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Dividend Income in Canada and If It’s Taxable
In short, yes, they are. Most dividends in Canada are taxable dividends. Because dividend income is already taxed by the corporation before it is given to shareholders, the tax rate on it is lower than that of other income, such as employment income, active business income or interest income, but not lower than capital gains. That being said, the tax rate that you are charged on Canadian dividends depends on where the dividend is considered to be eligible or non-eligible. If the dividend is foreign, then the tax rate will vary even more. It’s important to know the average tax rate so you can calculate tax on any dividends, leaving you prepared when it comes time to file your income tax return.
Eligible Dividends
The definition of an eligible dividend is a taxable dividend that is paid by a Canadian corporation to an individual who is also Canadian, and the corporation is designated as eligible under section 89(14) of the Income Tax Act. The majority of these types of dividends come from public corporations that don’t receive the small business deduction or corporations with a net income over the $500,000 small business deduction. Keep in mind, though, that in order to receive the federal dividend tax credit to lower the tax rate, the dividend has to come from Canadian corporations and be paid to Canadian individuals, along with meeting the tax criteria.
Since these corporations earn more income, they are income taxed at a higher rate for the tax year. When it comes to claiming eligible dividends, they are “grossed up” by the amount of 38% in order to reflect the corporate income that was earned. This new grossed-up amount also referred to as a dividend gross-up, is then given an enhanced dividend tax credit. This is to account for the extra tax the corporation already paid. This is why eligible taxes are essentially taxed at a lower rate for Canadian individuals who receive them. The federal dividend tax rate on eligible dividends is 15.0198%.
Non-Eligible Dividends
These types of dividends are also known as regular dividends. Such dividends generally come from private corporations that pay a lower tax rate. It is possible, though, for companies to have eligible and non-eligible dividends if they pay a lower tax rate on a portion of the income. Just like eligible dividends, non-eligible dividends are “grossed up” at a rate of 15% to reflect the pre-tax income, and then you are provided with a lower dividend tax credit. The Federal tax rate of non-eligible dividends is 9.0301%. The non-eligible dividend must come from a Canadian-controlled private corporation or any other Canadian company in order to be eligible for the tax credits.
Foreign Dividends
Foreign dividends are dividends that are distributed to a Canadian shareholder from a company that isn’t Canadian. These dividends are taxed without the dividend tax credit. This is because the company that issued the dividend did not pay taxes to the Canadian government. That being said, you can get a credit for the foreign dividends taxed. This is known as a withholding tax and is normally issued at a rate of anywhere between 15% and 25%. It can vary from country to country, though, depending on where your foreign dividends are from. That being said, the withholding tax isn’t available if you are holding your foreign dividends in registered accounts.
When Dividends are Taxable
Before corporations pay dividends, they can declare them. This means that the dividends have been authorized but not paid out yet. While a dividend being declared is important to a company's stock, it doesn’t have anything to do with the taxes. The amount being distributed through the dividend is the company's after-tax profit, and any dividends paid are taxed for the shareholder after they have been paid. A T5 tax form will be issued to Canadian investors by the company when they receive the dividend. This form will then be included in your tax return along with your taxable income.
When Dividends are Paid Out
In Canada, most corporations pay dividends quarterly, whether they pay eligible dividends or non eligible dividends. REITs (Real Estate Investment Trusts) are a bit different though. They pay monthly dividends.
Real Estate Investment Trusts
While payments from REITs are technically dividends, they really are called distributions. This is because they can be made up of a number of things, including capital gains, dividends, return of capital or any other form of incom,e and, as you know, all of these things have different tax rates. This is why many choose to invest REIT earnings into registered accounts. This helps make the tax situation a little bit easier.
While it may seem tricky to invest in REITs, many people do because they have a higher dividend yield. Unlike some other investments,s they can also hedge well against inflation.
Provincial Dividend Tax Credit
If you are claiming dividends in Canada, you can get additional dividend tax credits based on the province in which you reside. It also depends on what year you received the dividend. Here are the rates for 2023.
| Province | Dividend Tax Credit |
| British Columbia | Eligible Dividend - 12%Non-Eligible - 1.96% |
| Alberta | Eligible Dividend - 8.12%Non-Eligible - 2.18% |
| Saskatchewan | Eligible Dividend - 11%Non-Eligible - 2.105% |
| Manitoba | Eligible Dividend - 8%Non-Eligible - 0.7835% |
| New Brunswick | Eligible Dividend - 14%Non-Eligible - 2.75% |
| Newfoundland | Eligible Dividend - 6.3%Non-Eligible - 3.2% |
| Nova Scotia | Eligible Dividend - 8.85%Non-Eligible - 2.99% |
| Northwest Territories | Eligible Dividend - 11.5%Non-Eligible - 6% |
| Nunavut | Eligible Dividend - 5.51%Non-Eligible - 2.61% |
| Ontario | Eligible Dividend - 10%Non-Eligible - 2.9863% |
| PEI | Eligible Dividend - 10.5%Non-Eligible - 1.3% |
| Quebec | Eligible Dividend - 11.7%Non-Eligible - 3.42% |
| Yukon | Eligible Dividend - 12.02%Non-Eligible - 0.67% |
Canadian Dividend Tax Credit
While we did briefly mention this Canadian dividend tax credit mechanism above, let’s dive a little further into it and what it means. Essentially, the dividend tax credit is a Federal tax credit given to Canadian shareholders to apply against their tax liability on the grossed-up part of their dividends. It works because it applies along with provincial tax credits to any dividends received. The amounts depend on whether you have eligible dividends, non-eligible dividends or a combination of both.
The reason that the dividend tax credit is issued is to avoid double taxation since the Canadian corporation that issued the dividend already paid taxes on the income that they received. The dividend tax credit based the rates given to eligible and non-eligible tax creditson what the corporation would have paid in tax which also reflects the fair market value.
It’s important to note that the Canadian dividend tax credit is a corporate tax credit. However, it’s only available to individual shareholders.
Can Dividends Be Tax-Free?
In short, yes, they can. However, this depends on whether dividends are your only form of income or not. If this is the case, then, as a single person with no other income, you can earn up to $65,061 in eligible dividends before having to pay federal taxes. That being said, once you have $54,403 in eligible dividend income, you need to pay an alternative minimum tax (AMT). The amount for provincial taxes varies.
With non-eligible dividends, you can earn up to $31,361 before any federal taxes apply. This only applies if dividends are your only source of income. The amounts for provincial taxes vary, and there are no AMTs for non-eligible dividends.
The only other exceptions where you don’t have to pay any taxes on dividends are dividends that come from mutual funds or regulated investment companies that don’t pay taxes. This is because they invest in tax-exempt securities. These are known as tax advantage accounts or non-taxable dividends. It’s important to know if your dividends are taxable or not for proper tax planning, as well as what tax treatment they require, if any.
Difference Between Capital Gains Tax and Dividends Tax
One important thing to remember when it comes to investment income is that it isn’t all taxed the same. GICs and savings deposit accounts are taxed at your highest marginal tax rate, which is set by the Canada Revenue Agency. Dividend taxes have their own tax rates as well as tax credits at the federal and provincial levels. With capital gains, you are taxed 50% of what you earn at your marginal rate.
The main difference between dividends and capital gains is that dividends are profits as shareholders and capital gains are gained when you sell a security. That being said, you only have a capital gain if you sell the security for more than you paid for it. While both of these have a lower tax rate than investments taxed at your highest marginal tax rate, you still pay less taxes with dividends.
How The New Capital Gains Rules Affect Dividends
Until recently in Canada, all capital gains are calculated at a rate of 50%. However, there have been some recent changes in the capital gains tax rules. Now some capital gains are calculated at 66.66%. This includes corporate income tax amounts that fall under capital gains.
With the new rules, the inclusion rate is now two thirds instead of one half for corporations and trusts. For individuals, the inclusion rate only goes up to two thirds once the capital gains amount has gone over $250,000.
Receiving Dividends in Canada
In Canada, dividends have the lowest tax rate of all investment income. Depending on where you invest, you could receive income every month or every few months. It all depends on where you choose to become a shareholder. It also makes a difference if dividends are your only form of income or if you have any other forms of income as well. This will greatly affect what you are required to pay in taxes.
While there are dividends that are non-taxable, many of them are in the form of mutual funds or other securities, and you don’t receive the tangible value as you would with standard eligible and non-eligible dividends. While both types of dividends have lower taxation than other investments, you generally pay the lowest amount of taxes on eligible dividends.
Like with any type of investing, it’s important to pay attention. Figure out what your tax rates are and invest in things that will benefit you long term. Keep this in mind especially if you choose to invest in foreign dividends since their tax rate will be much higher than Canadian corporation dividends.
Income Pools and Dividends
When it comes to federal taxation for Canadian residents, the taxable amount paid on your tax bill can be affected by income pools. The tax system for this type of income is different from ordinary income and is calculated differently for corporations. Let’s look at how this works for qualifying dividends with General Rate Income Pools and Low Rate Income Pools.
General Rate Income Pool
With a General Rate Income Pool, also known as a GRIP, a Canadian Controlled Private Corporation can pay the atual dividend on eligible dividends to the extent on the GRIP without incurring certain taxes. These can still be paid at any point in the year, but the amount paid in eligible dividends at the end of thetax year, can’t exceen the GRIP.
The GRIP, is what is referred to as taxable income that isn’t affected by special deductions or tax rates. Due to this the GRIP balance on a corporation can change every year.
Low Rate Income Pool
A low-rate income pool also referred to as an LRIP, is different from a GRIP. The LRIP is taxable income that has benefited from special tax rates. With an LRIP, a corporation resident in Canada can pay eligible dividends in any amount unless there’s an LRIP. With LRIPs, corporations have to reduce them to zero with ordinary dividends before eligible dividends can be paid.
Final Thoughts
When it comes to investing, you need to claim what you earn on your income taxes. When it comes to dividend taxes in Canada, the tax implications are based on whether you have a capital gain or a capital loss. It also depends on whether your personal taxes include taxable capital gains. This is because corporate taxation is done a little differently.
Another thing to consider when claiming your dividends with Canadian taxation is whether you have received eligible dividends or non-eligible dividends. These will also affect your income earned for tax purposes. That said, claiming your dividends on your tax return can be a little tricky, so asking for help may be the best way to go. Whether it’s for personal income or a corporation’s income, a tax professional can help you, as well as other Canadian taxpayers, calculate their taxes accurately. orporation dividends.
