Tax Rates -> Dividend tax credit
Dividend Tax Credit for Eligible Dividends
Income Tax Act s. 82(1)(b)(ii)(D), 121(b)(iv)
Note: The gross-up and dividend tax credit are applicable to individuals, not corporations.
138% of eligible dividends are included in taxable income for individuals. The additional 38% is called the "gross-up". The dividend tax credit is then calculated, and the result is that the marginal tax rate for eligible dividends is quite a bit lower than the marginal tax rate for employment income, interest and foreign dividends. It is also lower than the marginal tax rate for capital gains, but only to a certain level of taxable income. See the tables of marginal tax rates for your province for the various marginal tax rates.
There is an enhanced dividend tax credit for eligible Canadian dividends received by individuals after 2005 from:
A portion of dividends paid by public corporations will sometimes be not eligible for the enhanced dividend tax credit, but only for the regular dividend tax credit for non-eligible Canadian dividends.
With the enhanced dividend tax credit, a "gross-up" is added to the actual dividend to determine the taxable dividend amount for an individual to include in income. The tax credit is calculated as a portion of the gross-up. See the tables below for gross-up and Federal tax credit percentages.
See the tables of dividend tax credit rates for eligible dividends for the federal, provincial and territorial rates.
See our Investment Income Tax Calculator, which demonstrates how eligible Canadian dividends are subject to less tax than foreign dividends and interest income, even when the Old Age Security (OAS) and the age amount tax credit are clawed back. However, the grossed-up income can also affect other income-tested benefits.
In keeping with the previously announced reductions to the federal corporate income tax rates, the 2008 Federal Budget reduced the gross-up on dividends eligible for the enhanced dividend tax credit, and reduced the dividend tax credit rate, beginning in the 2010 tax year. The dividend tax credit factor of 11/18ths of the gross-up was changed to
What did this do to the marginal tax rates for eligible dividends?
In 2016 the tax rate for the 2nd tax bracket was reduced, and a new top tax bracket was introduced for over $200,000 of taxable income. This reduced the marginal tax rate for the 2nd bracket from 9.63% to 7.56%, and created a new marginal tax rate of 24.81% for the highest bracket. The tax bracket thresholds are indexed each year. For all marginal tax rates and thresholds for the current year, federally and for each province and territory, see the Tables of Marginal Tax Rates.
See also our article which shows the maximum amount of dividends that can be received before any tax is payable.
Revised: March 29, 2020
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