Getting your Trinity Audio player ready...

Are dividends taxable in Canada? Dividends can be a great way to earn income from your investments or corporate shares. But you might wonder if you must pay taxes on them in Canada. The answer is yes. Dividends are taxable in Canada; you must report them on your tax return.

Table of Contents

Here’s the good news: Canadian companies receive special tax treatment for dividends, which can work in your favour. This is because the company has already paid tax on its profits. You may qualify for a tax credit that lowers your bill. The type of dividend and its source affect how much tax you’ll pay.

To report your dividends, you’ll get a T5 slip from the company that paid them. This slip shows how much you got and what kind they were. You’ll use this info when you file taxes with the Canada Revenue Agency.

Key Takeaways

Dividends from Canadian companies are subject to a lower tax rate than other forms of income.
You must report all dividends on your tax return using T5 slips
Tax credits can help reduce the amount of tax you pay on eligible dividends

Understanding Dividends in Canada

Dividends in Canada have unique tax implications. The tax system aims to balance fairness for investors and prevent double taxation.

Types of Dividends

In Canada, there are two main types of dividends: eligible and non-eligible. Eligible dividends come from large Canadian corporations that pay high corporate tax rates. These dividends get better tax treatment.

Non-eligible dividends are from smaller Canadian companies. They face higher tax rates. The government uses this system to encourage investment in bigger firms.

Knowing the difference is key for your tax planning. It affects how much you’ll owe at tax time.

Gross-Up of Dividends

The gross-up is a unique part of Canadian dividend taxation. It accounts for taxes the company has already paid.

Here’s how it works:

You receive a dividend.
You add a percentage to that amount on your tax return.
This larger amount is your “taxable dividend.”

The gross-up rate differs for eligible and non-eligible dividends. For eligible dividends, it’s 38%; for non-eligible dividends, it’s 15%.

This system might seem unusual, but it actively helps prevent double taxation and plays an essential role in Canada’s taxation of dividends.

Tax Rates for Dividends

Dividend tax rates in Canada can be complex. They vary based on your income and the type of dividend.

Eligible dividends often have lower tax rates. This is because the dividend tax credit offsets corporate taxes already paid.

Non-eligible dividends face higher rates. But they still get a tax credit, just a smaller one.

Your total tax rate depends on:

Your income bracket
Federal and provincial tax rates
The type of dividend

Dividend income can elevate your tax bracket, impacting your tax strategy.

Eligibility and Tax Credits

Canada offers tax credits to reduce the impact of dividend taxation. These credits apply at both federal and provincial levels. Your eligibility depends on the type of dividends you receive.

Federal Dividend Tax Credit

The federal dividend tax credit is a significant relief for investors. It helps offset the tax on dividend income, allowing you to claim a credit of 15.02% of the grossed-up amount for eligible dividends. Even non-eligible dividends have a lower credit rate of 9.03%, providing some relief from the tax burden.

To calculate your credit:

Gross up your dividends
Apply the credit rate
Deduct the result from your federal tax owing

The credit aims to prevent double taxation, as corporations have already paid tax on their profits.

Provincial Dividend Tax Credit

Each province offers its dividend tax credit. Rates vary by province and dividend type. For example, Ontario’s rate for eligible dividends is 10%, while non-eligible dividends are 2.9%.

To claim:

Check your province’s current rates
Apply the rate to your grossed-up dividends
Subtract from your provincial tax owing

Combined with the federal credit, this can significantly lower your overall tax bill.

Determining Eligibility for Tax Credits

Your eligibility for these credits depends on the type of dividends you receive. Eligible dividends come from profits taxed at the general corporate rate. They qualify for the enhanced dividend tax credit.

Non-eligible dividends are from income taxed at the small business rate. They get a smaller credit.

To determine your dividend type:

Check your T5 slip
Box 24 shows eligible dividends
Box 10 shows non-eligible dividends

It’s important to remember that you must report all dividends on your tax return to claim the credits. Keeping your T5 slips as proof of your dividend income and eligibility is a responsible and organized approach to tax reporting.

Tax Treatment of Specific Dividends

Understanding the distinct tax treatment of different types of dividends in Canada is crucial. The source, eligibility, and nature of dividends all affect how they’re taxed and what credits you may claim. This knowledge empowers you to make informed financial decisions.

Canadian vs Foreign Dividends

Canadian dividends get preferential tax treatment compared to foreign dividends. You can claim the dividend tax credit when you receive dividends from Canadian corporations. This credit reduces your overall tax burden.

Foreign dividends don’t qualify for this credit. You’ll pay tax on the full amount at your marginal rate. Keep in mind:

Report foreign dividends in Canadian dollars
You might be able to claim a foreign tax credit if you paid tax in another country
Watch out for withholding taxes on foreign dividends

Non-eligible vs Eligible Dividends

The tax treatment differs between non-eligible and eligible dividends. Eligible dividends come from large corporations or the after-tax profits of small businesses, and they get a more favourable tax treatment. On the other hand, non-eligible dividends are typically from Canadian-controlled private corporations (CCPCs) and use a 25% gross-up and a federal dividend tax credit of 13.33% of the grossed-up amount.

Non-eligible dividends are typically from Canadian-controlled private corporations (CCPCs). They use a 25% gross-up and a federal dividend tax credit of 13.33% of the grossed-up amount.

Eligible dividends have a higher gross-up and tax credit. This results in a lower effective tax rate for you.

Dividends from Real Estate Investments

Real Estate Investment Trusts (REITs) offer a unique dividend structure. REIT dividends are taxed differently from traditional corporate dividends.

Most REIT distributions are taxed as follows:

Regular income (highest tax rate)
Return of capital (tax-deferred)
Capital gains (preferential tax treatment)

Most REIT distributions do not provide a dividend tax credit. You should carefully check your T3 slip to see how the tax authorities classify your REIT income.

Calculating Dividend Taxes

Dividend taxes in Canada involve several key factors. These include your marginal tax rate, available tax credits, and province variations. Let’s examine how each of these elements impacts your dividend tax calculations.

Using the Marginal Tax Rate

Your marginal tax rate, based on your total taxable income, including salary, investments, and other sources, is crucial in determining how much tax you’ll pay on dividends.

To calculate your dividend tax:

Start with the grossed-up dividend amount
Add this to your other income
Apply your marginal tax rate

The gross-up rate for eligible dividends is 38%, while for non-eligible dividends, it’s 15%. If you receive $1,000 in eligible dividends, you’d report $1,380 on your tax return.

Capital gains are taxed differently than dividends. Only 50% of capital gains count toward your taxable income.

Incorporating Tax Credits

Canada offers dividend tax credits to prevent double taxation. These credits can significantly reduce your tax bill.

There are two types of dividend tax credits:

Federal dividend tax credit
Provincial dividend tax credit

The federal dividend tax credit is 15.02% for eligible dividends and 9.03% for non-eligible dividends. This credit applies to the grossed-up amount of your dividends.

To calculate your credit:

Determine your grossed-up dividend amount
Apply the appropriate credit percentage
Subtract this from your federal tax owing

Remember, these credits can only reduce your tax to zero. They can’t create a refund.

Impact of Provincial Variations

Dividend tax rates and credits vary by province in Canada, meaning your location can significantly affect your overall tax bill on dividends.

For example:

Ontario offers a dividend tax credit of 10% for eligible dividends
Alberta’s credit is 8.12% for eligible dividends

These differences can lead to varying effective tax rates on dividends across provinces. It’s crucial to check your specific provincial rates when calculating your taxes.

Some provinces have varying gross-up rates and tax brackets, complicating calculations.

You must consider federal and provincial rates and credits to understand your dividend taxes accurately. Using tax software or consulting with a professional can help you apply all relevant factors correctly.

Strategies to Optimize After-Tax Returns

Smart moves can boost your after-tax returns from dividends. These tips will help you keep more money in your pocket.

Utilizing Tax-Advantaged Accounts

Tax-Free Savings Accounts (TFSAs) are an excellent option for dividend investing. Dividends earned in a TFSA are tax-free, meaning more money remains in your account to grow.

Registered Retirement Savings Plans (RRSPs) offer tax deferral advantages. You won’t pay taxes on dividends until you withdraw funds from the plan. This advantage can lead to considerable savings if you are in a lower tax bracket upon retirement.

Consider using both TFSAs and RRSPs. This mix can give you the best tax advantages for your situation.

Investing Through Canadian-Controlled Private Corporations

If you own a business, a Canadian-controlled private Corporation (CCPC) can be a smart investment method. CCPCs often enjoy lower tax rates on active income.

You can hold funds in your CCPC for capital investments or tax-advantaged wealth growth.

When you need cash, you can pay yourself dividends, which may be more tax-efficient than taking a salary in some cases.

Considering Timing of Dividend Receipts

The timing of dividends can affect your taxes. If you’re close to a higher tax bracket, consider investments that pay dividends at helpful times.

Some companies pay dividends quarterly. Others pay monthly or annually. Choose what works best for your tax situation.

Consider selling dividend-paying stocks before the dividend payout date. Doing so can turn the income into capital gains, often taxed at lower rates.

Remember, don’t let taxes be the only factor in your investment choices. Always consider your overall financial goals and risk tolerance.

About the Author/Website

Ramon Desiderio is the founder and senior financial security advisor of SmartWealth Financial Incorporated (Intergenerational Wealth Inc. in British Columbia). This well-established financial advisor firm specializes in helping Canadians build, preserve, and magnify wealth through well-planned life insurance and financial services solutions. Whether you are just starting your wealth-building journey and want to build wealth risk-free and tax-efficiently, or you’re already financially successful and want to preserve or magnify your wealth for the next generation, we can help! Please feel free to book your initial consultation with us.