Dividend-paying stocks are a popular choice for investors since you can get some cash by simply holding certain investments. But how exactly are the earnings from these investments taxed? What is the rate of tax on dividends in Canada? More specifically, how much tax do you pay on dividends in Canada when tax season rolls around?
Let’s take a closer look at dividends, and how the government views them in terms of taxation.
Key Points
- Dividends are taxed differently than capital gains.
- Dividends can be broken down into eligible or non-eligible, each of which is also taxed differently.
- Non-eligible dividends are taxed at a rate of 15%. Eligible dividends are taxed at a rate of 38%.
What Are Dividends?
Dividends are payments that companies make to shareholders to share profits earned. Shareholders are paid according to the number of shares owned. So, more shares equal higher dividend payouts.
Dividends are paid out based on the company’s total earnings. Typically, dividends are paid when a company has extra cash that is not being reinvested, which is then divided accordingly among all shareholders.
Payments can be made on a monthly, quarterly, bi-annual, or annual basis.
Types Of Dividends: Eligible vs. Non-Eligible Dividends
Dividends are classified as either “eligible” or “other than eligible”:
Eligible Dividends
Dividends that are categorized as “eligible” means the company paid higher tax rates. In return, shareholders will also pay more taxes and receive a higher tax credit. The dividend gross-up is 38% for eligible dividends.
Other Than Eligible Dividends
Dividends that are categorized as “other than eligible” means the company paid lower tax rates. In return, shareholders will also pay fewer taxes and receive a lower tax credit. The dividend gross-up is 15% for non-eligible dividends.
Federal Dividend Tax Rate In Canada Calculation
To help you better understand how federal taxes work on dividends, let’s illustrate by assuming the following:
- You received $2,000 in dividend payments for your stocks in the previous tax year.
- The eligible dividends portion is $1,500 of the total, and the non-eligible dividends portion is $500.
- Your nominal tax rate based on your income is 30%.
To determine your taxable income, you will first need to gross-up each amount at the proper tax rate:
- Eligible dividends: $1,500 x 1.38 = $2,070 (grossed-up amount)
- Non-eligible dividends: $500 x 1.15 = $575 (grossed-up amount)
- Total taxable amount = $2,645 ($2,070 + $575)
- Federal tax payable = $793.50 ($2,645 x 30%)
Dividend Tax Credit
From here, you’ll need to apply the federal dividend tax credits, which are applied to the grossed-up amount. The Dividend Tax Credit rate for eligible dividends is 15.0198%, and 9.031% for non-eligible dividends.
In this example, you’d be able to subtract your federal table payable by the Dividend Tax Credit, which is equal to $448 ($2,070 x 15.0198% + $575 x 9.031%).
| What Is A Dividend Tax Credit? Dividends are paid to shareholders using a company’s after-tax profit, and shareholders are also taxed when they receive their dividends. In order to offset this double-taxing, dividend tax credits are applied to the tax liability on the “gross-up” component that companies pay. This gross-up approximates the amount of income a company would have to earn to issue a specific dividend and accounts for the portion of tax that a business pays on income prior to paying dividends. |
Tax Credit For Foreign Dividends
The dividend tax credit can only be used for Canadian stock accounts and cannot be applied to US or other foreign stocks. The majority of foreign dividends are assessed as withholding tax. The exact amount of this tax varies for each country.
If you wish to invest in stocks originating outside of Canada, you should get some guidance from an accountant.
How To Report The Taxable Amount Of Dividends
When you complete your tax return, you’ll need to report your dividends on your return as follows:
| Taxable Amount of Dividends (Eligible and Other Than Eligible): Enter the total of the amounts shown in the boxes on the following slips on line 12000 of your tax return: | Taxable Amount of Dividends (Other Than Eligible): Enter the total of the amounts shown in the boxes on the following slips on line 12010 of your tax return: |
| Boxes 32 and 50 of T3 slips | Box 32 of T3 slips |
| Boxes 25 and 31 of T4PS slips | Box 25 of T4PS slips |
| Boxes 11 and 25 of T5 slips | Box 11 of T5 slips |
| Boxes 130 and 133 of T5013 slips | Box 130 of T5013 slips |
Ways To Pay Your Taxes When You Can’t Afford It
- Use Government Payment Options – If you’re unable to pay back your taxes, you can make a payment arrangement with the CRA or request taxpayer relief. Both options can help make your tax payments more affordable.
- Use Your Credit Card – If you just need a little extra time to come up with the money to pay your taxes, consider using your credit card. You can use a third-party service like PaySimply to pay your taxes via credit card.
- Use A Personal Loan – If you can’t come to an agreement with the CRA, you can use a personal loan instead. With a personal loan, you can spread your payments over a few months to a few years. Personal loans typically have lower interest rates than credit cards. However, to qualify for the best rates, you’ll need good credit. As such, it’s important to check your credit scores ahead of applying for a loan.
What’s The Difference Between Dividend Stock Yield and Capital Gains?
A dividend yield tells you the percentage of a business’s share price that is paid out in dividends every year. It is calculated by dividing the company’s total annual dividends per share by the current stock price.
On the other hand, capital gains refer to the increase in the value of an asset, which is typically realized when that asset is sold. Capital gains come with tax advantages for Canadian investors because you’re only taxed on 50% of gains up to $250,000 at your regular tax rate (when in a taxable account). For gains over $250,000, 66.7% will be taxed.
For instance, let’s say you realize a gain of $5,000 when you sell an asset, and your regular tax rate is 30%. That means you pay a 30% tax on $2,500 (50% of the $5,000 gain), which would come out to $750, instead of paying your 30% tax rate on the full $5,000.
Why Should You Invest Your Dividends?
While you could take your earnings from your dividend payouts and spend it as you wish, you might want to consider reinvesting them instead, for a couple of reasons:
- Continuous stream of income – You can use your dividend stocks to provide you with an ongoing income stream. The income earned from your dividends can be continually re-invested in future shares, which can help you build wealth over time, save for retirement, or have on hand for emergencies.
- Tax credits – Investors get tax credits on dividend income earned from dividend-paying stocks.
What To Consider When Choosing Dividend Stocks
Before buying dividend stocks, consider the following first:
- The company’s reputation – Make sure the company you’re buying stocks in has a solid track record of being profitable and paying out dividends as promised.
- Annual dividend per share price – Maximize your investment by choosing a company that pays out a healthy yield or annual dividend per annual share price. That way you can get a sense of how much you could potentially receive in dividends for each dollar invested.
Keep in mind, however, that a high yield doesn’t always mean the stock is good. It’s prudent to look at the company’s fundamentals, including its current debt and future outlook for growth. Also, pay attention to any fluctuations in stock price, which is an indication of how a company’s stock performs over time.
Final Thoughts
Stocks that pay out dividends can give you another regular stream of income and contribute to your cash flow. But you’ll have to pay taxes on these earnings, much like you’d pay taxes on other forms of income. Consult with a tax specialist to ensure you’re paying taxes on these earnings appropriately.
