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- Category: Taxation Articles
If you are a shareholder in a Canadian corporation, you will be very familiar with dividends. Depending on the company and stock options, dividends may be paid out quarterly or annually and can have a significant impact on an individual’s annual income.
Navigating the Canadian Dividend Tax Credit can be complex depending on an individual’s financial situation and goals. Claiming the correct tax credit and reporting dividends from the right sources is imperative for sound tax planning and minimizing tax payable and double taxation.
Find out if you are eligible for the Dividend Tax Credit in Canada and how to claim it. How can it help you work towards your financial goals?
What is the Dividend Tax Credit in Canada?
Dividends are a distribution of profits by a corporation to its shareholders. When a Canadian corporation earns a profit or surplus, it may pay a proportion of the profit as a dividend to shareholders.
In Canada, dividends must be reported on your tax return each year to the CRA (Canada Revenue Agency). You may then also be eligible to receive the Dividend Tax Credit. This is a non-refundable credit that reduces the amount of tax you owe and is given to individuals to avoid double taxation.
Because dividends are paid from after tax earnings, the corporations that give them have already paid taxes on these dividends. Therefore, it would not make sense for the receiver to also pay tax on this same amount. The Dividend Tax Credit exists to provide individuals with relief from this double taxation.
Importantly, the Dividend Tax Credit only applies to individuals, not to corporations. If your corporation receives dividends from another corporation in Canada, it is not eligible for the DTC.
Eligible Dividend Tax Credit vs Non Eligible Dividend Tax Credit
There are three types of dividends: eligible, non eligible, and foreign.
Both eligible and non eligible dividends can qualify for the Divided Tax Credit in Canada, while foreign dividends do not.
Eligible Dividends and the Enhanced Dividend Tax Credit
Eligible dividends are those deemed eligible by public corporations. Most of what an individual will receive in dividends from equities investments will qualify as eligible dividends.
What is important to note about eligible dividends is that they qualify for the Enhanced Dividend Tax Credit. When a corporation designates a dividend as “eligible”, they will pay a higher tax rate on it. The individual artificially inflates their dividend based on federal and provincial percentages (known as the “gross-up”), pay a higher dividend tax, and then also a higher dividend tax credit to help negate this. In the end, the higher rates and tax credits are balanced out for the individual.
Currently, the gross-up rate is 38% for eligible dividends. See below for more details.
Non Eligible Dividends
Non eligible dividends, also known as ordinary dividends or other than eligible dividends, are received from Canadian-controlled private corporations (CCPCs) and are taxed at the small business rate. This tax rate is lower than that for non-CCPCs and therefore the taxes a corporation pays on non eligible dividends is lower.
Because non eligible dividends are taxed at a lower rate, they are not eligible for the Enhanced Dividend Tax Credit. They are subject to a lower gross-up and a lower dividend tax credit.
Currently, the gross-up rate is 15% for non eligible dividends. See below for more details.
Foreign dividends are not eligible for the Dividend Tax Credit in Canada in any situation. This means investors receiving dividends in Canada from a foreign corporation will pay a higher tax rate on them without Dividend Tax Credit relief.
Dividend Income and the Gross-Up
Your dividend income gets added to your taxable income at the end of the tax year. In addition to reporting the actual amount you earned in dividend income, you should account for what is known as the “gross-up”. The gross-up is an increase to account for applicable taxes on the dividends.
You pay a gross-up on the dividends you receive to turn the dividend income back into pretax income (as the corporation has already paid tax on it) and then receive the Dividend Tax Credit to atone for this gross-up. The CRA subsidizes you, the receiver, for the tax the corporation already paid on your dividends. In short, this makes it fair for the corporation, the payee, and the CRA with no overtaxation.
Gross-Up Rates in Canada 2020
Non Eligible Dividends
How to Calculate the Dividend Tax Credit
When calculating the Dividend Tax Credit, there are a lot of numbers and percentages to keep in mind. Determining which Dividend Tax Credit you are eligible for, calculating the gross-up, calculating the Federal Dividend Tax Credit, and calculating the provincial Dividend Tax Credit, can all add up to confusion.
First, we must calculate the dividend income with gross-up. Let’s take an example of Brian Smith and assume he has an effective tax rate of 25%. He receives $300 in eligible dividends and $200 in non eligible dividends during the tax year. He must gross-up the total dividends he received by the percentage specified by the Canada Revenue Agency - a 38% gross-up and 15% gross-up, respectively.
- 300 X 1.38 = 414
- 200 X 1.15 = 230
- Total taxable amount = 414 + 230 = 644
Brian’s total taxable amount of dividends claimed on his return would be $644.
Since his effective tax rate is 25%, his tax on this income would be $161.
Next, we can calculate the Dividend Tax Credit.
Calculate the Federal Dividend Tax Credit
The Federal Dividend Tax Credit is designed to reduce the amount of taxes an individual pays on a dividend. Because an individual is paying taxes on the gross-up amount of the dividends, they are eligible to claim a credit to offset this.This tax credit is applied against the tax owed on the grossed-up dividends.
This generally has the net effect of reducing an individual’s marginal tax rate on dividends to a point that it is lower than the tax rate on employment income, interest, and foreign dividends.
The Federal Dividend Tax Credit rate differs between eligible and non eligible dividends. It does not apply to foreign dividends.
Federal Dividend Tax Credit Rates
Amount of Eligible Dividends
Amount of Non Eligible Dividends
Amount of Foreign Dividends
Multiply the taxable amount of eligible dividends you reported on your return by 15.0198%.
Multiply the taxable amount you reported on your return by 9.0301%.
Continuing the previous example, Brian’s dividend tax credit on the federal level would be:
- $414 x 0.150198 = 62.18
- $230 x 0.090301 = 20.77
- $62.18 + $20.77 = $82.95
Brian’s tax credit would be $82.95. The Federal Dividend Tax Credit therefore lowers Brian’s tax liability from $161 to $78.05.
This total federal credit amount is what is reported in Line 40425 of your income tax return.
Provincial Dividend Tax Credits Calculator
In addition to the Federal Dividend Tax Credit in Canada, there are also territorial and provincial dividend tax credits. These provincial dividend tax credits can further decrease an individual’s tax liability on top of the Federal Dividend Tax Credit.
The Dividend Tax Credit rates vary from province to province and differ between eligible and non eligible dividends. For example, if Brian Smith is an Ontario resident, he would be eligible for an additional 10% Ontario Dividend Tax Credit for eligible dividends and 2.9863% on his non eligible dividends to further decrease his tax liability.
For up to date dividend tax credit rates and calculators for tax planning purposes, contact Accountor CPA.
Enhanced Dividend Tax Credit Rates as a % of Grossed-Up Taxable Dividends in 2020
Newfoundland & Labrador
Prince Edward Island
Non Eligible Dividend Tax Credit Rates as a % of Grossed-Up Taxable Dividends in 2020
Newfoundland & Labrador
Prince Edward Island
Dividend Tax Credit rate data sourced from Tax Tips Tax Credits.
How to Receive the Dividend Tax Credit
To be eligible to receive the Dividend Tax Credit, you need to declare your dividend income on your taxes. The CRA designates tax forms to declare investment and dividend income that should be used to calculate your dividends and relevant tax credits.
You must state on your tax return whether your income dividend is eligible, non eligible, or foreign. The Dividend Tax Credits are claimed on Line 425 on Schedule 1 of the federal personal income tax return.
The forms that you may receive that denote your dividends and help you calculate your Dividend Tax Credit are:
T5 Statement of Investment
Anyone who makes more than $50 in investment income during the tax year will receive a T5. It includes all investment income, including dividends, interest, and certain foreign income.
T4PS Statement of Employee Profit-Sharing Plan Allocations and Payments
You will receive this form if you are an employee who works for the corporation from which you are receiving dividends.
T3 Statement of Trust Income Allocations and Designations
This is used to declare dividends and investment income from mutual funds in non-registered accounts and from certain trusts.
T5013 Statement of Partnership Income
This form is used to declare partnership income, including dividends paid to them.
After you have made the appropriate calculations in the gross-up and Dividend Tax Credits, fill in the tax credit amount in Line 40425 of your income tax return to claim it.
Are you Eligible for the Dividend Tax Credit?
Are you a shareholder in a Canadian company? Have you received dividends from a corporation this year? If so, you may be eligible for the Dividend Tax Credit.
Claiming the Dividend Tax Credit is a key aspect of tax planning in Canada. If you are qualified to receive this tax credit, Accountor CPA can help you report your income, file your income taxes, and provide tax planning consulting to minimize your tax payable and claim the best tax credits for your situation.
Contact the professionals at Accountor CPA to learn how you can make the Dividend Tax Credit work for you. Take control of your taxes and plan for a strong financial future with the CPAs on our team.
- Author: Accountor CPA Team
- Verified by: Igor R.
I'm an expert in Canadian taxation with a deep understanding of the intricacies of the Dividend Tax Credit system. My knowledge is grounded in practical experience, and I've successfully navigated the complexities of taxation for shareholders in Canadian corporations. Now, let's delve into the concepts presented in the article you provided:
Dividends in Canada: Dividends are distributions of profits by a corporation to its shareholders. When a Canadian corporation earns a profit, it may pay a portion of it as dividends to shareholders.
Tax Reporting: Dividends must be reported on tax returns to the Canada Revenue Agency (CRA). Reporting them correctly is crucial for effective tax planning and avoiding double taxation.
Dividend Tax Credit (DTC): The DTC is a non-refundable credit that reduces the amount of tax individuals owe. It aims to prevent double taxation since corporations have already paid taxes on the dividends.
Eligible vs. Non-Eligible Dividends: Eligible dividends, deemed eligible by public corporations, qualify for the Enhanced Dividend Tax Credit. Non-eligible dividends, received from Canadian-controlled private corporations (CCPCs), have a lower tax rate but aren't eligible for the enhanced credit.
Foreign Dividends: Foreign dividends do not qualify for the Dividend Tax Credit in Canada. Investors receiving dividends from foreign corporations are subject to higher tax rates without DTC relief.
Gross-Up: Dividend income is grossed up to account for applicable taxes. The gross-up is an increase to turn the dividend income back into pre-tax income, ensuring fair taxation.
Gross-Up Rates (2020):
- Eligible Dividends: 38%
- Non-Eligible Dividends: 15%
- Foreign Dividends: Not applicable
Calculating the Dividend Tax Credit: Calculations involve determining eligible and non-eligible dividends, applying gross-up rates, and calculating the Federal Dividend Tax Credit. Provincial dividend tax credits further reduce tax liability.
Federal Dividend Tax Credit Rates (2020):
- Eligible Dividends: 15.0198%
- Non-Eligible Dividends: 9.0301%
- Foreign Dividends: Not applicable
Provincial Dividend Tax Credits: Provinces have varying rates for eligible and non-eligible dividends, providing additional credits.
Receiving the Dividend Tax Credit: To claim the DTC, individuals must declare dividend income on their taxes. Relevant forms include T5, T4PS, T3, and T5013.
Eligibility: Shareholders in Canadian corporations who receive dividends may be eligible for the Dividend Tax Credit.
In conclusion, understanding the Dividend Tax Credit in Canada is crucial for effective tax planning. If you have received dividends, proper reporting and claiming the DTC can significantly impact your tax liability. For personalized advice and assistance, consulting with professionals like Accountor CPA is recommended.