When you receive dividends from corporations you invest in, this dividend is an income that the Canada Revenue Agency (CRA) taxes.
The dividend tax you pay to the CRA depends on whether you have received the dividends from a foreign source or a Canadian corporation.
The dividends you receive from foreign sources are subject to tax at your federal and provincial marginal tax rate.
You may need to pay withholding taxes to the foreign country of the corporation that paid you the dividends.
If the foreign corporation is in the United States, you can receive a foreign tax credit of up to 15 percent based on the Canada – US tax treaty.
On the other hand, if you receive dividends from a Canadian corporation, the dividend tax you pay will depend on if the dividends are classified as eligible dividends or other than eligible dividends.
While your dividend income is taxed using your marginal tax rate, the actual tax amount you pay will differ based on the dividend tax credit that the CRA applies on eligible dividends and other than eligible dividends.
What is the Dividend Tax Credit?
The dividend tax credit is a credit you can claim when filing your tax return if you have invested in dividend-paying Canadian corporations and received investment income as dividends.
The dividend tax credit helps to avoid double taxation because corporations pay out dividends on their after-tax profits.
There are two types of dividend income that you can receive from taxable Canadian corporations: eligible dividends and other than eligible dividends.
Any company you invest in will notify you of the type of dividend you received in the year.
An eligible dividend is any taxable dividend that a Canadian corporation has designated to be eligible dividends to the Canada Revenue Agency (CRA).
Canadian corporations generally pay higher corporate taxes on their net income before paying out the eligible dividends.
The most common type of dividends received can be found in your T5, Statement of Investment Income.
Your actual amount of eligible dividends is reported in Box 24 of your T5 slip.
Box 25 will show the taxable amount of your eligible dividends.
This is usually grossed up with a taxable gross-up amount calculated as 38% of the amount of dividends reported in Box 24.
The dividend tax credit you can receive on your eligible dividend is shown in Box 26 and can be calculated as 15.0198% of your taxable dividend amount shown in Box 25 or 6/11th of the added gross-up amount.
Other Than Eligible Dividends
When Canadian corporations pay out dividends that are not designated to be eligible dividends, these are referred to as other than eligible dividends.
Canadian corporations generally pay lower taxes on income before paying out other than eligible dividends.
The gross-up amount for other than eligible dividends is usually calculated as 15% of other than eligible dividends received.
The dividend tax credit you can receive on your other than eligible dividend is calculated as 9/13th of the taxable gross-up amount or 9.0301% of your taxable amount of other than eligible dividends.
Calculating the Dividend Tax Credit
Let’s use an example to illustrate how the dividend tax credit is determined depending on what type of dividend you are issued.
Assuming that you have received $100 each for eligible and other than eligible dividends from a Canadian corporation that is subject to tax.
A simplified dividend tax credit can be illustrated as follows:
Eligible Dividend Tax Credit Calculation
Eligible Dividend Amount: $100
Gross up Amount: 38% of $100 = $38
Taxable Dividend Amount: $100 + $38 = $138
Dividend Tax Credit: 15.0198% of $138 = $20.73
Other Than Eligible Dividend Tax Credit Calculation
Eligible Dividend Amount: $100
Gross up Amount: 15% of $100 = $15
Taxable Dividend Amount: $100 + $15 = $115
Dividend Tax Credit: 9.0301% of $115 = $10.38
How To Claim The Dividend Tax Credit?
You need to report any taxable dividend that you have received as investment income in the tax year for federal income tax purposes.
Information about the dividends you received and dividend tax credits can be found in the following tax slips:
- T5, Statement of Investment Income,
- T4PS, Statement of Employee Profit-Sharing Plan Allocations and Payments.
- T3, Statement of Trust Income Allocations and Designations; and
- T5013, Statement of Partnership Income
To claim the dividend tax credit, you will need to report the taxable amount of eligible and other than eligible dividends that you have received from taxable Canadian corporations.
You can do this by entering the taxable amounts of the dividends received on lines 12000 (eligible dividends) and 12010 (other than eligible dividends) of your income tax and benefit return.
This information can be found in:
- Boxes 32 and 50 of the T3 slips
- Boxes 25 and 31 of the T4PS slip
- Boxes 11 and 25 of the T5 slips
- Boxes 130 and 133 of the T5013 slips
If you do not receive a dividend payment information slip, you can calculate the taxable income for eligible dividends as 138% of the actual eligible dividends received.
This can be calculated as 115% percent of the actual dividend amount received for other than eligible dividends.
After you have reported your dividends and taxable amounts for both eligible and other than eligible dividends, you can claim tax credits from taxable Canadian corporations in line 40425 of your tax return.
If you do not receive a dividend payment information slip, you can calculate the dividend tax credit for eligible dividends as 15.0198% of your taxable eligible dividends.
For other than eligible dividends, this can be calculated as 9.0301% of your taxable other than eligible dividends.
In addition to the federal dividend tax credit, you may be able to claim the provincial dividend tax credit, which will be filed separately.
How Much Dividend Income is Tax-Free in Canada?
The dividend tax credit you receive on your dividends from Canadian corporations reduces your taxable dividend income dollar for dollar.
As a result, the tax credit amount is tax-free dividend income.
The tax-free dividend will be based on the type of dividend income you receive.
Additionally, if you invest in Canadian corporations through your tax-free savings account (TFSA), all investment income will be tax-free, including the dividend income you receive.
If you receive dividend income through your registered retirement savings plan (RRSP), your dividend income will not be taxed, provided it remains in your RRSP.
However, your RRSP provider will withhold tax on dividend income that are part of any RRSP withdrawals.
Frequently Asked Questions
- Is there a tax credit on dividends?
- How much tax do I pay on dividends in Canada?