## How are dividends taxed in Canada?

Last Updated: 07-Dec-2022

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%.

## 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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