What does double taxation mean in a corporate context?

• A. Corporation taxed on income, shareholders taxed again on distributions.
• B. Shareholders taxed on salary, corporation taxed on profits.
• C. Dividends are exempt from taxation.
• D. Only the corporation pays tax; shareholders are not taxed.

Answer: (A)

Double taxation occurs because a corporation is treated as a separate taxpayer from its owners. The company pays tax on its profits, and when those profits are distributed as dividends to shareholders, the shareholders also pay tax on that dividend income. That two-step taxation is why it’s called double taxation, which matches the description of a corporation being taxed on income and shareholders being taxed again on distributions.

The other ideas don’t fit: salaries are taxed to the recipient as personal income (not the corporation’s profit being taxed twice), dividends being exempt would remove the second tax, and saying only the corporation pays tax ignores the shareholder tax on distributions.