Dividend Tax Credit

AAA

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

RELATED TERMS
  1. Advance Corporation Tax - ACT

    The prepayment of corporate taxes by companies in the United ...
  2. Double Taxing

    A tax law that causes the same earnings to be subjected to taxation ...
  3. Dividend

    1. A distribution of a portion of a company's earnings, decided ...
  4. Gross Income

    1. An individual's total personal income before taking taxes ...
  5. Tax Credit

    An amount of money that a taxpayer is able to subtract from the ...
  6. Guideline Premium And Corridor ...

    A test used to determine whether an insurance product can be ...
Related Articles
  1. Investing Basics

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  2. Fundamental Analysis

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  3. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  4. Trading Strategies

    Risk Management Techniques For Shorting Call Options

    Shorting covered calls is a popular options trade strategy. Here are the methods to mitigate the risk/loss and enhance profits for selling covered calls
  5. Economics

    EU Probes Tax Laws To Catch Corporate Cheaters

    Recently, the EU has launched an investigation into tax deals between Amazon and the country of Luxembourg.
  6. Mutual Funds & ETFs

    Why Monthly Dividend ETFs are Good for Everyone

    Monthly dividend ETFs can help ease the financial stress on investors of all ages. Here are a few fund names for you to consider.
  7. Fundamental Analysis

    How do I calculate the dividend payout ratio from an income statement?

    Understand the dividend payout ratio, how it differs from the dividend yield and how it can be calculated from a company's income statement.
  8. Trading Strategies

    What are the pros and cons of owning preferred stock instead of common stock?

    Understand and explore the advantages and disadvantages of owning preferred stock as opposed to owning common stock shares in a company.
  9. Taxes

    What is the difference between gross income and earned income?

    Being able to distinguish between earned income and gross income is an important tool in preparing for and filing your individual tax returns each year.
  10. Trading Strategies

    General Electric: Good News/Bad News

    General Electric is generous to its shareholders, but that's not the only factor to consider.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center