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Small Business Dividend Tax Credit

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Personal Tax -> Dividend tax credits -> Non-eligible Dividend Tax Credit

Non-Eligible (Small Business) Dividend Tax Credit (DTC)

Income Tax Act s. 82(1)(b)(i), s. 121(a)

Note:  The gross-up and dividend tax credit are applicable to individuals, not corporations.

Non-eligible dividends, also known as regular, ordinary, or small business dividends, are any dividends issued by a Canadian corporation, public or private, which are not eligible for the enhanced dividend tax credit.

The non-eligible dividend tax credit rate is used for dividends received by individuals from Canadian-controlled private corporations (CCPCs), to the extent that their income is subject to tax at the small business rate.  A portion of dividends from large public corporations may also be classified as not being eligible for the enhanced dividend tax credit and would therefore be classified as non-eligible dividends.

When an individual receives non-eligible dividends, the amount included in taxable income in 2016 and later years is 117% (for 2014 and 2015 it was 118%, 2013 and earlier years it was 125%) of the actual dividend.  The additional 17% is referred to as the gross-up.

The Federal 2015 Budget announced that the Small Business Tax Rate and the non-eligible dividend tax credit would be revised starting in 2016, as per the following Table, which shows the dividend tax credit as a % of the taxable grossed-up dividend.  The Income Tax Act (ITA) s. 121 specifies a fraction which is to be multiplied by the gross-up percentage in order to determine the dividend tax credit.  The fraction is indicated in the table below.

Contrary to what was presented in the Liberal Platform, the Federal 2016 Budget leaves the small business tax rate, non-eligible dividend gross-up and tax credit at 2016 rates.

  Will not happen
  2015 2016 2017 2018 2019+
Small business tax rate 11% 10.5% 10% 9.5% 9%
Non-eligible dividend gross-up  18% 17% 17% 16% 15%
Non-eligible dividend tax credit as per 2015 Budget 11.0169% 10.5% 10% 9.5% 9%
ITA s. 121 fraction 13/18 21/29 20/29 20/29 9/13
Dividend tax credit calculated as per Income Tax Act  11.0169% 10.5217% 10.0206% 9.5125% 9.0301%

See Small Business Taxation on the 2016 Budget website.  See Small Business Tax Rate on the 2015 Budget website.

The Federal 2013 Budget indicated that the then-current dividend tax credit and gross-up factor for these dividends overcompensated individuals for income taxes presumed to have been paid at the corporate tax level on active business income.  For this reason, for dividends paid in 2014 and later years, the gross-up factor was reduced from 25% to 18%, and the tax credit was revised from 2/3 of the gross-up amount to 13/18 of the gross-up amount.  This reduced the federal  DTC rate from 13 1/3% of the grossed-up dividend to 11.017%, and from 16 2/3% of the actual dividend to 13% of the actual dividend.

For a single individual with no income other than taxable Canadian dividends which are eligible for the small business dividend tax credit, in 2016 approximately $32,855 ($36,160 in 2015) can be earned before any federal taxes are payable.  For the maximum amounts that can be earned federally and in each province, see the table in the article on alternative minimum tax.  Keep in mind that when dividends are paid out to shareholders, the company is using income on which corporate income tax has already been paid, because dividends are not a deductible expense.

Federal & Provincial/Territorial Non-Eligible (Small Business) Business Dividend Tax Credit Rates

Non-Eligible Dividend Tax Credit Rates as a % of Grossed-up Taxable Dividends

Year Gross-up

Federal

AB(9)

BC

MB(4) NB(5) NL(8) NS(10)

NT

NU

ON(7)

PE(3) QC(6)  SK(1) 

YT(2)

2016 17% 10.5217% 3.08% 2.47% 0.7835% 4.0% 3.5% 3.33% 6% 2.91% 4.2863% 3.05% 7.05% 3.367% 3.14%
2015 18% 11.0169% 3.1% 2.59% 0.83% 4.0% 4.1% 3.5% 6% 3.051% 4.5% 3.2% 7.05% 3.4% 3.17%
2014 18% 11.0169% 3.1% 2.59% 0.83% 5.3% 4.1% 5.873% 6% 3.051% 4.5% 3.2% 7.05% 3.4% 4.03%
2013 25% 13.33% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 2.9% 8% 4% 4.51%
2012 25% 13.33% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 1.0% 8% 4% 4.51%
2011 25% 13.33% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 1.0% 8% 5% 4.51%
2010 25% 13.33% 3.5% 3.4% 2.5% 5.3% 5% 7.7% 6% 4% 4.5% 2.1% 8% 6% 4.45%
2009 25% 13.33% 3.5% 4.2% 2.5% 5.3% 5% 7.7% 6% 4% 4.5% 3.2% 8% 6% 4.45%
2008 25% 13.33% 4.5% 5.1% 3.15% 5.3% 5% 7.7% 6% 4% 5.13% 4.3% 8% 6% 4.45%
2007 25% 13.33% 5.5% 5.1% 3.67% 5.3% 5% 7.7% 6% 4% 5.13% 6.5% 8% 6% 4.45%

Non-Eligible Dividend Tax Credit Rates as a % of Actual Dividends

Year Gross-up

Federal

AB(9)

BC

MB(4) NB(5) NL(8) NS(10)

NT

NU

ON(7)

PE(3) QC(6)  SK(1) 

YT(2)

2016 17% 12.3104% 3.6071% 2.89% 0.917% 4.68% 4.095% 3.90% 7.02% 3.4% 5.015% 3.57% 8.249% 3.939% 3.678%
2015 18% 13% 3.66% 3.06% 0.98% 4.72% 4.84% 4.13% 7.08% 3.6% 5.31% 3.78% 8.319% 4.01% 3.74%
2014 18% 13% 3.66% 3.06% 0.98% 6.254% 4.84% 6.93% 7.08% 3.6% 5.31% 3.78% 8.319% 4.01% 4.755%
2013 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 3.63% 10% 5.00% 5.64%
2012 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 1.25% 10% 5.00% 5.64%
2011 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 1.25% 10% 6.25% 5.64%
2010 25% 16.67% 4.38% 4.25% 3.13% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 2.63% 10% 7.5% 5.56%
2009 25% 16.67% 4.38% 5.25% 3.13% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 4.00% 10% 7.5% 5.56%
2008 25% 16.67% 5.63% 6.38% 3.94% 6.63% 6.25% 9.63% 7.5% 5% 6.41% 5.38% 10% 7.5% 5.56%
2007 25% 16.67% 6.88% 6.38% 4.59% 6.63% 6.25% 9.63% 7.5% 5% 6.41% 8.13% 10% 7.5% 5.56%

In some provinces, the dividend tax credit is based on a % of the federal gross-up, and in others it is based on a % of the taxable dividend.  Yukon's calculation for the dividend tax credit includes the % gross-up in the calculation, as well as the small business corporate tax rate and highest personal income tax rate.  Thus, if any of these factors changes, the dividend tax credit automatically changes.  None of the provinces or other territories have this automatic calculation in their Income Tax Acts.

(1) See SK non-eligible dividend tax credit article.  the Saskatchewan 2016 Budget indicated that the tax credit would remain at 3.4% of the taxable dividend.  However, Bill 22, which received Royal Assent on June 30, 2016, revised the rate to 23.173% of the federal gross-up, resulting in a tax credit of 3.367% of the taxable dividend.
(2) YT rates are dependent on corporate income tax rates, highest personal income tax (PIT) rate and gross-up %.  Their 2015 Budget reduced the small business corporate income tax rate to 3% and increased the highest PIT rate to 15%, resulting in the change above.
(3) PEI dividend tax credit rate for 2013 revised, as per the PEI 2013 Budget.  Dividend tax credit rate for 2014 revised as per Bill 7.   The 2016 change is automatic based on change in gross-up %..
(4) MB 2016 Budget bill includes a revision for 2016 (years where the federal gross-up is 17%), from 0.83% to 0.7835% of the taxable dividend.
(5) NB dividend tax credit for 2014 - they retained the 5.3% rate, but in 2015 introduced legislation to revise the rate to 4% for 2015 and later years.
(6) See Quebec non-eligible dividend tax credit information - they announced in 2015 that the non-eligible dividend tax credit rate would remain unchanged at 7.05% of the taxable dividend when the gross-up rate changes.
(7) Ontario's November 7, 2013 Economic Outlook announced that the rate for regular, or non-eligible dividends would be left at 4.5% of the taxable (grossed-up) dividend. The legislation was revised to define the tax credit as 29.5% of the gross-up on the dividends, which equates to 4.5% of the taxable dividend for 2014/2015.  Ontario confirmed in their 2016 Budget that the rate for 2016 would be 4.2863% of the taxable dividend. See Ontario non-eligible dividend tax credit information.
(8) The NL 2016 budget revised the non-eligible dividend tax credit from 4.1% to 3.5% of the taxable dividend, for dividends received on or after July 1, 2016.  See NL non-eligible dividend tax credit information.
(9) Alberta tabled legislation in October 2015 to revise the dividend tax credit for non-eligible dividends, such that the dividend tax credit would remain at 3.1% of the taxable dividend.  The tax credit will be reduced in 2017, as per the Alberta 2016 Budget.  See AB non-eligible dividend tax credit information.
(10) The Nova Scotia dividend tax credit rate for non-eligible dividends is defined as 22.94% of the federal gross-up, as revised by Bill No. 108 Financial Measures (2015) Act, although the NS 2015 budget had indicated the rate would be 3.5% of the taxable dividend. For 2014 and earlier years, it was 38.5% of the Federal gross-up.

The above 2016 amounts are based on rates known as of February 19, 2016.

See the following example of the calculation of the taxes payable on small business dividends for taxpayers in the lowest tax brackets:

Small business dividend tax credit using
Ontario tax rates for 2014
Tax
Bracket 1
Tax
Bracket 2
Combined federal + Ontario tax rate 20.05% 24.15%
 
Dividends eligible for enhanced DTC $100.00 $100.00
Gross-up 18.00 18.00
Taxable dividend $118.00 $118.00
 
Federal + ON tax (at 20.05% & 24.15%) $23.66 $28.50
Less dividend tax credits:
Federal 11.017% x $118 $13.00   $13.00  
Ontario 4.50% x $118 5.31   5.31  
Total dividend tax credits   $18.31   $18.31
Tax payable on dividends $5.35 $10.19
 
Marginal tax rate 5.35% 10.19%

 

Revised: October 29, 2016

 

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