Taxation of Dividends in Canada

What Are Dividends?

Dividends are payments that a company makes to its shareholders as a share of its profits. Dividend payment can be in the form of cash or additional shares of the company’s stock.

Companies generally issue dividends as a way to distribute their earnings to shareholders and attract investors.

Taxation of Dividends

In Canada, dividends are subject to special tax rules and the way they are taxed depends on the type of dividend received and individual’s tax situation. There are two main categories of dividends:

1. Eligible Dividends:

These dividends are paid out of a company’s earnings that have already been subject to corporate income tax. They benefit from a favorable tax treatment due to the dividend gross-up and tax credit system.

When an invididual receive eligible dividends, they need to include the grossed-up amount in your income. However, they also receive a dividend tax credit which helps reduce the overall tax they owe on these dividends.

2. Non-Eligible Dividends:

Also known as regular dividends, these are typically paid out of a company’s earnings that have not been subject to the same level of corporate income tax as eligible dividends.

Non-eligible dividends are subject to a higher gross-up rate, resulting in a larger portion of the dividend being included in your taxable income. However, the tax credit for non-eligible dividends is lower than that for eligible dividends.

What is the Tax Rate on Dividend Income

The tax rates on dividends vary depending on your overall income, province of residence and type of dividend a incidivual receive.

Generally, individuals in lower income tax brackets may benefit from lower tax rates on eligible dividends due to the dividend tax credit. On the other hand, non-eligible dividends are usually taxed at higher rates compared to eligible dividends.