See the actual tax on your eligible or non-eligible dividends after the gross-up mechanism and dividend tax credit. Compare the effective rate to salary or interest income at your marginal bracket.
Canada uses an "integration" system for taxing dividends. Instead of simply taxing the cash you receive, the system grosses up your dividend to approximate what the corporation earned pre-tax, taxes that larger amount at your marginal rate, and then gives you a tax credit to offset the corporate tax already paid.
The result is that eligible dividends from public companies are taxed at a significantly lower effective rate than interest income, salary, or rental income. Non-eligible dividends from small businesses also benefit, but to a lesser degree.
The effective rate depends on your province and your other income level, because the dividend is stacked on top of your existing income for marginal rate purposes. Use the calculator above to see the exact breakdown for your situation.
Eligible dividends from Canadian public corporations are grossed up by 38% and then you receive a dividend tax credit. The net effect is a lower effective tax rate than salary or interest income at the same marginal bracket. For example, at $60,000 other income in Ontario, a $10,000 eligible dividend might be taxed at only 7-9% effective rate, compared to 29-31% for salary.
Eligible dividends come from public corporations (and some private ones) that paid tax at the general corporate rate. They get a 38% gross-up and a larger dividend tax credit. Non-eligible dividends come from small businesses (CCPCs) that paid the small business rate. They get a 15% gross-up and a smaller credit, resulting in a higher effective personal tax rate.
The gross-up inflates your dividend to approximate the corporation's pre-tax earnings. You report the grossed-up amount as taxable income on your return, then claim the dividend tax credit to offset the "double taxation." The gross-up is 38% for eligible dividends and 15% for non-eligible dividends.
The dividend tax credit is designed to offset the corporate tax already paid on the earnings that funded your dividend. It prevents the same income from being fully taxed at both the corporate and personal level. The combined effect of gross-up and credit is called "integration" — the goal is that dividend income is taxed similarly to salary income over the two levels.
Yes. At low income levels (roughly below $50,000-$60,000 depending on province), the dividend tax credits can exceed the tax owed on the grossed-up dividend, resulting in a negative effective rate. This means receiving eligible dividends actually reduces your overall tax bill. This is common for retirees with only dividend income.