What’s an Integrated Tax Rate and How Does It Impact You?

If you run a business, whether it’s just you and your laptop or you leading a larger team, understanding how your income gets taxed can save you thousands of dollars. 

One of the most misunderstood concepts is the integrated tax rate. It sounds technical (and it is), but stick with us—we’ll break it down in simple terms below so you can keep more of your hard-earned money.

Understanding business structures and their tax responsibilities

Let’s start with the basics: your business structure, or more specifically, whether you have an incorporated business vs. a sole proprietorship.

If you’re a sole proprietor, you and your business are viewed as the same from both a legal and tax perspective. You report your business income on your personal tax return, and you’re taxed at your personal income rate.

On the flip side, if your business is incorporated, it’s a separate legal and tax entity. If you own an incorporated business and pay yourself income in the form of dividends or salary, the integrated tax rate is relevant to assess how much tax you’ll pay. It determines how much you’ll actually keep in your pocket.

As the shareholder of an incorporated company, you’ll have to file a separate corporate tax return (T2). And any income you pay yourself is taxed again, either as salary or dividends, on your personal return.

Sole proprietors aren’t impacted the same way, since all business income flows directly to their T1 General Tax Form.

GST/HST remittance

No matter how your business is structured, if your company earns more than $30K in revenue in a single quarter or over 4 consecutive quarters, you must register, collect, and remit Goods and Services Tax/Harmonized Sales Tax (GST/HST) to the Canada Revenue Agency (CRA). Filing this correctly and on time is essential to stay compliant.

What is an integrated tax rate?

When a corporation earns income, it pays corporate tax on that income. But if you, as the owner, want to take that income home—say through a dividend or salary—you will pay personal tax on it too. That’s two layers of tax on the same dollar.

This is where the concept of integration comes in. Canada’s tax system is designed to neutralize the outcome, so you’re not unfairly penalized for earning money through a corporation. The integrated tax rate is the total effective tax you pay, combining both the corporate level and personal level.

How to calculate the integrated tax rate

When your business is structured as a Canadian-Controlled Private Corporation (CCPC) and your taxable income is less than $500K, you get access to a special tax break called the Small Business Deduction (SBD).

The first $500K of active business income earned by a CCPC is taxed at a reduced corporate tax rate—9% federally, plus a provincial portion that varies depending on where you live, bringing the total to between 9-12.2%. This is significantly lower than the general corporate tax rate, which is usually around 26-31%. So your business keeps more money upfront.

When you take that income out of the corporation and pay yourself through dividends or salary, you’ll pay personal tax on it. Without integration, you’d be taxed twice: once at the corporate level and again personally. However, with the tax integration system, the tax you pay personally is adjusted to reflect what’s already been paid at the corporate level.

The combined (or integrated) tax rate—after adding in personal tax on dividends or salary—is still designed to roughly match what you would have paid if you earned that income personally to begin with.

Sample calculation using the integrated tax rate

Here’s a simplified version of how integration works in practice for a CCPC.

Let’s say your corporation earns $100K in net income, after taxes. Thanks to the SBD, it pays a reduced corporate tax rate of about 12%. That’s $12K in corporate tax.

The remaining $88K gets paid out to you as a dividend. You now pay personal tax on that dividend, which could range from 20-35% based on your total income and province. 

To put this in perspective, if that same $100K had been earned personally without flowing through a CCPC, it would have been taxed at your full marginal rate, which could range from 40% to over 50%, depending on your province and total income.

By comparison, through the CCPC, you paid $12K in corporate tax and then personal tax on the $88K dividend. Once both layers of tax are applied, the total tax bill typically aligns closely with what you would have paid personally. This achieves tax integration, which neutralizes any tax advantage or disadvantage between earning income corporately or personally. Here’s a comparison:

Scenario 1: Earning $100,000 personally as an employee

Let’s say you are residing in Ontario.

• Personal tax on $100,000 = with an average tax rate of 26.14%, plus your CPP and EI deductions  = $26,136
• Net amount in your pocket = $100,000 - $26,136 = $73,864

Scenario 2: Earning $100,000 through a CCPC

Let’s break it down step by step:

1. Corporate income: $100,000

Tax rate (with SBD): 12%

Tax paid: 12% of $100,000 = $12,000

Net after-tax income: $88,000

2. Personal tax on paying yourself $88,000 in non-eligible dividends:

• Now, in Ontario, you’ll pay 12.07% on your dividends
• Dividend Tax on $88,000 = $10,625

3. Total tax paid across both levels:

• Corporate tax: $12,000
• Personal dividend tax: $10,625
• Total: $22,625

4. Net amount in your pocket:

$100,000 - $22,625 = $77,375

Without a CCPC: You keep $73,864 after tax.

With a CCPC: You keep $77,375, so you’re slightly ahead.

However, this is not a permanent tax advantage. The CRA will adjust dividend tax rates to neutralize any significant tax deferral advantage.

Note: Tax rates vary between provinces. If you’re in Quebec or Newfoundland, for example, you might pay more than someone in Alberta. Use an online tax calculator or consult a TurboTax tax expert to get province-specific numbers.

Can you claim business loss on personal taxes?

If you’re a sole proprietor, the answer is usually yes—you can claim a business loss on your personal tax return, which can reduce your overall taxable income. While some business expenses can be claimed on personal taxes, they must be legitimate and properly documented.

However, if you run an incorporated business, the rules are different. The losses stay within the corporation. You can carry them forward or backward to offset corporate profits in other years. But you can’t use them to reduce your personal taxes.

Should you pay yourself a salary or dividends?

A big decision a lot of incorporated business owners face has to do with whether to pay themselves a salary or dividends.

A salary is a business expense; your corporation deducts it and you pay personal income tax on it with Canada Pension Plan (CPP) contributions. Dividends are paid from after-tax corporate profits—there’s no CPP, and they’re taxed at a different personal rate.

An integrated approach helps you mix and match for maximum efficiency. For example, a low salary combined with dividends could minimize your tax liability and maximize your Registered Retirement Savings Plan (RRSP) room. If your corporation is classified as a personal service business, you might face higher tax rates and lose certain deductions—so plan carefully, and consider taking advantage of the year-round advice offered by TurboTax Business Assisted.

Tax planning tips for entrepreneurs

Beyond just choosing between salary and dividends, entrepreneurs can use a variety of strategies to structure their income and reduce their overall tax burden. Consider the following ways to hang on to more of your profits.

• Balance salary and optimize dividends to reduce overall tax: Salary is considered a business expense, so your corporation can deduct it, but it also means you’ll pay CPP contributions and regular income tax rates. Dividends, on the other hand, are paid out of after-tax corporate profits and are taxed at lower personal rates, with no CPP required. By keeping your salary modest and topping up with dividends, you can often strike a better balance and lower your total tax burden.
• Split income with family members using share structures (where allowed): If your spouse or adult children are involved in the business, you may be able to allocate some income to them by issuing shares and paying them dividends. This strategy, called income splitting, can help reduce the overall family tax bill, since you’re distributing income across multiple lower tax brackets instead of just one higher bracket. But be careful: The CRA has rules under Tax on Split Income (TOSI) that limit this strategy, so it’s best used with guidance from Canadian professional tax experts.
• Use a Capital Dividend Account (CDA) to pay out tax-free amounts: A Capital Dividend Account (CDA) is one of the few ways a private corporation can pay a shareholder tax-free money. A CDA can contain proceeds like the non-taxable portion of capital gains or life insurance payouts received by the corporation. When available, issuing capital dividends from this account lets you extract money without triggering personal tax—a huge bonus if you qualify.
• Defer bonuses or dividends to a later year to manage tax brackets: Timing is everything. If you’ve already earned a lot this year and expect next year’s income to be lower, it might make sense to delay a bonus or dividend. This way, you avoid bumping yourself into a higher tax bracket, potentially saving thousands. Similarly, if you’re approaching a big expense or retirement, timing income strategically can soften the tax hit.
• Track the balance of your Refundable Dividend Tax on Hand (RDTOH) to recover tax already paid: The RDTOH is a built-in mechanism that lets your corporation get some of its tax back when it pays out dividends. Basically, the government gives a refund to the corporation once it distributes taxable dividends to shareholders. Keeping track of this balance ensures you’re claiming everything you’re entitled to and not leaving money on the table. 
• Use TurboTax Business to file your taxes: Even with the best DIY intentions, the tax system can get complicated fast, especially when you’re dealing with things like multiple income sources, family members, or carryforward losses.

 TurboTax Business walks you through the entire process, and gives you access to real business tax experts when you are preparing your return.

How you can maximize your corporate business income

Filing taxes in Canada doesn’t have to be complicated—especially if you understand the basics of how your income is taxed. With the right tools and a little planning, you can minimize what you owe and keep more to invest in your business.

Use TurboTax Business, a CRA-certified software, to confidently file your T2 Corporation Tax Return, a form all incorporated businesses in Canada must file annually to report their income and calculate taxes owed to the CRA. With unlimited help from tax experts and a final review before you hit “submit,” it’s never been easier to file business taxes online.

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TurboTax Business can help you file your corporate taxes with confidence, get business tax expert help, ensuring your business is compliant.

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