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.
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