Calculating Dividend Tax Credit

As a shareholder of a public company, you’re eligible to participate in the sharing of profits in the form of dividend in which you may be eligible to receive a dividend tax credit. (DTC) A company will pay out dividends when there is growth in the business and a strong likelihood of long stream of cash flows. Any profits are either reinvested back into the company or paid out to shareholders in a form of a dividend.

Types of Dividends

There are three types of dividends, eligible, ineligible and capital dividends, Below we’ll discuss eligible and ineligible dividends.

Eligible Dividends

• Eligible Dividends – Eligible dividends are paid out by public corporations that reside in Canada or Canadian Controlled Private Corporations. When a dividend is paid out by a corporation, they have to designate each eligible dividend that they pay, as required by the Income Tax Act. These type of dividends are taxed at lower tax rate due to “dividend gross up” and eligibility for the Enhanced Dividend Tax Credit. The gross up amount for eligible dividends is 38%. Canadians prefer to receive eligible dividends from Canadian corporations as they’re treated more favorably during tax time.
  • Gross Up: Dividends are “grossed up” because they’re paid from a corporation’s after tax profits. Tax has already been paid. To prevent double taxation, dividends are grossed up and offset by a dividend tax credit. Adding the gross up amount to the dividend is as if the corporation had not pay corporate income tax. The grossed up amount of dividend is added to your income but keep in mind that the Enhanced Dividend Tax Credit gives you credit for the amount of tax that the corporation has already paid. This would prevent double taxation.
  • Gross Up Amount of Eligible Dividends: 38% (2020)

Ineligible Dividends

• Ineligible Dividends – Non eligible dividends are regular dividends paid out by Canadian corporations, public or private. These dividends are taxed at a lower corporate income rate and not eligible for the enhanced dividend tax credit.
  • Gross Up: Non-eligible dividends are grossed up as well but at a lower rate to reflect for the lower tax paid. The grossed up amount must be included in your income which will be offset by a dividend tax credit. The DTC percentage for ineligible dividends is lower than eligible dividends to reflect for the lower tax rate the corporation paid.
  • Gross Up Amount of Ineligible Dividends: 15% (2020)

Dividend Tax Credit (DTC)

When dividends are paid by a corporation, they’re either coded as eligible or ineligible. Depending on the type, these dividends are grossed up and included in a taxpayer’s income. However, they’re offset by a Dividend Tax Credit. This DTC prevents double-taxation of dividend income since the corporation already paid tax on the dividends. Below is an example of the taxation of a eligible dividend.

• Example of Gross Up of Eligible Dividends: James received $1,000 of eligible dividends from a Canadian corporation in 2019. He received this dividend amount out in his non registered account. Keep in mind that you can’t gross up dividends in a registered account. On his T5 tax slip, James would see three amounts regarding this dividend.
  • Eligible Dividend Amount: $1,000
    • This amount of $1,000, is paid to you with company’s after tax profits.
  • Grossed Up of Eligible Dividend Amount: $1380
    • The $1,000 dividend is grossed up by 38%. This is approximately how much pretax profit the corporation would have had to earn in order to pay you the $1,000 in dividends. This assumes a tax rate of 38%. The amount of $1380 is added to your income.
  • Federal DTC: $1380 x 15.02% = $207.28
    • The dividend tax credit helps offset the gross up amount for the eligible dividend and gives you credit for approximate amount of tax that the corporation has already paid. The Federal DTC on eligible dividend rate is 15.02%.
  • Provincial DTC: $1380 X 10% (ON) = $138.0
    • On top of the federal tax credits, provinces also have their own additional tax credit that they provide. In Ontario, this amount is 10%. However, this varies from province to province.