How Are Dividends Taxed In Canada?

How Are Dividends Taxed In Canada?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated April 13, 2022

Dividend-paying investments allow you to take advantage of cash flow as your stock values increase. But how exactly are the earnings from these investments taxed?

After all, any returns on investment are considered a form of income. But how exactly are dividends taxed when tax season rolls around?

Let’s take a closer look at dividends, and how the government views them in terms of taxation.

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

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. Eligible dividends are taxed at a rate of 38%.

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. Non-eligible dividends are taxed at a rate of 15%.

How Do Dividend Taxes Work In Canada?

Dividends are taxed at both the federal and provincial levels. The Canada Revenue Agency (CRA) taxes at a rate of 15.0198% on the tax portion of eligible dividends and 9.031% for non-eligible dividends. 

Since businesses already pay taxes on the funds distributed to shareholders in the form of dividends, the government taxes these payments at a lower tax rate compared to other types of income. As such, shareholders pay lower tax rates on income made from dividends. 

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Federal Dividend Tax Rate Calculation 

To help you better understand how federal taxes work on dividends, let’s illustrate 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)
  • Tax amount paid = $793.50 ($2,645 x 30% tax rate)  

From here, you’ll need to apply the federal dividend tax credits, which are applied to the grossed-up amount. The rate for eligible dividends is 15.0198%, and 9.031% for non-eligible dividends. 

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.

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 slipsBox 32 of T3 slips
Boxes 25 and 31 of T4PS slipsBox 25 of T4PS slips
Boxes 11 and 25 of T5 slipsBox 11 of T5 slips
Boxes 130 and 133 of T5013 slipsBox 130 of T5013 slips

Check out the difference between a T4 and a T4A.

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. 

Find out if you’re still a Canadian tax resident if you live outside of Canada.

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 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 the gain at your regular tax rate. 

For instance, let’s say you realized a gain of $5,000 when you sell an asset, and your regular tax rate is 30%. That means you pay 30% tax on $2,500, which would come out to $750, instead of paying your 30% tax rate on the full $5,000. 

What’s The Difference Between Taxable Dividends And Interest Income?

In terms of taxation, the income you earn from dividends or capital gains is more beneficial than income earned from interest. Investments that earn interest include things like a high-interest savings account, rental properties, bonds, or a certificate of deposit (CD). 

Any interest earned would be fully taxable. So, if you earned $5,000 in interest income, you’ll be taxed on the entire amount at your regular tax rate.

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. Also, pay attention to any fluctuations in stock price, which is an indication of how a company’s stock performs over time. 

Dividend Tax Rate FAQs

What is the dividend tax rate in Canada?

When you receive a dividend payout, you must declare the dividend on your income tax return. The tax portion of eligible dividends is applied with a rate of 15.0198%, and a rate of 9.031% for non-eligible dividends. 

Are dividends and stocks taxed the same in Canada?

No, dividends and stocks are not taxed the same way. If you earn capital gains on stocks, only 50% of those gains are taxed at your nominal tax rate.  Dividends, on the other hand, are taxed a little differently. The taxable income in this case involves different tax rates for eligible and non-eligible portions of the dividend. 

What is the payout ratio?

The payout ratio refers to the dividend paid relative to a business’s earnings. When payouts are high, more of the company’s earnings go towards dividends. When payouts are low, more of the company’s earnings are likely invested towards the company’s growth.

What is the dividend yield?

The dividend yield refers to the percentage of the return a company pays out every year in dividends in relation to the price per share. This figure is calculated by dividing the annual dividend per share by a stock’s current price.

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. 

Rating of 4/5 based on 3 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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