Canadian dividend tax rules shape how investors are taxed on income paid from Canadian corporations. Understanding these rules helps you forecast after tax returns and structure your portfolio for efficiency.
Dividends from eligible and non eligible sources are treated differently, so knowing the details reduces surprises at tax time.
How Canadian Dividend Tax Is Reported And Calculated
Canadian dividend income is grossed up and then offset by a dividend tax credit, which changes the effective rate you pay.
| Province | Eligible Dividend Gross Up | Non Eligible Dividend Gross Up | Federal Dividend Tax Credit Rate |
|---|---|---|---|
| Ontario | 38% | 15% | 15.0198% of eligible, 9.0301% of non eligible |
| British Columbia | 38% | 15% | 15.0198% of eligible, 9.0301% of non eligible |
| Alberta | 38% | 15% | 15.0198% of eligible, 9.0301% of non eligible |
| Quebec | 38% | 15% | 14.5389% of eligible, 8.5638% of non eligible |
| Nova Scotia | 38% | 15% | 15.0198% of eligible, 9.0301% of non eligible |
Eligible Versus Non Eligible Dividends
Eligible dividends are paid from income taxed at the general corporate tax rate, commonly from public corporations and some private corporations.
Non eligible dividends typically come from small private corporations taxed at the lower small business limit, and they receive a smaller gross up.
The gross up increases your reported income, but the dividend tax credit offsets this at a higher rate, producing a lower effective tax than interest income.
Provincial Tax Treatment And After Tax Returns
Each province adds its own dividend tax credit on top of the federal credit, which modifies the effective provincial rate you pay on dividends.
Higher tax brackets face larger gross ups but also receive larger credits, so the progression is not always linear across income levels.
In many provinces, eligible dividends can be more tax efficient than interest for retirees and investors in higher marginal brackets.
Integrating Dividends Into Your Overall Tax Plan
Strategic use of dividend paying assets works best when combined with your RRSP, TFSA, and non registered accounts.
- Hold higher yielding dividend stocks in tax sheltered accounts first to avoid annual dividend tax inside registered plans.
- Use your non registered account for eligible dividends to benefit from the stronger federal and provincial dividend tax credits.
- Consider timing of dividend declarations near year end to coordinate with your overall income and deductions.
- Track adjusted cost base and gross up amounts carefully when selling positions to avoid surprises at year end.
- Review your provincial residency, because credits and tax rates vary significantly depending on where you live.
Dividend Tax Vs Interest Income Comparison
Interest income is fully included at your top marginal rate, while eligible dividends benefit from gross up and tax credits that lower the effective rate.
At similar pre tax yields, dividends often produce higher after tax returns for investors in middle to higher income brackets in many provinces.
Non eligible dividends still favor interest in most cases, but the gap narrows as your income decreases and provincial credits apply.
Dividend Tax For Retirees And Low Income Investors
Low income retirees may pay little to no dividend tax because their credits can exceed their tax liability, especially on eligible dividends.
Provincial programs and credits can interact with dividend tax rules, so modelling your complete income is important before changing income sources.
FAQ
Reader questions
How is my eligible dividend income calculated for tax purposes in Canada?
Your eligible dividend is multiplied by the 38% gross up to determine your taxable income, then you claim the federal dividend tax credit of 15.0198% of the grossed up amount plus the provincial credit based on your home province.
Are dividends from a TFSA subject to Canadian dividend tax?
No, dividends earned inside a TFSA grow tax free and are not subject to Canadian dividend tax at any time, regardless of whether they are eligible or non eligible.
Do I pay more tax on dividends if I am self employed in Canada?
Yes, as a self employed person your dividends are still subject to the same gross up and dividend tax credit rules, but you cannot reduce your business income by paying yourself wages instead of dividends without considering reasonable compensation tests. Non eligible dividends are grossed up by 15% and you receive the corresponding federal and provincial dividend tax credits, which results in a lower effective tax rate than interest income but generally higher than eligible dividends.