How dividends are taxed in Canada

• Eligible Canadian dividends — paid from income taxed at the general corporate rate; the most tax-favoured.
• Non-eligible (ordinary) Canadian dividends — typically from small-business income; a smaller credit.
• Foreign dividends — no Canadian credit; fully taxable like interest, often with foreign tax withheld.

Canadian dividends are grossed up — you report more than you received — and then a dividend tax credit offsets the extra. The mechanism approximates the corporate tax already paid, so the dividend isn’t taxed twice. The net effect is that eligible Canadian dividends are usually taxed at a lower effective rate than interest income.

US and international dividends get no dividend tax credit. They’re fully taxable at your marginal rate, and foreign tax is often withheld at source — usually 15% for US dividends in a non-registered account, recoverable via the foreign tax credit. Account location matters here (see the foreign withholding guide).

Dividends are income in the year received; capital gains are only realized (and only partly taxed) when you sell. Neither affects the other’s reporting, but both flow from the same holdings — and reinvested dividends (DRIP) quietly raise your ACB, which matters when you eventually sell.