This page explains the facts about dividend taxes in Canada, including eligible and non-eligible dividends, tax credits available, and how to determine which type of dividend you have received. Dividends you receive are actually greater than the amount of dividend declared because the corporation already pays part of the tax on your dividend income. Dividends paid by larger corporations are often eligible dividends, meaning they have paid most of their tax. Dividends paid by smaller corporations are often non-eligible dividends, meaning they have paid a smaller portion of their tax.
Dividends in Canada are taxed differently depending on whether they are eligible for enhanced dividend tax credit or not eligible for enhanced dividend tax credit. We can call them eligible dividends and non-eligible dividends for brevity. You can determine the type of dividend you have received by checking the relevant statement. The applicable statement can be one of the following.
These are typically dividends received from Canadian corporations that have paid taxes at the general corporate tax rate. Eligible dividends receive preferential tax treatment because they are subject to a lower tax rate.
The federal dividend tax credit rate for eligible dividends is approximately 15.02%. This preferential treatment means that if you received eligible dividends, you would be entitled to a tax credit equal to this rate, which reduces the overall tax you owe on the dividend income.
Non-eligible dividends are typically dividends received from Canadian corporations that have paid taxes at a lower small business tax rate. These dividends are taxed at a higher rate compared to eligible dividends.
The federal dividend tax credit rate for non-eligible dividends is approximately 9.03%.
When you receive dividends, they are subject to a "gross-up" and a corresponding "dividend tax credit."
|Government||Eligible Dividend||Non-Eligible Dividend|
|Gross up rate||Tax credit rate||Gross up rate||Tax credit rate|
The gross-up increases the taxable amount of the dividend you received, while the dividend tax credit helps offset some of the taxes owed on the grossed-up amount. Gross-up should bring the amount of your dividend up to the original profit the corporation had made before paying corporate taxes.
If you receive dividends from a foreign corporation, that company has not paid corporate taxes to CRA. As a result, it cannot pass credit for its paid taxes to its shareholders. Therefore, dividends from foreign corporations are taxed the same way as employment income or interest income.
In other words, Canadian shareholders in foreign corporations face double taxation on their investment income. Their investment earnings are once taxed by the government in whose jurisdiction the company is active. Again, their investment will be taxed by CRA when it is passed to their Canadian shareholders.
The tax implications of investing in foreign securities go far beyond not receiving the dividend tax credit. Many jurisdictions withheld tax from the earnings of non-residents. For example, the US withholds 30% of dividends received by foreign investors from US companies.
If you are a Canadian resident, you can get preferential tax treatment because of the tax treaty between Canada and the US. By filling out the appropriate form and letting your broker know you are a Canadian resident, your US dividend withholding tax will be reduced to 15%. Further, the tax treaty between Canada and the US exempts Canadian registered retirement accounts from the withholding tax. Note that Canadian tax law requires Canadians to report and pay taxes on all their income, even if it is from a foreign source. Yet it offers Canadians tax credit in exchange for the foreign tax they have paid on their foreign income.
The majority of people who receive dividends are those who have purchased dividend-paying stocks. We have just seen that from a tax efficiency perspective, Canadian residents are better off buying Canadian dividend stocks instead of foreign dividend stocks.
In such cases, your trading platform should send you a T5 statement for each tax year. The easiest way to figure out how CRA treats the dividend you received is to look at your T5 statement.
|Government||Lower Rate||Higher Rate||Business Limit|
The federal corporate tax rate is applied to a corporation's taxable income. The federal government currently sets this rate at 38%. However, a general tax reduction of 13% applies to eligible income. Corporate income is eligible for this reduction unless they enjoy other large deductions. Also, corporations can receive a tax abatement of 10% if the income is earned in Canada. As a result, the effective federal corporate tax rate in Canada is 15%.
Canadian Controlled Private Corporations (CCPC) may be able to use Small Business Deduction (SBD) to reduce their tax rate significantly. Because of the small business deduction, Canada has two effective corporate tax rates. These rates are often called the lower rate and the higher rate.
When a CCPC pays the higher rate on a portion of its income, that portion goes into the general rate income pool (GRIP). That income can be used to pay eligible dividends.
In addition to federal corporate tax, each province and territory in Canada has its own corporate tax rates and rules. Provincial or territorial tax rates vary significantly, and they have different tax brackets, exemptions, and deductions. Some provinces may also offer preferential tax rates for certain types of businesses or industries.
Corporations operating in multiple provinces or territories must calculate their provincial or territorial taxes separately for each jurisdiction where they have a taxable presence.
The total corporate tax liability is the sum of the federal corporate tax and the provincial or territorial corporate tax.
The combined federal and provincial/territorial tax rate will depend on the jurisdiction where the corporation operates and the nature of its income.
Corporations may be eligible for various tax credits, deductions, and incentives, which can reduce their overall tax liability. These can include research and development tax credits, investment tax credits, and small business deductions.
Corporations may be able to carry forward or back losses to offset taxable income in other years. This can help smooth out tax liabilities over time.
Corporations must file annual tax returns with the Canada Revenue Agency (CRA) and, in some cases, provincial or territorial tax authorities. Please keep in mind that tax laws and rates can change.