Provinces have sometimes declared a tax holiday (i.e., a period in which no provincial taxes will be assessed)for new Canadian controlled private corporations that start up business operations within their boundaries. The province's objective in granting this tax free period is to encourage economic growth and employment within the province. Describe the impact of such tax holidays on the type of compensation that will be used for the owner-manager of the business. Explain your conclusion.

Question

Quizplus · Accepted Answer

The Answer is The effect of a provincial tax holiday for a Canadian controlled private corporation is to reduce the overall tax rate on the first $500,000 of active business income to 9 percent (38% - 10% - 19% + 0%). This is 3.04 percent below the 13.04 percent rate that is assumed in the integration provisions and, as a consequence, the tax deduction associated with salary payments would be less significant. Without considering other factors, the presence of a provincial tax holiday would favour the use of dividend payments to the owner-manager over the use of salary compensation.

Provinces Have Sometimes Declared a Tax Holiday (I