How are dividends taxed in Canada?
- Asked By
- Updated On:07-Dec-2022
- Replies:1
Short Answer
The dividends received in Canada are deducted by tax credit before calculating the final assesable income. The grossing up rate as of 2022 is 38%.
Detailed Answer
What are dividends?
Shareholders are owners of the company as they are a part of funding of the company. When a company earns profits, it distributes the earnings to the shareholders. The amount of distribution is determined by the board of directors of the company. Dividends forms a part of the assessable income in all the countries. Let us find how it is treated for taxation purpose in Canada.
How are dividends taxed in Canada?
The Canadians are eligible for dividend tax credits. This dividend tax credits can be deducted from the tax liability on the grossed-up potion of dividends received from the Canadian companies. Before exploring the dividend tax calculation let us learn some important terms:
Eligible dividends: It is a taxable dividend, that is distributed to a resident of Canada by a Canadian company that is identified by that company to be an eligible dividend.
Non-eligible dividends: They are small business dividends or any dividends issued by a Canadian company that is either public or private, which do not qualify for the eligible dividend tax credit.
<u>User Case 1</u>
Let us assume Peter’s marginal tax rate is 33%. He receives eligible dividend of $1,000 that are eligible for tax credits. The grossing up rate as of 2022 is 38%
• The grossed-up dividend = $1,000*1.38 = $1,380.
• His tax income to be reported = $1,380 *33% = $455.40
• The federal rate of dividend tax credit is 15.0198%. for eligible dividends.
• Tax credit = $1,380 * 0.150198 = $207.27
• Tax liability = $455.40 - $207.27 = $248.13
<u>User Case 2</u>
Let us assume that the same Peter whose marginal tax rate is 33% receives a non-eligible dividend of $1,000 that are eligible for tax credits. The grossing up rate as of 2022 is the same 38% for non-eligible dividends too.
• The grossed-up dividend = $1,000*1.38 = $1,380.
• His tax income to be reported = $1,380 *33% = $455.40
• The federal rate of dividend tax credit is 9.0301% for non-eligible dividends.
• Tax credit = $1,380 * 9.0301% = $124.62
• Tax liability = $455.40 - $124.62 = $330.78
Taxation of dividends in Canada
The above-mentioned method of tax calculation for dividends in Canada are applicable only if they are received outside of registered accounts such as TFSA, RRSP, RESP etc.,
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