Dividend Tax Credit
What Is the Dividend Tax Credit?
The dividend tax credit is the amount that a Canadian resident applies against their tax liability on the grossed-up portion of dividends received from Canadian corporations. The gross-up and the dividend tax credit are applicable to individuals, not corporations.
Understanding the Dividend Tax Credit
The eligible dividends an individual receives from Canadian corporations are "grossed up" by 38%, starting around 2018. For dividends to authoritatively be recognized as eligible dividends, they must be designated as eligible by the company paying the dividend. The gross-up rate for non-eligible dividends, starting around 2019, is 15%. Think of a gross-up as an increase to account for applicable taxes.
For instance, assuming a company pays $20 dividends per share, investors will receive $20 x 1.38 = $27.60 per share, implying that their dividends after taxes will be $20 per share. The grossed-up amount is remembered for the taxpayer's income tax form as taxable income. Both Canadian federal and provincial states then grant individuals a tax credit equivalent to a percentage of the grossed-up amount, which assists with lessening the genuine tax payable.
38%
The amount the eligible dividends an individual receives from Canadian corporations are "grossed up" by starting around 2018.
For instance, we should expect Susan Smith has a effective tax rate of 25%. She receives $250 in eligible dividends and $200 in non-eligible dividends during the 2018 tax year. To compute the federal dividend tax credit, she needs to gross-up the total dividends she receives by the percentage determined by the Canada Revenue Agency (CRA). In this case, the percentages are 38% for eligible dividends and 15% for non-eligible dividends.
- = ($250 x 1.38) + ($200 x 1.15)
- = $345 + $230
- = $575
This means that Susan reports $575 as taxable income. Since her effective 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 tax credit on the federal level will be:
- = ($345 x 0.150198) + ($230 x 0.090301)
- = $51.82 + $20.77
- = $72.59
The tax credit, in this manner, reduces Susan's original tax liability to $143.75 - $72.59 = $71.16.
Note that there are both federal and provincial tax credits. For instance, in the event that Susan lives in the region of Alberta, she can claim a provincial tax credit of 10%, which when applied to her dividends, can additionally diminish her tax liability.
Dividend tax credits are non-refundable credits that are executed trying to offset double taxing since dividends are paid to shareholders with a corporation's after-tax profit and the dividends received by shareholders are likewise taxed. Dividends received from a foreign corporation are not subject to the gross-up and dividend tax credit components. Thusly, you'll pay a higher rate of tax on dividends from a foreign corporation.
Features
- Gross-up and dividend tax credits just apply to individuals.
- Canadian residents apply for dividend tax credits against tax liabilities on the grossed-up portion of dividends received from Canadian corporations.
- There are many times federal and provincial tax credits.
