The dividend tax credit, or DTC for short, is a tax provision that Canadians can apply on their dividend income to reduce their associated tax liability. It can be calculated as a percentage of the accumulated dividend income. Usually, the DTC grosses up your dividend income, then you receive an affiliated tax credit. This tax provision was designed to encourage Canadians and various companies to invest. When the government fosters investments, it provides a tax credit for eligible revenues that will promote the economy’s growth. In this article, we will discuss more on the dividend tax credit, the different tax credit rates, and its benefits. Continue reading to learn more!
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What is the dividend tax credit in Canada?
The dividend tax credit is a type of non-refundable tax credit an investor can utilize to reduce the taxes they owe resulting from earning dividend income. It is available to both Canadian residents and non-residents. Further, the tax credit is available to anyone who receives a dividend from a Canadian company.
Every nation has a tax administration system, and in Canada, the Canada Revenue Agency (CRA) manages the taxation system. CRA ensures that when a corporation earns a profit, it also pays corporate income tax. In the same way, when a company distributes dividends to its shareholders, it ensures the shareholders pay income tax on the dividends they receive.
When a corporation pays a dividend, they automatically attach a dividend tax credit. However, the type of dividend tax credit you receive depends on the size of the company issuing the dividend. The possibility of paying eligible or non-eligible dividends depends on whether they are over the $500,000 Small Business Limit (SBL) or not. The DTCs on eligible dividends are higher than on non-eligible dividends, especially since corporate taxes are built on retained earnings from which eligible dividends are paid.
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Who is eligible for the dividend tax credit?
As earlier mentioned, the dividend tax credit is available to both Canadian residents and non-residents. Furthermore, you must be earning dividend income on your investments to claim the dividend tax credit. It is also available to investors who hold shares in Canadian corporations or any Canadian-controlled private corporations (CCPCs).
Eligible vs non-eligible dividends
The two types of Canadian dividends are the ‘eligible’ or ‘non-eligible’ dividends. Let’s take a closer look below:
- Eligible dividend: This is a type of taxable dividend paid to residents of Canada. They are usually from Canadian public corporations with net income over the $500,000 Small Business Deduction Limit. A portion of income that is taxed at the higher corporate tax rate flows into a corporation’s general rate income pool (GRIP) balance and increases over time.
- Non-eligible dividend: Also known as a regular dividend, this is from small business corporations that earn below $500,000 of net income. This dividend can also be ‘grossed-up,’ and may also have a dividend tax credit attached to it. However, the percentages involved reflect the amount of corporate tax paid at a lesser rate. In other words, no income is taxed at a higher corporate rate and no GRIP pool is created.
Related Reading: Eligible vs Non-Eligible Dividends
Dividend tax credit rates in Canada
The table below shows the gross-up tax rates for eligible dividend tax credits for the 2015 to 2022 tax years. There are no rate changes thus far for 2023.
| Year | Gross-Up Rate | Federal | AB | BC | MB | NB | NL | NS | NT | NU | ON | PEI | QC | SK | YT |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022/23 | 38% | 15.0198% | 8.12% | 12% | 8% | 14% | 6.3% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.70% | 11% | 12.02% |
| 2021 | 38% | 15.0198% | 8.12% | 12% | 8% | 14% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.70% | 11% | 12.02% |
| 2020 | 38% | 15.0198% | 10% | 12% | 8% | 14% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.70% | 11% | 12.02% |
| 2019 | 38% | 15.0198% | 10% | 12% | 8% | 14% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.78% | 11% | 12.02% |
| 2018 | 38% | 15.0198% | 10% | 10% | 8% | 14% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.86% | 11% | 12.02% |
| 2017 | 38% | 15.0198% | 10% | 10% | 8% | 14% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.9% | 10.75% | 15.0% |
| 2016 | 38% | 15.0198% | 10% | 10% | 8% | 13.5% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.9% | 11% | 15.0% |
| 2015 | 38% | 15.0198% | 10% | 10% | 8% | 12% | 5.4% | 8.85% | 11.5% | 5.51% | 10.0% | 10.5% | 11.9% | 11% | 15.0% |
The dividend tax credit rates on the provincial level for both eligible and ineligible in Canada for 2022 and 2023 are shown in the table below:
| Province | Dividend Tax Credit Rate |
|---|---|
| British Columbia | Eligible – 12% Non-Eligible – 1.96% |
| New Brunswick | Eligible – 14% Non-Eligible – 2.75% |
| Alberta | Eligible – 8.12% Non-Eligible – 2.18% |
| Newfoundland | Eligible – 6.3% Non-Eligible – 3.2% |
| Manitoba | Eligible – 8% Non-Eligible – 0.7835% |
| Nova Scotia | Eligible – 8.85% Non-Eligible – 2.99% |
| Saskatchewan | Eligible – 11% Non-Eligible – 2.105% |
| Northwest Territories | Eligible – 11.5% Non-Eligible – 6% |
| Ontario | Eligible – 10% Non-Eligible – 2.9863% |
| Quebec | Eligible – 11.7% Non-Eligible – 3.42% |
| PEI | Eligible – 10.5% Non-Eligible – 1.3% |
| Yukon | Eligible – 12.02% Non-Eligible – 0.67% |
Related Reading: Best Dividend ETFs in Canada for 2023
How to Calculate the Dividend Tax Credit
If you want to calculate the dividend tax credit, you need to know your marginal tax rate (MTR). The marginal tax rate is the maximum amount of tax you pay for every additional dollar you earn as income. It varies across Canada, with BC having more than 20 MTRs for both eligible and ineligible dividends. In simple terms, your marginal tax rate is dependent on your income level and province or territory of residence.
The first step is to calculate your total dividend income (or expected income) with its gross-up. For instance, using the MTR of 23.46% for eligible dividends and 37.99% for non-eligible dividends. When you receive $100 in eligible dividends and $200 in non-eligible dividends, you can add the right MTR to each figure to get your grossed-up amount.
Following the example above, below is the calculation of the grossed up dividend:
- Eligible dividends: $100 x 1.2346 = $123.46
- Non-eligible dividends: $200 x 1.3799 = $275.98
To calculate the total taxable amount, you can add the two total amounts: $123.46 + $275.98 = $399.44. This is the total taxable amount of dividends to claim on your return.
How do you calculate the dividend tax credit on eligible dividends?
According to CRA, the eligible dividend tax credit is set at a tax rate of 15.0198% at the federal level. Using the grossed-up total from the general example above, you can calculate your eligible DTC with the percentage tax rate. Continuing with the example above, the dividend tax credit would be $18.54 ($123.46 x 15.0198%).
How do you calculate the dividend tax credit on ineligible dividends?
According to CRA, the non-eligible dividends tax credit is set at a tax rate of 9.0301% at the federal level. Using the grossed-up total from the general example above, you can calculate your ineligible DTC. Continuing with the example above, the dividend tax credit would be $24.92 ($275.98 x 9.0301%).
Remember that you also receive a dividend tax credit at the provincial or territorial level, for both eligible and ineligible. The calculation is the same as above, but the rate will vary depending on where you reside.
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How to Claim the Dividend Tax Credit
If you are a resident of Canada, you can claim the dividend tax credit on your annual income tax return on line 40425. You will be required to provide your grossed-up dividends amounts and your tax rate in the income section to calculate the credit. The credit will be reflected in your final tax refund or balance owing.
Related Reading: Types of Tax Returns in Canada
What is the benefit of dividend tax credit Canada?
The dividend tax credit in Canada offers several benefits for investors; some of these benefits include:
1. Makes dividends more tax-effective
The dividend tax credit is a great tool for reducing the tax burden on investors, but it only applies to dividends from Canadian companies and is most effective at certain levels. In other words, you can save more investment earnings and have extra money to keep investing or spending.
2. Encourages investment in Canadian companies
The dividend tax credit is tax effective which ensures continuous investment in Canadian stocks, mutual funds and other investments that yield dividends. Dividends attract lower rates of income tax than salary.
3. Easy to claim
As clearly stated above, the calculation and claim process of the dividend tax credit is fairly easy and straight forward. Similar to any other type of investment, you also need to pay attention when calculating your dividend tax rate. Find out what your tax rates are and invest in what will benefit you. You may want to remember this if you want to invest in foreign dividends, especially since their tax rate is way higher than Canadian corporation dividends.
The dividend tax credit is one of many tax benefits available to Canadians. Are you interested in claiming the DTC or finding other ways to reduce your tax liability? A financial advisor can help! Fill out this quick questionnaire to find an advisor today.
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