If you are receiving dividends from a business or investment, it is important to understand the rules for tax on dividends in Canada. These important considerations should be part of your tax planning process. Want to learn more? Keep reading.

What are Dividends?

Dividends are payments made to shareholders directly from a company’s profits. They are a way for companies to reward their investors for holding their stocks. Dividends are also a great way for you to pay yourself through your company because they are taxed at a lower rate than other income taxes.

Whenever a shareholder receives a payment from a company – which usually happens quarterly or annually – they are subject to taxation at both the federal and provincial levels.

How Tax on Dividends Work in Canada

Any dividend payments that you receive must be reported when filing taxes each year so that the correct amount can be calculated and paid accordingly. The amount of tax on dividends in Canada will depend on several factors. Where you reside and your total income level for the year are two of the main considerations.

The type of dividend you are receiving will also impact taxation. There are two different types of dividends: eligible and other than eligible dividends. Eligible dividends are those paid by bigger Canadian corporations, while other than eligible dividends are those paid by private corporations (smaller businesses).

Dividends received should be listed on your personal income taxes under Line 1200 of your tax return.  Most companies will provide you with a tax slip to facilitate the process of declaring dividends in your income taxes. Under Line 1200, the following slips would be included: T3 slips, T4PS slips, T5 Slips and T5013 slips. If you did not receive a slip, the calculation of dividends for line 1200 follows this rule: for eligible dividends, the actual amount of dividends received is multiplied by 138%; for non-eligible dividends, the actual amount is multiplied by 115%.

Like with income taxes, dividends tax rates depend on your taxable income bracket. Dividends received may be taxed at different rates than your other sources of income. They might also impact your overall taxable income and add to what you already owe in taxes. For current information on income tax rates, click here. 

Dividend Tax Credits

One of the advantages of receiving dividends from a corporation or paying yourself with dividends instead of a salary is the application of dividend tax credits and deductions.

Generally speaking, individual taxpayers who have earned more than $50,000 in taxable income per year pay taxes at both the federal and provincial levels on any dividends received. However, those earning less than this threshold may be eligible for dividend tax credits from both levels of government.

Dividend Tax Credits are claimed in Line 40425 of your income tax return. If you received a tax slip, the credit amount would be indicated. If you did not receive a tax slip, the total amount reported on Line 1200 should be multiplied by 15.0198% for eligible dividends or 9.0301% for non-eligible dividends.

Want to speak to an expert?

If you are looking for expert advice on claiming dividends in your income tax or if you are planning on whether or not to pay yourself in dividends, our tax experts can help. Contact us today.

Sources:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-40425-federal-dividend-tax-credit.html

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12000-taxable-amount-dividends-eligible-other-than-eligible-taxable-canadian-corporations.html