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The result is a tax equal to all of a CCPC’s investment income, except for the amount a salaried employee could have earned

Aco started with a larger amount than Jonah and, after 25 years, Aco earns $850,000 of investment income, again equal to 10 times its initial investment. Under existing rules, Aco pays corporate tax at a rate of 50 per cent each year as the income is earned. Aco therefore pays total corporate tax of $425,000. Also, under “tax integration,” the combined tax to Aco and Andrea remains at $425,000 in future when Aco pays its after-tax investment income to Andrea as dividends.

The government’s concern is that Jonah only has $250,000 of after-tax income to help fund his retirement, while his neighbour Andrea has $425,000. This is not fair, says the government. So what to do?

Under the government’s proposal, Aco would still pay immediate tax of $425,000 as the investment income is earned. However, when Andrea is about to retire and Aco pays dividends to her out of its after-tax investment income, the tax results are very different.

The government’s position is that Aco should only have earned $500,000 before tax, the same as Jonah, not $850,000. And so the proposal effectively splits Aco’s investment income into two parts — the “legitimate” portion of $500,000 and the “tainted” amount of $350,000.

Under the new rules, Aco and Andrea will still pay combined tax of 50 per cent on the $500,000 portion — tax of $250,000. And what of Aco’s additional investment income of $350,000? The government will take all of it as tax — every penny. The result is that Aco earns $850,000, and Aco and Andrea pay combined tax of $600,000 ($250,000 plus $350,000). Andrea is left with an after-tax amount of $250,000, the same as Jonah.