How Are Dividends Taxed in Canada?
Dividends are a common form of investment income that many Canadians receive from their investments in stocks and mutual funds. However, it is important to understand how dividends are taxed in Canada to ensure you are properly reporting and paying taxes on this income. In this article, we will explore the taxation of dividends in Canada, including the different tax rates and rules that apply.
Taxation of Eligible Dividends:
In Canada, dividends are categorized as either eligible or non-eligible. Eligible dividends are those paid by Canadian public corporations that qualify for the enhanced dividend tax credit. These dividends are generally taxed at a lower rate compared to non-eligible dividends.
For federal tax purposes, eligible dividends are grossed up by 38% and then taxed at the individual’s marginal tax rate. The gross-up essentially increases the amount of the dividend before applying the tax rate. For example, if you receive $1,000 in eligible dividends, the grossed-up amount would be $1,380, which is then taxed at your marginal tax rate.
Once the gross-up is taxed, a dividend tax credit is applied to reduce the overall tax liability. The tax credit is a percentage of the grossed-up dividend and is based on the individual’s marginal tax rate. This credit acts as a partial refund of the tax paid on the grossed-up amount.
Taxation of Non-Eligible Dividends:
Non-eligible dividends are those paid by Canadian private corporations and do not qualify for the enhanced dividend tax credit. These dividends are taxed differently than eligible dividends.
Similar to eligible dividends, non-eligible dividends are grossed up by 38% for federal tax purposes. However, the tax rate applied to the grossed-up amount is usually higher compared to eligible dividends. The tax credit available for non-eligible dividends is also lower.
Provincial Tax Considerations:
In addition to federal taxes, dividends are subject to provincial taxes, which can vary across provinces. Each province has its own tax rates and rules regarding the taxation of dividends. It is important to consult the specific provincial tax regulations to determine the applicable tax rates for your province.
Frequently Asked Questions (FAQs):
1. How are dividends taxed in Canada?
Dividends in Canada are taxed based on whether they are eligible or non-eligible. Eligible dividends are generally taxed at a lower rate compared to non-eligible dividends.
2. What is the gross-up for eligible dividends?
Eligible dividends are grossed up by 38% for federal tax purposes.
3. What is the purpose of the dividend tax credit?
The dividend tax credit reduces the overall tax liability by providing a partial refund of the tax paid on the grossed-up amount.
4. How are non-eligible dividends taxed?
Non-eligible dividends are also grossed up by 38% for federal tax purposes, but the tax rate and tax credit applied are usually higher compared to eligible dividends.
5. Are dividends subject to provincial taxes?
Yes, dividends are subject to provincial taxes, and the applicable tax rates can vary across provinces.
6. Are there any tax advantages to receiving eligible dividends?
Yes, eligible dividends generally receive more favorable tax treatment compared to non-eligible dividends.
7. Do I need to report dividends on my tax return?
Yes, dividends must be reported on your tax return, whether they are eligible or non-eligible.
8. Are there any tax strategies to minimize the tax on dividends?
Consulting with a tax professional can help you explore potential tax strategies to minimize the tax on your dividends.
9. Are dividends received in a Tax-Free Savings Account (TFSA) taxable?
No, dividends received in a TFSA are not taxable.
10. Can dividends received in a Registered Retirement Savings Plan (RRSP) be taxed?
Yes, dividends received in an RRSP are taxable when withdrawn from the plan.
11. Are foreign dividends subject to Canadian taxes?
Yes, foreign dividends are subject to Canadian taxes, and they may be eligible for foreign tax credits.
12. Can I claim a foreign tax credit for taxes paid on foreign dividends?
Yes, you may be eligible to claim a foreign tax credit on your Canadian tax return for taxes paid on foreign dividends. However, specific rules apply, and it is advisable to consult a tax professional.