As a Canadian taxpayer, you may have come across the term “dividend tax credit” while filing your taxes. It’s an important tax benefit that can reduce the amount of tax you owe on eligible dividends. In this blog, we will dive deeper into what the dividend tax credit in Canada is and how it works.
What is the Dividend Tax Credit?
In Canada, dividends are taxed at a lower rate than regular income to encourage investment and stimulate the economy. The dividend tax credit is a non-refundable tax credit that reduces the amount of taxes owed on eligible dividends. This means that if you receive eligible dividends from a Canadian corporation, you may be entitled to claim the dividend tax credit and reduce your overall tax liability.
How Does the Dividend Tax Credit Work?
The dividend tax credit in Canada is based on the grossed-up amount of eligible dividends you receive. Grossing up means increasing the actual amount of the dividend you received by a certain percentage. For example, if you receive $1,000 in eligible dividends, the grossed-up amount would be $1,389. The gross-up rate for eligible dividends in Canada is currently 38%.
Once you have determined the grossed-up amount of your eligible dividends, you can calculate the amount of the dividend tax credit. The credit is calculated by multiplying the grossed-up amount of your dividends by the dividend tax credit rate, which varies depending on your province or territory of residence. As an example, for the 2022 tax year, the federal dividend tax credit rate is 15.02%.
It’s important to note that the dividend tax credit cannot exceed the amount of tax you owe on your dividends. In other words, if you owe less tax than the amount of your dividend tax credit, you won’t receive a refund for the difference.
Eligible vs. Non-Eligible Dividends
To be eligible for the dividend tax credit in Canada, the dividends you receive must be “eligible dividends.” Eligible dividends are dividends paid by Canadian corporations that have paid income tax at the corporate level. These dividends are generally taxed at a lower rate than non-eligible dividends.
On the other hand, non-eligible dividends are dividends paid by Canadian corporations that have not paid income tax at the corporate level. These dividends are generally taxed at a higher rate than eligible dividends and are not eligible for the dividend tax credit.
The dividend tax credit in Canada is an important tax benefit that can help reduce your overall tax liability if you receive eligible dividends. It’s important to understand the difference between eligible and non-eligible dividends and how the dividend tax credit is calculated to maximize your tax savings.
If you have any questions or concerns about the dividend tax credit or your taxes in general, it’s always a good idea to consult a professional tax advisor. They can provide you with personalized advice based on your individual tax situation and help you make informed decisions about your finances.
Overall, understanding the dividend tax credit in Canada is an important step towards making the most of your investments and reducing your tax liability.