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Tax on Dividends in Canada: A Comprehensive Guide and Calculator
Dividend income is a vital component of many Canadian investors’ portfolios, but its taxation can be intricate. This guide simplifies how dividends are taxed, explores key calculations, and provides a step-by-step example using a dividend tax calculator.
Understanding Dividend Taxation in Canada
Canadian dividends are taxed under an integration system to prevent double taxation. Corporations pay taxes on profits, and shareholders receive dividends from after-tax income. The Canada Revenue Agency (CRA) applies a gross-up mechanism and dividend tax credits to balance corporate and personal taxes.
Table of Contents
Types of Dividends
- Eligible Dividends
- Paid by corporations taxed at higher rates (e.g., public companies).
- Gross-Up Rate: 38% (2024 rate).
- Federal Tax Credit: 15.0198% of the grossed-up amount.
- Non-Eligible Dividends
- Typically, from private corporations taxed at lower rates (e.g., small business income).
- Gross-Up Rate: 15% (2024 rate).
- Federal Tax Credit: 9.0301% of the grossed-up amount.
How to Calculate Tax on Dividend Income: Step-by-Step
Step 1: Classify the Dividend
Identify if dividends are eligible or non-eligible (reported on T5 slips).
Step 2: Gross-Up the Dividend
- Eligible: Multiply by 1.38.
- Non-Eligible: Multiply by 1.15.
Step 3: Add to Total Taxable Income
Include the grossed-up amount with other income (e.g., salary, interest).
Step 4: Apply Marginal Tax Rate
Determine your federal and provincial marginal tax rate based on total taxable income.
Step 5: Calculate Dividend Tax Credit
- Federal Credit:
- Eligible: Grossed-up amount × 15.0198%.
- Non-Eligible: Grossed-up amount × 9.0301%.
- Provincial Credit: Varies by province (check local rates).
Step 6: Compute Net Tax Owed
Subtract federal and provincial credits from the tax calculated on grossed-up dividends.
Example Calculation: Eligible vs. Non-Eligible Dividends
| Type | Received | Gross-Up | Grossed-Up Amount | Federal Credit |
|---|---|---|---|---|
| Eligible | $100 | ×1.38 | $138 | 138 × 15.0198% = $20.73 |
| Non-Eligible | $200 | ×1.15 | $230 | 230 × 9.0301% = $20.77 |
| Total | $300 | – | $368 | $41.50 |
Tax Calculation:
- Taxable Income: $368 (grossed-up dividends) + other income.
- Marginal Tax Rate: Assume 25% federal rate.
- Tax on grossed-up dividends: 368×25368×2592**.
- Net Tax After Credits: 92(tax)−92(tax)−41.50 (federal credit) = $50.50.
Note: Provincial taxes and credits would further adjust this amount.
Using a Dividend Tax Calculator
Online calculators (e.g., TurboTax, Wealthsimple) streamline this process by:
- Accepting inputs: Dividend type, amount, province, and other income.
- Automatically grossing up dividends and applying federal/provincial credits.
- Generating an estimated tax liability.
Key Considerations
- Provincial Variations: Alberta’s tax credits differ from Ontario’s—always verify local rates.
- Tax Brackets: Higher-income earners may face larger taxes on grossed-up dividends.
- Non-Refundable Credits: Credits reduce taxes owed but won’t trigger refunds if exceeding liability.
Conclusion
Mastering dividend taxation in Canada involves understanding gross-ups, tax credits, and marginal rates. By leveraging the steps above or a reliable calculator, investors can accurately forecast taxes and optimize after-tax returns.
Pro Tip: Consult a tax professional for complex portfolios or cross-province investments.