In theory, the total tax paid by a corporation and its shareholders should be the same as if the individual had earned the income directly. This is the principle of integration. No tax advantage (or disadvantage) should arise from the use of a corporation.
Recall that a corporation is a separate legal entity subject to its own corporate tax payable on income earned. After the corporation pays tax, whatever is left over is available for distribution to its shareholders. However, this income is taxable income to the shareholder as well at his or her progressive individual rate. Thus the same income earned by the corporation is taxed twice; once at the corporate level and then again at the individual level. If this issue of double taxation was not addressed by the ITA, an individual would clearly prefer not to incorporate.
The ITA is designed so that although income earned through a corporation is still subject to two levels of tax, such income is "integrated" so that, in theory, the total tax payable by the corporation and its shareholder is no more or less than if an individual earned the income directly.
This lesson will introduce some of the mechanisms used to achieve integration.