Dividend Tax Credit Guide

How Dividend Taxation Works

Canadian dividend taxation involves three steps:

1. Gross-up: Increase dividend by a factor
2. Pay tax: On the grossed-up amount
3. Claim credit: Dividend tax credit reduces tax

This system integrates corporate and personal taxes.

Eligible vs Non-Eligible Dividends

Eligible Dividends

• From large public corporations
• From private corporations using non-small business income
• Higher gross-up (38%)
• Higher dividend tax credit
• Lower effective tax rate

Non-Eligible Dividends

• From small business corporations (CCPCs)
• Income taxed at small business rate
• Lower gross-up (15%)
• Lower dividend tax credit
• Higher effective tax rate than eligible

Gross-Up and Credit Rates

Calculation Example: Eligible Dividend

Receive $1,000 eligible dividend:

• Gross-up: $1,000 × 1.38 = $1,380 taxable
• Federal tax (say 20.5%): $283
• Federal dividend tax credit: $1,380 × 15.0198% = $207
• Net federal tax: $76
• Plus provincial tax minus provincial credit

Calculation Example: Non-Eligible Dividend

Receive $1,000 non-eligible dividend:

• Gross-up: $1,000 × 1.15 = $1,150 taxable
• Federal tax (say 20.5%): $236
• Federal dividend tax credit: $1,150 × 9.0301% = $104
• Net federal tax: $132

Effective Tax Rates on Dividends

Combined federal-provincial rates vary by province and income. For Ontario at $50,000 income:

• Eligible dividends: ~7-10% effective rate
• Non-eligible dividends: ~15-20% effective rate
• Interest income: ~30% marginal rate

Negative Tax Rate Scenario

At very low incomes, eligible dividends can have a negative tax rate:

• Dividend tax credit exceeds tax owing
• Reduces tax on other income
• Can't get refund of excess credit
• But can reduce tax to zero

Dividends vs Other Investment Income

Compared to Interest

• Interest: 100% taxable at full rate
• Dividends: Preferential treatment
• Dividends usually better in non-registered accounts
• Interest better in RRSP (taxed at withdrawal)

Compared to Capital Gains

• Capital gains: 50% inclusion rate
• Effective rate often lower than dividends
• Control timing of capital gains
• Both have advantages

Dividends in Different Accounts

Non-Registered Account

• Dividend tax credit applies
• Good for Canadian dividends
• Gross-up affects benefit calculations

TFSA

• All growth tax-free
• No dividend tax credit (not needed)
• Good for any income type

RRSP/RRIF

• No dividend tax credit
• All withdrawals taxed as regular income
• Better for interest/foreign dividends

Foreign Dividends

No Dividend Tax Credit

• Foreign dividends don't get Canadian DTC
• Taxed as regular income
• No gross-up applies

Foreign Withholding Tax

• US dividends: 15% withheld (with treaty)
• Can claim foreign tax credit
• Credit may not fully offset
• RRSP exempt from US withholding

Provincial Dividend Tax Credits

Each province has its own dividend tax credit:

Reporting Dividends

T5 Slip

• Box 10: Actual eligible dividends
• Box 11: Taxable eligible dividends (grossed-up)
• Box 12: Eligible dividend tax credit
• Box 23: Actual non-eligible dividends
• Box 24: Taxable non-eligible dividends
• Box 25: Non-eligible dividend tax credit

Where to Report

• Line 12000: Taxable dividends from Canadian corporations
• Schedule 4 for details
• Federal dividend tax credit on return

Planning with Dividends

Corporation Owner-Managers

• Salary vs dividend decision
• Integration with corporate tax
• RRSP room requires salary
• CPP from salary, not dividends

Retirees

• Watch gross-up affecting OAS clawback
• May prefer capital gains
• Or hold in TFSA

Low-Income Investors

• Can receive dividends nearly tax-free
• But watch benefit impacts
• Gross-up increases reported income