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Understanding the Taxes on Dividends in Canada

In Canada, all the taxpayers who have dividend stocks are eligible for a dividend tax credit in Canada. You can claim this dividend tax credit on all the Canadian stocks that are held outside the TFSA, RRIF, and RRSP.

 

This eventually cuts your effective tax rate. As a result, your dividend income is taxed at a lower rate than the interest income.

 

This is how Eligible and Non-Eligible Dividends are taxed out in Canada:

 

Dividend tax credit on Eligible Dividends:

 

138% of eligible dividends are included in taxable income for individuals.  The additional 38% is called the "gross-up", which is meant to represent the corporate income tax that has been paid on the income earned by the corporation.  The dividend tax credit is then calculated, with the intention of providing a tax credit for the corporate income tax paid.  The result is that the marginal tax rate for eligible dividends is quite a bit lower than the marginal tax rate for employment income, interest and foreign dividends.  It is also lower than the marginal tax rate for capital gains, but only to a certain level of taxable income.

 

Eligible Dividend Tax Credit Rates

Dividend tax credit on Non Eligible Dividends:

 

Non-eligible dividends, also known as regular, ordinary, or small business dividends, are any dividends issued by a Canadian corporation, public or private, which are not eligible for the eligible dividend tax credit.

The non-eligible dividend tax credit rate is used for dividends received by individuals from Canadian-controlled private corporations (CCPCs), to the extent that their income is subject to tax at the small business rate.  A portion of dividends from large public corporations may also be classified as being non-eligible dividends.

The amount included in taxable income for non-eligible dividends in 2019 and later years is 115% of the actual dividend.  The additional 15% is referred to as the gross-up.

The dividend is included in the recipient's income when it is paid by the corporation, not when it is declared.

 

Federal & Provincial/Territorial Non-Eligible (Small Business) Business Dividend Tax Credit Rates

Understanding the Taxes on Dividends in Canada

Duggal Professional Corporation takes pride in offering expert bookkeeping and tax services to businesses and individuals in Edmonton. We also specialize in a wide range of tax compliance services, payroll management and auditing services, and business consultancy services.

Get in touch to learn more about our tax and accounting consultancy in Edmonton.