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Canadian Dividends and the Dividend Tax Credit

The following post is written by Brian So, a financial advisor and blogger at www.aafsinsurance.com.

While my previous posts focused on the impact of withholding tax on dividends paid from the US and foreign companies, I realize that most people have a high concentration of their portfolio in the Canadian market. Therefore, to wrap up my mini-series on dividends, the last topic will be on dividends paid by Canadian companies. Don’t worry, there won’t be any complex withholding tax rules discussed in this post.

Dividends are payments made by corporations to their shareholders. Because dividends are paid out of after-tax profits of corporations, the individual shareholder receives preferential tax treatment to offset double taxation. This comes in the form of the gross-up and non-refundable dividend tax credit. At first glance, the gross-up may seem disadvantageous because it appears you are paying tax on money you didn’t receive. But tax relief is provided in the form of the federal and provincial dividend tax credit, which essentially gives dividends preferential tax treatment comparable to capital gains.

Canadian dividends are sorted into eligible and non-eligible. Eligible dividends are generally paid by Canadian public corporations subject to the general corporate tax rate, like those listed on the TSX. Non-eligible dividends are generally paid from Canadian controlled private corporations (CCPCs) subject to the lower small business tax rate, although there are exceptions to both. The difference between the two comes from their tax treatment: the amount of gross-up and tax credit. Eligible dividends receive a 38% gross-up and 15.02% dividend tax credit while non-eligible dividends receive a 25% gross-up and 13.33% tax credit.

For example, if you received $100 of eligible dividend from a Canadian public corporation, you would gross it up by 38% to get $138, which is the amount of income that you would include on your tax return. Then, you multiply $138 by 15.02% to get $20.72, which is the federal tax credit you receive. Each province has its own provincial dividend tax credit too. In BC, you receive a 10% credit, or $13.8 in my example. At the lowest federal and provincial tax bracket of 15% and 5.06% (in BC) respectively, you would pay $138 x 15% = $20.7 of federal tax and $6.98 of provincial tax for a total of $27.68. This would be completely offset by the tax credit of $34.52 with $6.84 remaining to deduct tax from other sources. With tax treatment that is this friendly to the individual investor, you can see why dividend paying stocks are such a popular investment these days.

The table below summarizes the dividend tax credit rates for eligible and non-eligible dividends.

Table 1. Federal and provincial dividend tax credit rates.

Fed AB BC SK MB ON QC NB PEI NS NL YT NT NU
Eligible 15.02 10 10 11 8 6.4 11.9 12 10.5 8.85 11 15.08 11.5 5.51
Non-eligible 13.33 3.5 3.4 4 1.75 4.5 8 5.3 1 7.7 5 4.51 6 4

It should be noted that the gross-up and dividend tax credit is only available for non-registered accounts. In a RRSP, every dollar of dividend paid will be taxed as income when withdrawn, which makes putting dividend stocks in your RRSP less attractive of an option. As for the TFSA, since there is never any income tax payable on investment returns, it also is unaffected by the gross-up and dividend tax credit.

Knowing the different tax treatments of dividends, interest and capital gains as well as which account provides the best after-tax results can make a world of difference in calculating your investment returns. Please seek a tax professional and financial advisor if you require assistance with your current situation.


Brian So is a financial advisor and blogger at http://aafsinsurance.com. His areas of expertise include retirement planning, tax savings and insurance advice. If you want to hear his thoughts about the world of personal finance, follow him on Twitter.

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13 Responses to "Canadian Dividends and the Dividend Tax Credit"

  1. farcodev says:

    Cool insight! I wondered if you will do something about Canadian taxes of dividends.
    It will be useful for 2014.

    Thanks!

  2. It’s too bad that the dividend tax credit doesn’t apply for RRSPs. Oh well, I guess because the government already gives us a tax break with RRSPs, we can’t press our luck!

  3. Andrew Wade says:

    So, is a good rule of thumb to put Canadian company stocks in the TFSA, then? (with it then getting complicated beyond that?)

    • Brian So says:

      If you have no other investments then yes it’s typically a good idea to put dividend paying Cdn stocks in a TFSA. But since people usually have interest-bearing investments as well it is better to put those in a TFSA since it doesn’t benefit from the DTC.

      • Andrew Wade says:

        Thanks, Brian. I am just starting to invest for the first time, so I won’t be anywhere near the TFSA limit. No interest-bearing investments right now other than my almost negligible bank account. The idea of dividends as a form of current passive income appeals to me a lot more than saving up for some potentially non-existent retirement.

        • Brian So says:

          Keep it up! It’s always nice to hear about new investors starting up. The advantage that this generation has over previous ones is the wealth of information available online before we make an investment decision. A good resource is this site and many other personal financial blog. Read up on the basics of investing and you’ll be sure to have success in the long-term.

  4. Carmen says:

    “This would be completely offset by the tax credit of $34.52 with $6.84 remaining to deduct tax from other sources”

    Math has never been my strong point so forgive me if I am missing the obvious, but how did you calculate this take credit of $34.52?

    Thank you

    • Brian So says:

      Hi Carmen,

      Remember that tax credit is used to reduce tax payable. Since the dividend generates a federal tax credit of $20.72 and provincial tax credit (in BC) of $13.8 for a total of $34.52. The tax payable for this dividend is $20.7 of federal tax and $6.98 of provincial tax. The federal tax credit and tax payable cancels out, but the provincial tax credit can offset the provincial tax with $6.84 (13.8-6.98) remaining to reduce provincial tax from other sources.

      Hope that answers your question.

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