What You Need to Know About Tax on Dividend Income in Canada
Canadian investors who receive eligible dividend income from Canadian corporations can benefit from both federal and provincial dividend tax credits. Learn about these dividend tax credits as well as how Canadian residents can benefit from the tax treatment of dividend income in Canada.
What are Dividend Tax Credits in Canada?
Individual investors pay personal income tax on dividend income received; however, dividends are paid to investors from corporate earnings that have already been taxed. In Canada, federal and provincial dividend tax credits are available for Canadian investors in an attempt to offset such double taxation. This is a non-refundable tax credit benefitting Canadian investors receiving eligible dividend income, reducing the amount of tax that they owe.
Are My Dividends Eligible for the Tax Credit?
The income tax treatment of dividend income is determined by the Canadian corporation’s status and whether this income is paid as “eligible” or “non-eligible” dividends. Eligible dividends provide the greatest benefit to the taxpayer through preferential tax treatment by Revenue Canada.
When a Canadian corporation chooses to pay dividends to shareholders, the dividends can come from different pools of income within the corporation. The source of the dividend income determines how you will be taxed on that income.
Dividends paid by a Canadian public corporation are almost always classified as “eligible” dividends.
A Canadian Controlled Private Corporation (CCPC) can pay both “eligible” and “non-eligible” dividends. If a CCPC qualifies for the federal Small Business Deduction (SBD) and dividends are paid from this income pool up to the SBD amount, then these are designated as “non-eligible” dividends since the source corporate income was not taxed to the CCPC at full rates; however, dividends issued from income above the SBD amount are taxed to the CCPC at the full federal corporate rate and therefore qualify as “eligible” dividends for the recipient’s income tax.
Dividends received from a foreign corporation receive no preferential treatment and are taxable at the taxpayer’s marginal income tax rate.
Benefit for Canadian Residents
For Canadian residents, the tax rate applied to dividend income depends on the type of dividend received. Individuals who earn eligible dividends can claim the federal dividend tax credit along with the provincial dividend tax credit, which differs by province.
Non-eligible dividends also benefit from preferential tax treatment but at much lower federal and provincial dividend tax credit rates.
Investing in dividend-paying stocks substantially increases the after-tax rate of return for Canadian taxable investors given that dividends can be taxed at a lower rate than other income and an understanding of the tax treatment of the different types of dividend income will contribute to more effective tax planning and investment strategies.
An Example: Tax Savings on Dividend Income in 2022 in Ontario
In Canada, dividend income is eligible for dividend tax credits whereas interest income is not eligible for any such tax credits. As a result, for the 2022 taxation year, Canadian investors resident in Ontario in the highest tax bracket pay tax at only 39.34% on eligible dividend income, compared to 53.53% in the highest tax bracket on interest income. This represents an income tax savings of about 14% relative to interest income.
Your Customized Dividend-Paying Investment Portfolio to Preserve and Build Wealth
Wealthy individuals and families, family offices, foundations, corporations, institutions and trusts come to Bloom Investment Counsel, Inc. for our expertise in providing and actively managing segregated, customized dividend-paying investment portfolios.
Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm with over 37 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 increase of the underlying stocks themselves and benefiting from the preferential tax treatment on the dividend income payments. But that is not all.
Investing in dividend-paying stocks provides additional benefits to investors who wish to preserve and build long-term wealth. Learn more by visiting our investment management services page.
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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.