What is the dividend tax credit and what it means for Canadian investors? The credit was introduced by the Canadian government to avoid double taxing dividends. It applies to dividends paid to Canadian shareholders from Canadian Corporations. The credit is made up of a federal and a provincial component, and as a result the final credit differs among provinces. This article Canadian Dividends No Tax shows the effect of the tax rate for each province.
What is the dividend tax credit?
It’s the amount a Canadian investor can use in their personal tax return to reduce the taxes paid. It is a non-refundable credit that reduces the amount of tax you have to pay. Shareholders of Canadian corporations receive dividend income (from common or preferred stocks) which is reported on a T5, T3 or T4PS.
Tax credits are earned from Canadian eligible or non-eligible dividends. Corporations will designate the dividend as eligible or not. The benefit to you is highest from the eligible dividends as you will see in the following example.
For tax purposes the dividend income is part of your taxable income. It is accounted/added as a “gross up” (its an increase, to account for applicable taxes already paid by the corporation). The gross up rate is 38 percent for eligible dividends and 15 percent on ineligible dividends.
The dividend tax credit is only applicable to individuals. Corporations and small business can not use this credit.
How to Calculate the dividend tax credit
Step 1: First you gross up the amount of dividends received, by 38% for eligible dividends, and 15% for non eligible dividends. In our example we use $1,000.00 of dividend amount for both categories.
Step 2: The tax credit amount is 15.019% of the grossed up amount. See Example below:
Calculation for Eligible Dividends
| Dividend Amount | gross up rate | grossed up dividend | Credit Rate | Credit Amount |
| $ 1,000.00 | 138% | $ 1,380.00 | 15.019% | $ 207.26 |
Calculation for Non-Eligible Dividends
| Dividend Amount | gross up rate | grossed up dividend | Credit Rate | Credit Amount |
| $ 1,000.00 | 115% | $ 1,150.00 | 15.019% | $ 172.72 |
As you can see, from eligible dividends the credit amount is $207.26, while from the non-eligible dividends the credit amount is $172.72. These credits will be applied against the rest of your taxable income to reduce the final tax payment to the CRA.
Armed with this knowledge, as an investor, you can plan how to best take advantage. A few examples of using this include:
- Withdrawing from your RRSP without paying any taxes.
- Producing a constant dividend income from preferred or common shares without paying any taxes.