The dividend tax credit is the amount that a Canadian resident may deduct from his or her tax burden on the gross share of dividends received from Canadian firms. 1 Individuals, not businesses, are eligible for the gross-up and dividend tax credit.
What Is A Dividend?
- Dividend tax credits are applied for by Canadian citizens to offset tax responsibilities on the grossed-up component of dividends received from Canadian firms.
- Individuals are the only ones who may claim gross-up and dividend tax credits.
- There are often federal and provincial tax benefits available.
Understanding the Dividend Tax Credit
As of 2018, qualified dividends received from Canadian companies are “grossed up” by 38%. 2 Dividends must be identified as eligible by the firm providing the dividend in order to be formally recognized as such. As of 2019, the gross-up rate for non-eligible dividends is 15%. 3 Consider a gross-up to be an increase to account for any relevant taxes.
For example, if a corporation pays $20 dividends per share, investors will get $20 x 1.38 = $27.60 per share in dividends after taxes. The grossed-up amount is reported as taxable income on the taxpayer’s income tax return. Individuals in Canada are subsequently granted a tax credit equal to a percentage of the grossed-up amount, which helps to minimize the actual tax due.
As of 2018, the amount by which an individual’s qualified dividends from Canadian companies are “grossed up.”
Let us suppose Susan Smith has an effective tax rate of 25%. During the 2018 tax year, she gets $250 in eligible dividends and $200 in non-eligible dividends. To compute the federal dividend tax credit, she must multiply the total dividends she gets by the Canada Revenue Agency’s prescribed percentage (CRA).The percentages in this situation are 38% for eligible dividends and 15% for non-eligible payouts.
- = ($250 x 1.38) + ($200 x 1.15)
- = $345 + $230
- = $575
This implies Susan has $575 in taxable income. Because her effective tax rate is 25%, her tax on this income will be as follows:
- = $575 x 0.25
- = $143.75
The federal dividend tax credit is 15.0198% for qualified dividends and 9.0301% for non-eligible dividends as a percentage of taxable dividends. 1 Her federal dividend tax credit will be as follows:
- = ($345 x 0.150198) + ($230 x 0.090301)
- = $51.82 + $20.77
- = $72.59
Susan’s initial tax burden is consequently reduced to $143.75 – $72.59 = $71.16 as a result of the tax credit.
It is worth noting that there are both federal and provincial tax credits. For example, if Susan resides in Alberta, she may claim a 10% provincial tax credit, which, when applied to her profits, can reduce her tax obligation even more. 4
Dividend tax credits are non-refundable credits used to offset double taxation since dividends are given to shareholders from a corporation’s after-tax earnings and dividends received by shareholders are likewise taxed. Dividends received from a foreign company are not subject to the dividend tax credit and gross-up methods. 5 As a result, dividends from a foreign firm will be taxed at a higher rate.
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