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Tax rates on dividends changed for 2006 and beyond

On June 29, 2006, the Department of Finance released draft legislation which outlines how the government intends to implement recently announced changes to the taxation of dividends. The government required 66 pages to outline the details, which are technically complex.
Based on the latest information, the top tax rate on dividend income for a Quebec resident for 2006 and beyond will be 36.4% on dividends from private companies and 29.7% on dividends from public companies. In 2005 the top tax rate on dividends was 32.8%.

The top tax rate on dividend income for an Ontario resident on dividends issued by public companies will be reduced from 31.3% to 22.4% in 5 annual rate reductions ending in 2010.

The record keeping relating to dividends will now become considerably more complicated, and require a company to keep track of two new tax pools out of which dividends are issued: a general rate income pool ("GRIP"), and a low rate income pool ("LRIP").

Now that the draft legislation is released, tax practitioners await the various provincial responses. Such provincial responses are necessary in order to evaluate what the combined federal-provincial tax rates will be on eligible dividends across Canada. As of August, 2006 both Quebec and Ontario have announced their intentions regarding the federal changes, however these have yet to become law.

The release of this draft legislation reflects a significant change in tax policy. We invite you to contact your engagement partner to review the impact of the new dividend rules on your tax position. 

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