Dividend Tax Credit

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DEFINITION of 'Dividend Tax Credit'

The amount a Canadian resident applies against their tax owing on the grossed up portion of dividends received from Canadian corporations.

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BREAKING DOWN 'Dividend Tax Credit'

The dividends an individual receives from Canadian corporations are "grossed up" by 25%. This amount is then included on their income tax form as taxable income. Both Canadian federal and provincial governments then grants individuals a tax credit, equal to a percentage of the grossed up amount. This helps to reduce the actual tax payable.

Let's run through an example. Susan Smith has a marginal income tax rate of 25% and is located in Alberta, where the provincial dividend tax credit is 6.4%. The federal dividend tax credit is 13.33%. Her total dividends for the year were $250. On the taxable income portion of her tax return she will include $312.50 (250*1.25). Her approximate taxes owing on this dividend would then be $78.13 (312.50*25%). She also receives dividend tax credits of $41.67 (312.50*13.33%) and $20 (312.50*6.4%). Therefore, in all her taxes payable on her dividend is $16.46 (78.13-41.67-20). This amounts to only 6.58% of her original dividend.

Dividend tax credits are implemented in an attempt to offset double taxing, since dividends are paid to shareholders with a corporation's after-tax profit and the dividends received by shareholders are also taxed.

There are both federal and provincial tax credits.

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