How Are Dividends Taxed in Canada? - Genymoney.ca (2024)

You may have probably heard that you can earn up to $60,000 in Canadian dividend income, completely tax free if you don’t have any other sources of income in certain provinces, for example, here in British Columbia. Amazing isn’t it? However not all dividend income is treated equally. How much tax do you pay on dividends in Canada? Here’s the answer to how are dividends taxed in Canada.

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Some Canadians are dividend investors, some people are index investors, some are a bit of both.

There’s no denying the joy you feel when you get a dividend payment in your account though, it’s passive income.

You have to be a bit careful which accounts you put your income generating assets in to optimize your tax efficient investing, though.

This post will go over how much tax you would pay on dividends in Canada (Canadian eligible dividends), what the dividend tax credit is, how are US dividends are taxed in Canada, and how foreign dividends are taxed in Canada.

Basically this post will go over important aspects of investing in Canada and how your investment income is treated differently.

Table of Contents

Capital Gains, Interest Income, Dividends

As a primer and reminder, for capital gains (when you sell your investment) Canadians are taxed at 50% of the capital gains at your marginal rate.

Your marginal rate is an incremental step in tax that you pay.

The higher your income the higher your marginal rate will be.

For the most recent marginal rates I check Taxtips.ca.

Let’s go back to looking at the taxes you pay on capital gains.

So for example, if you bought 100 shares of TD bank (just an example, it is not a stock recommendation) for $50 and you sold it for $85, you would have a capital gain of $3500. You would pay taxes on $3500 x 50%= $1750 at your marginal rate.

If you made $75,000 in employment income, your marginal rate in British Columbia is 28.20%. If you earned $3500 in capital gains, you would pay about $1750 x 28.2%= approximately $500 in capital gains taxes on your investment income. This is not counting the dividend income that you would have received on your TD Bank shares.

Covered Call ETFs in Canada are more tax efficient since the payout from the premiums is mainly from capital gains.

Let’s say you received $3500 in dividend income from this Canadian corporation for the year. For the same income $3500 on eligible dividend income and a $75,000 in employment income, you would pay $57 in BC on this income.

For the same income $3500 but ineligible dividend income and $75,000 employment income, you would pay $693 dollars in British Columbia on this income.

And for the same income $3500 in interest income (for example, GIC’s or High Interest Savings Account interest income) or foreign dividends converted to Canadian dollars totalling $3500 (for example, US dividend income that had been converted to Canadian dollars come tax time) and $75,000 in employment income, you would pay $987 in taxes on your $3500 in ‘other income’. This is if you kept your interest income and foreign dividend paying stocks outside of your RRSP or TFSA.

Related: RRSP vs TFSA: Which One to Invest in First

It is a huge difference, right?

How Much Tax Do You Pay on Dividends In Canada?

Yes, it is true, on Canadian eligible dividends, you don’t pay very much tax. They are taxed quite favourably if you have no other sources of income. However you do pay some taxes. If you lived in places like Hong Kong or Singapore, there is no tax paid on capital gains and dividends.

In this Taxtips.ca chart for 2022 taxes, as you can see, you can have $54,000 in Canadian eligible dividend income and pay $0 taxes in BC and Alberta (provided you have no other sources of income).

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Remember though, it is Canadian eligible dividend income, meaning mainly Canadian publicly traded corporations.

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Here is another chart from Taxtips.ca showing the federal and provincial tax credits on eligible dividends as a percentage of actual dividends.

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Canada Dividend Tax Credit

Canadian dividend income is taxed favourably because there are federal and provincial dividend tax credits.

These non-refundable tax credits are in place because a corporation is paying out their dividends to shareholders with after-tax profit, and then shareholders receive these dividends and pay taxes on them. This helps avoid double taxation.

When a Canadian public corporation pays you a dividend as an investor, the income is ‘grossed up’ by 38% and a 15% tax credit is taken off the total amount. This is called the dividend gross up. It has been this rate since 2012.

The gross up is because it simulates the pre-tax income earned by the corporation and then the tax credit estimates the tax paid by the corporation.

Essentially, the tax credit is about 21%.

This makes the marginal tax rate for eligible Canadian dividends much lower than that of your regular active income or working income, and other incomes such as interest income.

You don’t have to calculate how much in eligible dividends you have as you will automatically see it on your T3 and T5 tax slips come tax time.

The marginal tax rate for eligible dividends is much lower than the marginal tax rate for income earned through employment, interest income, and foreign dividends.

To be considered an eligible dividend the corporation designates whether the dividend is considered eligible. Eligible dividends occur because the corporation have not received special tax treatment or deductions, and hence the corporation has paid more taxes therefore the shareholder should not have to be double taxed to such an extent.

Generally, publicly traded dividend paying companies in Canada have eligible dividends.

Dividend Tax Calculator Canada

All this talk about eligible dividends will probably make you wonder if there’s a dividend tax calculator in Canada.

Although I couldn’t find a specific dividend tax calculator per se, I like to use the one by Wealthsimple (they acquired Simple Tax) because it’s quick and easy to use and most importantly it is free to use. It’s one of the free tax programs available in Canada.

You just input the numbers into their free tax calculator and designate your province and that’s it. You can quickly run numbers that way without having to use things like Excel to see a ball park of what taxes you will owe with certain types of income.

As you can see below win the Wealthsimple tax calculator for the 2022 tax year, with $54,000 in eligible dividend income in B.C. you pay $0 in taxes (if that’s your only source of income).

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What if you have $50,000 in earned income in BC?

You will pay about 28.2% in income taxes (marginal rate) but the average tax rate is 20.22%, and you will pay $10,109 in taxes.

If you have $50,000 in capital gains in BC, you will pay 14.1% tax (50% of your capital gains are taxed at the marginal rate) and average tax rate of 4.77%, which equals about $2384.

Drum roll please, and if you have $54,000 in eligible dividends in BC, you will pay 0% average tax rate in taxes, which is $0 (ZERO DOLLARS).

Remember, this is Canadian eligible dividends. I can see why Canadians has so much ‘home bias’, because our taxation incentives heavily favours investing in our home country.

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Now, I’m talking about dividends paid from individual Canadian corporations.

Not ETFs.

ETF passive income are called distributions (not dividends) and that can be a number of different types of income (dividend income, interest income, even some have capital gains etc.).

How Are US Dividends Taxed in Canada?

Dividends paid out by US corporations do not qualify for a dividend tax credit and are taxed at your marginal rate.

Typically, the IRS (Internal Revenue Service) in the United States imposes a 30% withholding tax on US dividends paid to non-US residents.

However, because of the Canadian-US Treaty, this is reduced to 15% if you complete an IRS form called the W-8BEN to avoid the double taxation.

Normally you would complete this W-8BEN form once when you sign on with your brokerage and you will need to renew this every three years. The W-8BEN form looks like this.

If you hold your US dividend paying shares within an RRSP (or other retirement focused account such as a RRIF, LIRA, and LIF), then there is no 15% withholding tax and your US dividends are not taxed at the marginal rate.

If you hold a Canadian listed ETF that invests in US corporations (such as VXC) in an RRSP, the 15% withholding tax on the distributions paid out is not recoverable. However, if you are investing in the “one fund” ETF method (one ETF across the board), don’t let the “tax tail wag the dog” and just stick it in the RRSP for tax deferred growth.

Related: Step by Step Guide on How to Invest your TFSA with Questrade

For a US listed US ETF that invests in US corporations (such as VTI) the distributions of this are taxed at your marginal rate. There is also a 15% withholding tax on the distributions. This is if you hold it in your non-registered or margin account.

You also have to be wary of the T1135 if you hold a US listed ETF or company in your non-registered accounts.

How Are US-Listed Canadian Corporations Dividends Taxed?

To get things a bit more complicated, there are a number of Canadian corporations that are listed on both the TSX and the NYSE.

One trades in Canadian dollars and one in US dollars (yes you could even do Norberts Gambit to exchange your USD and CAD this way though it will incur capital gains or losses and what not). For example, TD bank trades on both the TSX and the NYSE. On the TSX it’s TD.TO and on the NYSE it’s TD.

Dividend income that you receive from NYSE:TD is not subject to the withholding tax because it is a Canadian corporation, it’s just traded on a different stock exchange and traded in US dollars. Many of these Canadian corporations listed on the NYSE pay their dividends in Canadian dollars or pay in US dollars and they will be eligible for the Canadian dividend tax credit.

And to make things EVEN more complicated, there are some Canadian corporations listed on both the NYSE (and TSX) that pay their dividends Canadian dollars but if it’s on the NYSE, it is converted to US dollars by your brokerage!

This is a great way to earn US dollars without having to convert yourself, though you’ll be subject to the foreign currency conversion spread of your brokerage. I checked with my brokerage Questrade and they do not do this, they leave the dividend paid out as is.

Dividend Earner has a list of Canadian companies that pay their dividends in US dollars. These would also not be subject to the withholding tax because they are Canadian corporations.

How Are Foreign Dividends Taxed in Canada?

Dividends paid out by a foreign-based corporation to a resident in Canada do not qualify for a dividend tax credit and are also taxed at your marginal rate. There is also no such Treaty with a reduced withholding tax of 15%.

Depending on the where the country of the corporation is based, there might be a foreign tax credit claimable, though.

It is best to hold your foreign dividend paying stocks in the RRSP to avoid being taxed on your dividends at your marginal rate.

I don’t have ver many foreign dividend paying stocks outside of US corporations and instead invest with an ex-Canada ETF for global exposure. However, I do have LVMUY in my RRSP and painfully see the withholding taxes being taken when I get a dividend.

Related: Dividend Pro App Review

How Are Canadian Dividends Taxed? A Recap

I hope this answers your question on how are dividends taxed in Canada.

In summary, Canadian dividends are taxed very favourably.

Since it would vary from province to province and your individual tax scenario is different (many people aren’t just earning $54,000 in dividend income as their only source of income) I would recommend just going to use a dividend tax calculator on Wealthsimple and plugging the numbers in.

It’s free to use (for now at least!) and easy to use.

To recap, Canadian dividends (eligible) are taxed favourably, US dividend income is taxed as other income (meaning your full marginal rate), foreign dividend income is taxed as other income (at your marginal rate), and US listed Canadian corporations are also eligible dividends since they are still Canadian corporations.

The Canadian tax system is complicated, but knowing your sources of income is important if you want to be tax efficient and avoid paying withholding taxes and being taxed at your marginal rate on certain types of income, for example, foreign or US dividend income.

Tax minimization is a key to building wealth in addition to lowering fees.

If you have maxed out your RRSP and TFSA, do you try and keep your Canadian dividend paying companies outside of your registered accounts?

You may also be interested in:

  • Tax Deductions for Influencers in Canada
  • High Interest Savings vs GIC
  • Questrade DRIP
  • How much should I have saved by 35?

How Are Dividends Taxed in Canada? - Genymoney.ca (7)

genymoney

GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.

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I'm a seasoned financial expert with extensive knowledge in investment strategies, taxation, and personal finance. My expertise is grounded in years of practical experience and a deep understanding of the financial landscape.

Now, let's delve into the concepts mentioned in the article about dividend taxation in Canada:

1. Capital Gains, Interest Income, Dividends

The article discusses the taxation of different forms of investment income, such as capital gains, interest income, and dividends. Capital gains are taxed at 50% of the capital gain at the marginal rate. The higher the income, the higher the marginal rate.

2. How Much Tax Do You Pay on Dividends In Canada?

Canadian eligible dividends are taxed favorably, and the article provides an example of how much tax you would pay on different types of income in British Columbia. It emphasizes the importance of considering the tax efficiency of investment accounts.

3. Canada Dividend Tax Credit

The article explains the favorable taxation of Canadian dividend income, highlighting federal and provincial dividend tax credits. The gross-up of dividend income by 38% and a 15% tax credit contribute to a lower marginal tax rate for eligible Canadian dividends.

4. Dividend Tax Calculator Canada

While not explicitly providing a dividend tax calculator, the article recommends using Wealthsimple's free tax calculator for quick and easy calculations of taxes owed on eligible dividend income in Canada.

5. How Are US Dividends Taxed in Canada?

US dividends are taxed at the marginal rate in Canada, but due to the Canadian-US Treaty, the withholding tax is reduced to 15% if the investor completes the W-8BEN form. Holding US dividend-paying shares within an RRSP exempts them from the withholding tax.

6. How Are US-Listed Canadian Corporations Dividends Taxed?

Canadian corporations listed on both TSX and NYSE may pay dividends in Canadian dollars, making them eligible for the Canadian dividend tax credit. The article introduces complexities arising from currency conversion when dividends are paid in US dollars.

7. How Are Foreign Dividends Taxed in Canada?

Foreign dividends are taxed at the investor's marginal rate in Canada, with no reduced withholding tax. Holding foreign dividend-paying stocks in an RRSP is recommended to avoid being taxed at the marginal rate.

8. How Are Canadian Dividends Taxed? A Recap

The article concludes by summarizing that Canadian dividends (eligible) are taxed favorably, while US and foreign dividend income is taxed at the marginal rate. It emphasizes the complexity of the Canadian tax system and the importance of tax-efficient investing.

For personalized advice based on your specific situation, consulting a financial advisor is recommended.

How Are Dividends Taxed in Canada? - Genymoney.ca (2024)

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