the dividend that will be taxed in the shareholder's hands. Since non-eligible dividends are grossed up by 38%, the amount of the dividend received by the shareholder is calculated as follows:

Dividend received = (1 + 0.38) x $150,000 = $207,000

The dividend tax credit is then applied to the amount of the dividend to reduce the amount of tax payable.

Dividend tax credit = $20,000

Taxable dividend = $207,000 - $20,000 = $187,000

The shareholder's tax on the dividend is then calculated as:

Tax on dividend = $187,000 x 50% = $93,500

Finally, we need to account for the tax already paid by the corporation.

Net personal tax owing = Tax on dividend - (corporate tax payable x dividend gross-up rate)

Net personal tax owing = $93,500 - ($19,500 x 0.38) = $55,038

Therefore, the net personal tax owing on the dividend is $55,038.

Pear Corporation Earned $150,000 of Pre-Tax Income