Taxation of Dividend Income

One of the inherent powers of a state, whether this power is stated or not in its constitution is to collect monies through taxation to support itself and in the promotion of the welfare of its citizenry through public service. This power of the state can not be made illegal by any laws, legislations or rulings because without this power, a state simply ceases to exist. The Canadian economy depends largely on collection of taxes levied by the Canadian government on corporations and individuals.

Corporations and citizens alike are mandated by the government to pay taxes in one form or another. Fiore said that “[if] a taxpayer meets Canadian residency criteria, the taxpayer is subject to a tax on world-wide income rather than just Canadian-source income (70). This means that if a Canadian citizen owns shares of stocks of a corporation operating just within the United States market, for example, and then this citizen receives dividends for his ownership in the company; then the citizen needs to pay taxes for that dividend to the Canadian government.

The taxation of dividends, which is often referred to as a double taxation practice of the government, by the Canadian government is the subject of numerous debates between and among legislators, corporations, and stock holders. Double taxation for dividends happen because “[the] corporation is taxed when income is earned, and the shareholder is taxed when the corporation distributes dividends” (Fiore 70). Somehow this communicates to the society that the government would rather have the corporations investing back their earnings into their businesses rather than rewarding their stock holders through dividends.

This paper aims to argue whether the taxation of dividend income is creating inefficiency in the Canadian economy. This researcher used the arguments of economists who are experts on this topic as well as her opinions about the research question. Canadian Economy The Canadian economy, together that of the United States, Australia, New Zealand, Japan and several countries in Western Europe, is considered as one of the “most dynamic” (Maddison 27) economies in the world.

The country has an estimated per capita gross domestic product (GDP) of $33,900 in 2005 and the total investment in the country during the same year is estimated to be at 20. 5 per cent of GDP (indexmundi. com) Dividend Taxation Grant Thornton, LLC illustrated dividend income taxation in Canada so very well. The LLC says that, which is true, when a Canadian citizen “[receives] a dividend from a Canadian corporation, the amount [that that individual reports on his or her] return is not the amount [he or she] received – it’s more!

” (grantthornton. ca). Dividends from taxable Canadian corporations are included in your income, along with a 25% gross-up of the amount received. You can then claim a federal dividend tax credit equal to 16-2/3% of the actual dividend. Below is an illustration of this concept and the dividend income taxation works in the country. Source: (grantthornton. ca) * A total dividend income for the year is $26,000 or below, then the taxpayer or stock holder is exempted from paying taxes on those dividends.

Some people argue that the reason why the government double tax dividend income is because tax on dividends paid for by the stock holder “is a payment for the privilege of doing business in the corporate form” (Walsh). Some others argue that “stock ownership is concentrated in the hands of wealthy individuals, who can afford, under the ability to pay doctrine, to pay more in taxes” (Walsh). This, then, means that the government and society punishes those who possess more economic wealth.