Dividend Income in Canada – Do You Know How It’s Taxed?
Dividend income is an important aspect of many Canadians’ investment strategies, offering a steady stream of income in addition to potential capital gains on the underlying investment. Understanding how this income is taxed is crucial for effective tax planning and optimizing returns.
Overview of Dividend Income
Dividends are payments made by a corporation to its shareholders, usually derived from the company’s profits. They are an attractive form of investment income as they represent regular payouts, usually quarterly but sometimes monthly. Dividends are categorized into two main types:
- Eligible Dividends: These are typically paid by Canadian public companies and are subject to a lower tax rate in the hands of the shareholder due to tax benefits provided to encourage investment. Eligible dividends are those paid out of income that has been taxed at the corporate level.
- Non-Eligible Dividends: These are usually paid by private companies or smaller corporations that do not qualify for the same tax benefits as public companies. Non-eligible dividends are taxed at a higher rate in the hands of the shareholder because they are paid out of income that has been taxed at lower corporate rates.
The Taxation Framework for Dividends
In Canada, dividend income is taxed at both the federal and provincial levels. The taxation framework in each of these levels is then broken down again depending on whether the dividend is categorized as an eligible dividend or a non-eligible dividend.
The framework is broken down as follows. All figures are approximate, represent a percentage of actual dividends received, and are a range reflecting different income tax brackets:
Eligible Dividends:
- Federal Rates: The federal marginal tax rate on eligible dividends ranges from 0% to 25%.
- Provincial Rates: The provincial and territorial marginal tax rates for eligible dividends can range from -10% (implying a refund for lower tax brackets due to the tax credit available) to 46%, and varies by province.
Non-Eligible Dividends:
- Federal Rates: The federal marginal tax rate on non-eligible dividends ranges from 7% to 28%.
- Provincial Rates: The provincial and territorial marginal tax rates on non-eligible dividends also vary widely by province, ranging from 7% to 49%.
Dividend Tax Credit
The dividend tax credit is designed to reduce the effective tax rate on dividend income by compensating for the corporate taxes already paid on the income before it is distributed to shareholders. The tax credit is also divided into federal and provincial levels, they are as follows:
- Federal Dividend Tax Credit: This credit is applied based on the type of dividend (eligible or non-eligible) and reduces the federal tax payable on the dividend income.
- Provincial Dividend Tax Credit: Provinces offer their own dividend tax credits, which vary by jurisdiction. These credits are also designed to lower the provincial tax burden on dividend income.
Dividend tax credit is one of the reasons investing in dividend-paying equities is attractive to Canadian taxable investors.
Invest in Dividend-Paying Stocks with Bloom
Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm with almost 40 years of experience managing in excess of $2.5B in assets over the years.
With dividend-paying portfolios, our clients’ portfolios earn income, in addition to participating in potential capital gains from the increase of the underlying stocks themselves and taxable clients benefit from the preferential tax treatment on the dividend income payments.
Investing in dividend-paying stocks provides additional benefits to investors who wish to preserve and build long-term wealth. Learn more by visiting the investment management services page on our website or by calling us at +1–416–861–9941.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.