Why are Canadian dividends taxed less than a paycheque?
Dividends from Canadian companies come with a tax credit. Here is how the gross-up and the credit work, without the maths.
How it works, in three steps
- 1The dividend is grossed up. Your tax slip shows a larger amount than the cash you received: 38% more for eligible dividends and 15% more for non-eligible ones.
- 2The larger amount is taxed at your normal rates. It is added to your other income for the year.
- 3Then you subtract a dividend tax credit. The federal and provincial credits make up for tax the company already paid on its profit, so the final tax is lower than on the same amount of salary or interest.
Eligible dividends mostly come from public companies and get bigger credits. Non-eligible dividends mostly come from private companies and get smaller ones. Your T5 or T3 slip tells you which is which.
Why it is worth knowing
Because of the credit, Canadian dividends can be taxed at a much lower rate than interest, and at moderate incomes the gap can be large. How large depends on your province and income, so the calculator is the best way to see your own number.
Where does it apply?
It applies to
- Dividends from Canadian companies paid into a regular (non-registered) account
- Canadian dividend ETFs and mutual funds that pass dividends through
It does not apply to
- Dividends inside a TFSA (not taxed) or an RRSP (taxed as income when you withdraw)
- Foreign dividends, which get no dividend tax credit
- Interest, which is fully taxed as income
The honest catches
- The gross-up raises your reported income. That can affect income-tested benefits such as Old Age Security, even though the credit lowers the tax.
- Enter the cash amount. The amounts on your slip are already grossed up. The calculator adds the gross-up itself, so use the cash you actually received.
- Rates change. Credits and brackets are updated each year, so check the figures for the current tax year.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
See the tax on your dividends
Enter the cash dividends you receive and your province. The calculator applies the gross-up and credits for you.
Open the Dividend Tax Calculator