Dividend Tax Credit

Loading the player...

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.

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.

RELATED TERMS
  1. Franked Dividend

    An arrangement in Australia that eliminates the double taxation ...
  2. Qualified Dividend

    A type of dividend to which capital gains tax rates are applied. ...
  3. Dividend Exclusion

    A rule that allows corporations to subtract dividends received ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Nominee Dividend

    A dividend that a person receives on behalf of someone else. ...
  6. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
Related Articles
  1. Personal Finance

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
  2. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  3. Markets

    3 Tax Implications of Dividend Stocks

    Dividend paying companies are attractive in a low interest rate environment, but income seeking investors have to be careful of the potential tax hit.
  4. Investing

    What's a Franked Dividend?

    A franked dividend is an arrangement in Australia that eliminates the double taxation of dividends.
  5. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  6. Personal Finance

    The Top 5 Countries for Dividend Investing (WBK, BBL)

    Read about the five best foreign countries for American dividend investors, based on a ranking of their average after-tax dividends and tax-withholding laws.
  7. Personal Finance

    Do Canadians Really Pay More Taxes Than Americans?

    We look at the difference in tax rates and services offered on both sides of the border.
  8. Investing

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  9. Investing

    Stock-Picking Strategies: Income Investing

    Income investing, which aims to pick companies that provide a steady stream of income, is perhaps one of the most straightforward stock-picking strategies. When investors think of steady income ...
  10. Markets

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
RELATED FAQS
  1. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to dividends and capital gains, although this will change slightly in 2013. Currently, ... Read Answer >>
  2. If I reinvest my dividends, are they still taxable?

    Take a brief look at how the Internal Revenue Service taxes different kinds of dividends, including taxation on dividends ... Read Answer >>
  3. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  4. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
  5. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  6. What is the difference between a write-off and a deduction?

    Understand the differences between a tax write-off and a tax deduction. Learn how each one works to reduce income taxes and ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center