If you are a shareholder in a Canadian corporation, you may receive profits from those shares that are called dividend income. The dividends should be reported when completing your tax return. Typically, you also may be eligible to receive the Federal Dividend Tax Credit. This is a non-refundable credit that reduces the amount of tax you owe after filing your return.
Balvir Singh Saini, a certified general accountant from Brampton explains that “the dividend tax credit is given to avoid double taxation.”
- Canadian corporations may pay either eligible or other than eligible dividends.
- Each dividend type affects your personal tax return differently.
- There is a dividend tax credit available for each dividend type.
Dividend Tax Credit for Eligible & Non-eligible Dividends
Corporations designate dividends as eligible or other than eligible. The difference is negligible to you, except for tax purposes. The type of dividends depends on the status of the corporation:
Eligible Dividends: The corporation has to designate the dividends as “eligible” which means that they paid higher tax rates. In return, you will pay more taxes and receive a higher tax credit.
Other Than Eligible Dividends: The corporation has to designate the dividends as ‘other than eligible” which means that they paid lower tax rates. In return, you will pay less taxes and receive a smaller tax credit.
As an investor, you’ll be able to note on your T5 statement of investment income whether your dividend is eligible or other than eligible. If you’re an employee who works for the corporation, you’ll receive a T4PS, which is a statement of employee profit-sharing plan allocations and payments.
According to the Canada Revenue Agency, other statements that may include dividend income are:
- A T3, statement of trust income allocations and designations
- A T5013, statement of partnership income
Dividend Income and Gross-Up
Your dividend income gets added to your taxable income. In addition to reporting the amount you earned in dividend income, you should account for a gross-up. Think of a gross-up as an increase to account for applicable taxes.
For example, say your job pays $5,000 per week, but your salary is $5,500 per week because your employer wants $5,000 to be your income after taxes. This means your employer has grossed-up your salary.
The CRA has you add in a gross-up to account for any tax the corporation has already paid on your dividend income.
Calculating Dividend Income With Gross-Up
Currently, the gross-up rate is 38% for the eligible dividends and 15% for the other than eligible dividends.
As an example;
If you received $200 worth of eligible dividends and $200 worth of other than eligible dividends, you would have to gross up your dividends by 38% and 15%, respectively. So, you would claim $506 as dividend income on your return:
- Taxable amount of the eligible dividends = $200 X 1.38 = $276; then
- Taxable amount of the other than eligible dividends = $200 X 1.15 = $230
- Total taxable amount = $276 + $230 = $506
You will report the total taxable dividends on line 12000 of your income tax return. However, the taxable amount of other than eligible dividends will also be reported on line 12010 of your income tax return. You can use the federal worksheet to assist in calculating the proper taxable amount and to direct you with where to report them in the tax return.
How to Calculate the Federal Dividend Tax Credit?
Since you pay taxes on the gross-up amount of the dividends, you are eligible to claim a credit to offset this gross-up. The Federal Dividend tax credit also depends on the status of the dividends whether they are eligible or other than eligible. The most recent credit values are 15.0198% of the taxable eligible dividends amount and 9.0301% of the taxable other than eligible dividends.
Continuing the previous example;
- The $200 eligible dividend had a grossed up value of $200 x 1.38 = $276, so your federal tax credit = $276 X 15.0198 percent = $41.45
- The $200 other than eligible dividend had a grossed up value of $200 x 1.15 = $230, so your federal tax credit = $230 X 9.0301 percent = $20.77
- Total federal credit = $41.45 + $20.77 = $62.22
You will report the total federal credit amount in line 40425 of your income tax return.
Why do you receive Dividend Tax Credit?
The purpose of the federal dividend tax credit is to balance things out. You receive your share of the corporation’s earnings as a dividend.
You report a gross-up to turn that income back into pretax income — because the corporation has already paid taxes on it — then, you receive a tax credit to make it fair for everyone.
Both you and the corporation aren’t being double-taxed and the CRA subsidizes you for the tax the corporation already paid on your dividends.
TurboTax Premier offers an easy step-by-step guide on how to report your dividends from all sources and claim the appropriate federal tax credit for each. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
*TurboTax Live™ Full Service is not available in Quebec.
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