A dividend is a payment made by a corporation to its shareholders, typically out of earnings or profits. It is the portion of corporate profits paid out to stockholders and, under Canadian corporate tax law, dividends are taxed differently than other types of income. This article will provide an overview of dividends under Canadian corporate tax law and discuss the differences between eligible and ineligible dividends.
Eligible Dividends
Who is eligible for dividends?
Eligible dividends can be paid to both individuals and corporations, including publicly traded companies that are taxable in Canada. In order for dividends to be eligible, they must meet certain criteria as outlined in the Income Tax Act. These include that they are paid out of taxable income earned in Canada or from any dividends received from a taxable Canadian corporation. Furthermore, eligible dividends must be accompanied by an official dividend tax credit to the recipient.
This credit is calculated based on the number of dividends paid and provides relief on taxes owed. For example, if you are an individual resident in Canada who is receiving dividends from a company based in Canada, your dividends will be subject to 15% federal tax plus applicable provincial tax depending on which province you live in. The effective rate can vary widely across provinces as well as amongst different types of taxpayers (e.g., businesses vs individuals).
How dividends are taxed
Eligible dividends are subject to both federal and provincial/territorial taxation at different rates depending on the province or territory in which the dividends are paid.
At the federal level, dividends are subject to a gross-up rate of 38%, which means that they are taxed at 15%. Depending on the province or territory of residence, dividends may also be subject to additional provincial/territorial tax. The amount of this additional tax is determined by each province and territory’s personal income taxation regulations. For example, dividends paid to an individual resident in Ontario will be taxed at a combined marginal rate of around 47%. It is important to note that dividends from Canadian corporations may be eligible for dividend tax credits (DTCs) which reduce the overall taxes owed on them. DTCs are based on the amount of dividends received and provide relief on taxes due which can result in significant savings.
By taking advantage of eligible dividends, individuals and businesses alike can benefit from significant tax savings. However, it is important to consult with a professional accountant to ensure that dividends are properly reported and dividends received are in fact eligible for DTCs. Brij & Associates is here to help you navigate the taxation process surrounding dividends and provide advice regarding the best options for your personal or business needs. Contact us today for more information!
Advantages of eligible dividends
Eligible dividends can provide tax savings over other types of income, as well as a more stable source of income for investors. Examples of eligible dividends include dividends from corporations that are taxable in Canada and dividends paid on publicly traded shares listed on Canadian stock exchanges.
The dividends paid on eligible dividends are eligible for a dividend tax credit, which can significantly reduce the amount of taxes owed by recipients. This can be especially beneficial for individuals or corporations that are in higher income tax brackets since they receive an additional reduction on their total tax liability. Additionally, dividends provide a more stable source of income than other forms of investment returns and may be less volatile than stock prices, making them attractive to both investors and businesses. Finally, dividends are often taxed at lower rates than other sources of income such as interest or capital gains.
Non-eligible Dividends
Who is eligible for dividends?
Non-eligible dividends can only be paid to corporations that are taxable in Canada. Non-eligible dividends, which are dividends paid out of active business income earned by a Canadian corporation, can only be paid to corporations that are taxable in Canada. This means that they cannot be paid to non-residents, trusts or individuals. The taxation treatment of dividends is different from the taxation treatment of other types of income. Dividends do not attract the same level of taxation as ordinary income and may be subject to a reduced rate when received by qualifying taxpayers.
How dividends are taxed
Unlike eligible dividends, non-eligible dividends are only subject to federal taxation and not provincial or territorial taxes. The taxation of dividends varies depending on the type of dividends. Eligible dividends are subject to both federal and provincial or territorial taxes, while non-eligible dividends are only subject to federal taxation. For Canadian residents, dividends received from a taxable Canadian corporation are generally eligible for the dividend tax credit.
Non-eligible dividends are taxed at the same rate as other types of income and may be subject to additional surtaxes depending on your province/territory of residence. It is important that you understand how dividends are taxed so you can make informed decisions about when and how to receive them.
Advantages of ineligible dividends
Noneligible dividends provide a tax savings over other types of income but not as much as eligible dividends do. Additionally, they offer more stability to investors than other forms of income due to the lack of provincial or territorial corporate tax rates applied to them. Examples of ineligible dividends include foreign dividends earned on shares listed on foreign stock exchanges and dividends paid out by companies based outside Canada that are taxable in Canada.
Understanding Eligible vs Noneligible Dividends
Brij & Associates can help you understand the taxation process surrounding dividends. Eligible dividends offer tax savings over other types of income and provide a more stable source of income for investors. Non-eligible dividends are only subject to federal taxation and not provincial or territorial taxes, but do not offer as much of a tax advantage as eligible dividends. It is important to be aware of how dividends are taxed in order to make informed decisions when receiving them, and Brij & Associates can help you navigate this complex process. Contact us today for more information! 647 897 5383