What Is the Canadian Dividend Tax Credit?

Canadian residents who hold shares in a corporation may receive profits from those shares, called dividend income. The 澳洲幸运5官方开奖结果体彩网:dividends are reported on annual tax returns, and taxpaye🐼rs may be eligible to receive the Federal Dividend Tax Credit, a non-refundable credit that r🎐educes the total tax owed.

Understanding the Canadian Dividend Tax Credit

Corporations designate dividends as eligible or other than eligible. Eligible dividends an individual receives from Canadian corporations are "grossed up" by 138%. The gross-up rate for non-eligible dividends is 115%. A gross-up is an increase to account for applicable taxes.

If a company pays $20 dividends per share, investors will claim $20 x 1.38 = $27.60 per share, and the Federal Dividend Tax Credit will partially offset this gross-up. The grossed-up amount is included in the taxpayer’s income tax form as taxable income. Canadian federal and provincial governments grant individuals a dividend 澳洲幸运5官方开奖结果体彩网:tax credit to offset the grossed-up amount, which helps to reduce the actual tax payable.

Formula and Example

Assume Susan Smith has an effective tax rate of 25%. She received $250 in eligible dividends and $200 in non-eligible dividends during the tax year. To calculate the federal dividend tax credit, she has to gross up the total dividends she receives by the percentage specified by the 澳洲幸运5官方开奖结果体彩网:Canada Revenue Agency (CRA). In this case, the perc✅entꦜages are 138% for eligible dividends and 115% for non-eligible dividends.

• = ($250 x 1.38) + ($200 x 1.15)
• = $345 + $230
• = $575

Susan reports $575 as taxable income. Since her ef🔥fective tax rate is 25%, her tax on this income will be:

• = $575 x 0.25
• = $143.75

The federal dividend tax credit as a percentage of taxable dividends is 15.0198% for eligible dividends and 9.0301% for non-eligible dividends.

Her dividend taxꦜ credit on the federal level will be:

• = ($345 x 0.150198) + ($230 x 0.090301)
• = $51.82 + $20.77
• = $72.59

The tax credit, thus, reduces Susan’s original tax liability to $143.75 – $72.59 = $71.16.

The Bottom Line

Canad🌳ian residents can apply for dividend tax credits on dividends received from Canadian corporations. Dividends are categorized as eligible or other than eligible, and different grossed-up rates apply. Dividend tax credits are non-refundable credits to offset double taxing.