Alberta will enhance its corporate dividend tax credit and raise the small business income threshold, the province’s government announced today.

The province is enhancing its dividend tax credit and boosting the small-business income threshold to encourage greater investment and help ensure Alberta remains the place to do business, announced Finance Minister Shirley McClellan.

”We strive to maintain a competitive tax system in Alberta because it’s an integral part of the province’s prosperity,” said McClellan. “Eliminating the double taxation of corporate dividends will enhance Alberta’s investment climate. Increasing the income threshold promotes small-business growth.”

Currently, dividend income is taxed twice: first when the income is earned in the corporation, and again at the personal income tax level, when investors receive the dividends. To address this double taxation, federal and provincial governments provide dividend tax credits on personal income taxes as an offset. However, the dividend tax credits have not fully offset taxes paid at the general corporate rate.

Earlier this year, the federal government announced it is enhancing the dividend tax credit for eligible corporate dividends beginning in 2006, eliminating double taxation by 2010.

Alberta will parallel the federal changes and eliminate double taxation by increasing the tax credit on eligible dividends paid out of corporate income taxed at the general rate. The changes will be implemented over four years and will apply to eligible dividends received on or after January 1.

The government also plans to raise the small-business income threshold (the amount of income eligible for the small-business deduction) from $400,000 to $500,000, to be phased in by 2009.

At the same time, the province will correct an inadvertent benefit provided when the small-business tax rate was reduced to 3%. The dividend tax credit was not adjusted to take into account the small-business tax rate reduction between 2001 and 2004. This provided an overly generous dividend tax credit for income taxed at the small-business rate and flowed out as dividends.

“The changes to the dividend tax credits ensure a fair and equitable tax system for all Albertans,” said McClellan. “At the same time, they also encourage small businesses to retain more of their income for growth. This is further enhanced with the boost to the small business threshold, which increases the amount taxable at the lower small business rate.”

The changes to the dividend tax credits and the small business threshold will be phased in between 2006 and 2009 to allow businesses and investors time to adjust.