In Canada, dividend income is treated differently than other forms of income such as employment income or business income. The tax treatment of dividend income is designed to encourage investment and promote economic growth. This article will explain how dividend income is taxed in Canada and the various tax rates and credits that apply.
Firstly, it is important to understand the different types of dividends that can be received. In Canada, there are two main types of dividends: eligible dividends and non-eligible dividends. Eligible dividends are paid by Canadian corporations that have met certain criteria, such as being publicly traded or incorporated in Canada. Non-eligible dividends are paid by Canadian corporations that do not meet these criteria.
Eligible dividends are generally taxed at a lower rate than non-eligible dividends. For individuals receiving eligible dividends, the tax rate varies based on their total income. In 2021, the federal tax rate on eligible dividends ranges from 5.36% to 29.52%, depending on the individual’s income level. In addition to the federal tax rate, individuals may also be subject to provincial or territorial taxes on their dividend income. The provincial tax rates on eligible dividends vary across Canada but generally range from 0% to 21%.
For individuals receiving non-eligible dividends, the tax rates are slightly higher. In 2021, the federal tax rate on non-eligible dividends ranges from 11.96% to 40.71% depending on the individual’s income level. Again, the individual may also be subject to provincial or territorial taxes, which can range from 0% to 21%.
To further encourage investment and provide tax relief to individuals receiving dividend income, Canada offers a Dividend Tax Credit. This credit effectively reduces the amount of tax owed on eligible dividends. For eligible dividends, the federal dividend tax credit is equal to approximately 15.0198% of the grossed-up dividend amount. The gross-up factor is set annually by the government and is used to calculate the taxable amount of the dividend.
In addition to the federal dividend tax credit, most provinces and territories also provide their own dividend tax credits. The amount of these credits varies depending on the province or territory. The combined federal and provincial dividend tax credits can significantly reduce the overall tax owed on dividend income.
It is worth noting that dividend income received within a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) is not subject to tax. However, when the funds are withdrawn from these accounts, they will be taxed at the individual’s marginal tax rate.
For individuals who own shares in a Canadian Controlled Private Corporation (CCPC), there are additional tax rules to consider. CCPCs are subject to a different tax regime called the small business deduction. Under this regime, the first CAD $500,000 of active business income is taxed at a lower rate. If a CCPC pays dividends to its shareholders, they may be eligible for the dividend tax credit on those dividends.
It is also important to note that the taxation of dividend income can be complex and may vary depending on individual circumstances. It is always recommended to consult with a tax professional or accountant to fully understand the tax implications of dividend income.
In conclusion, dividend income in Canada is taxed at different rates depending on whether it is eligible or non-eligible dividends. Eligible dividends generally receive more favorable tax treatment, with lower tax rates and the availability of dividend tax credits. Non-eligible dividends are subject to higher tax rates but may still qualify for certain tax credits. The taxation of dividend income can be complex, and it is recommended to seek professional advice to ensure compliance with tax laws and to optimize tax planning strategies.
