The Dividend Tax Rate in Canada: What You Need to Know Now

Quick Links

1. What Is a dividend tax credit?
2. How are Dividends Taxed in Canada?
3. Federal Dividend Tax Rate
4. Dividend Tax Credit to Foreign Dividends
5. Taxable Dividends and Interest Income
6. Dividends From Real Estate Investment Trusts (REIT)
7. Dividend Stock Yields and Capital Gains
8. Dividend Defined
9. Declaring a Dividend
10. Dividend Payouts
11. Stock Valuations
12. Why is Dividend Investing a Good Move?
13. About the Dividend Retirement Plan (DRIP)
14. How to Choose Dividend Stocks
15. Look to Past Trends on Dividend Stocks
16. Dividend Yield
17. Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs)
18. Frequently Asked Questions About The Dividend Tax Rate in Canada: What You Need to Know Now

If you live in Canada and are an investor, you can benefit from the dividend tax rate. Why is this exactly? A dividend stock in Canada will share the tax burden with the company you’re investing in. If the company performs well financially because of the money you invested, you get to keep the stock and any future dividend returns. Not only that but you pay less tax on dividend income.

Canadian companies will often qualify for a tax credit on dividends when they pay out dividends from the Canadian Revenue Agency. If you’re someone who invests without any professional help, you want to really understand how the CRA views your dividend income and how it can work for you. For some Canadians, it may not make sense to invest in this way while others can gain a lot of benefits.

What Is a dividend tax credit?

A dividend is money that is paid out of profits of a corporation to owners, which are known as shareholders. The shareholders will vote in a Board of Directors and approve what is tax-free when it comes to dividend income. This is all done through a Board Resolution where they say a dollar value per dividend. A dividend is essentially money paid out to shareholders on a per-share basis, which comes out of the corporation’s profits that the shareholders have invested in through shares.

This brings us to what a dividend tax credit is. It’s the amount that goes toward tax liability on the gross-up component of dividends that a Canadian company will have to pay. The tax credit is only for a Canadian stock account. You won’t be able to apply this credit on stocks that are out of the country. You can access these stock accounts through an online or retail broker.

It’s important to understand that the dividend gross-up and tax credit are used as a way of not having to pay double taxes on dividends. They are paid out by the corporation from any profits (after tax). The whole reason for a dividend gross-up is in an effort to restore the dividend amount to the amount a firm would pay if it’s didn’t have to pay any tax. Dividends are paid out to share holders from any earnings after tax.

What makes a dividend eligible?

They are received from a public or private corporation that hasn’t received a small business deduction and have a net income of over CAD$500,000. While the firm will pay less tax on non-eligible dividends, you’re entitled to a lower tax credit as a shareholder.

Dividends are federal and provincial taxes. Qualified dividends are taxed at 15.0198 percent with the tax portion of non-eligible dividends being taxed at 9.031%.

How are Dividends Taxed in Canada?

If you’re a Canadian taxpayer that holds a Canadian dividend, you can be eligible for the tax credit. Any dividend income is taxed at a lower rate. If you’re in the highest tax bracket you pay tax of 39% on dividends as opposed to paying 53% on interest income. If you’re in the highest tax bracker, you pay tax on capital gains of about 27%.

If you hold dividend stocks, you get a bonus because they can be eligible for a tax credit in Canada. The credits are available on dividends paid on stocks that are held outside of RRSP, RRIF, or a TFSA and will cut your tax rate.

Federal Dividend Tax Rate

1. To calculate the federal dividend tax rate, you would multiply whatever the eligible dividend is by 1.38. This is because eligible dividends are taxed at 38%, giving a mathematical multiplier of 1.38. This is going to give you a gross-up amount.
2. From there, you multiply any non-eligible dividends by 15%, making the multiplier 1.15. Then you add the first amount (eligible dividend) with the non-eligible dividend amount. If you have to pay the 30% nominal tax rate on gross-up dividend income, you multiply the total amount by 0.30 to get the total.
3. Federal dividend tax credits also need to be applied. The rate for eligible dividends is 15.0198% with the non-eligible dividends being 9.031%. Tax credit is applied to the gross-up tax amount and not the total income that is taxed.
4. You don’t apply the tax credit to the total taxable income to figure out how much you owe in taxes. The tax credit should be applied to whatever taxes are due on the taxable dividends. If dividends are earned and you have a lower tax bracket, the tax rate is 18% on the total amount of your taxes owed.

Regardless of what your tax bracket is, the dividend credit will save you some money. You may also have tax credits at a provincial level, which will further reduce the taxes you have to pay. Each province is different when it comes to the dividend taxes.

Federal tax rates based on earnings…

Dividend Tax Credit to Foreign Dividends

You can’t apply the Canadian dividend credit to stocks that come from outside of the country. Many of the foreign dividends are assessed withholding tax but this will depend on the country. If you want to invest in stocks outside of Canada, it’s best to speak with a financial professional like your accountant.

Taxable Dividends and Interest Income

When it comes to taxes, income from interest doesn’t give you the same benefits that you get from income coming from stock dividends or capital gains. Investing in interest income include things like rental properties or high interest savings accounts. Any interest income that you make on these are fully taxable so if you get $1,000 worth of interest income, you’re taxed at 30% so you have to pay $300 in taxes.

Dividends From Real Estate Investment Trusts (REIT)

When you invest in REIT, it’s more advantageous to hold the investment in a registered account. This isn’t considered a dividend but instead, a distribution. It may include dividends but also capital gains or interest. If you hold an REIT in a registered account, taxation may be easier as there are different rates.

Dividend Stock Yields and Capital Gains

Many investors that understand the market will often put their focus on dividend yields. This is the total annual dividends per share by a business that is divided by the real time stock price. There are some companies that have been paying dividends for many years. To be clear, stock dividends aren’t the same as capital gains one gets from selling a stock. Capital gains from stocks offer Canadians tax advantages as well.

If you make $1,000 in capital gains, you’re taxed on half of the gain with your regular tax rate. So if you’re being taxed at 30% and make $1,000 in capital gains, you will pay 30% tax on $500. The downside is that you no longer hold the asset.

In Canada, capital gains come with better tax treatment and get taxed at a lower rate than dividends. The capital gains tax will be paid on profit made from the asset. This asset can be a bond, share of stock, or things like buildings and equipment. There’s something called the capital gains inclusion rate, which calculates how much of a portion you get. With a dividend yield, you keep the asset and get the future income that might come from it.

Dividend Defined

The dividend is a payment companies make to share profits with their shareholders. It will be paid in a few different way, either monthly, quarterly, twice a year, or once a year. Investors make money based on their investment in the company. Dividends will be paid out based on how many shareholders are in the pool. Often, a company will pay out dividends when they have extra money that they’re not reinvesting with. The extra money is divided among all the shareholders.

Declaring a Dividend

A company will announce what the dividend per share is for any shareholders that qualify. There will be a press release, which will include:

• The date shareholders can expect to get their payment, also known as the Payment Date.

• The date that share s no longer trade with a dividend. This is known as the Ex-Dividend Date. If you, as a shareholder, trade on or after the date, you won’t be entitled to any dividend payment that is being sent out.

• The date the dividend is declared, the Declaration Date.

• The list a company will review to see the eligibility of shareholders, known as the Record Date.

Most dividends on shares will commonly be paid out quarterly but this does vary. Sometimes, one payment is made for special dividends. How much you get will depend on how many shares you have in the company. If you own 100 shares and get 0.50 cents per share, you would earn $50 annually. As a shareholder who is due to receive dividends, you’re listed as a Shareholder of Record with the company you invested in. You own the stock and when the dividend is paid, it is in close relation to the financial well being of the company along with the share price.

If the share has a high dividend yield, this signifies the company is doing well financially. In contrast, it can also mean that the company is using extra money to pay investors instead of using it to reinvest.

Dividend Payouts

There is some risk when investing in a company. If the dividend payout reduces after the company had been paying you out dividends, it could mean the company is in financial trouble. On the other hand, it could signify that the company is planning to grow. Before investing in a dividend stock, you should ask questions to gauge the viability of the company.

• What exactly does the company do?

• What are the projections in terms of growth in the future?

• What is a stock’s price to earnings?

Also, you should have access to the balance sheet or at least an overall picture of how the company has been doing. All of this information should be easily accessible with full transparency.

Stock Valuations

There may be a reduction on share dividends or they may be completely eliminated. If this happens, you will want to consider moving your money to a different stock. Some companies may be using money it would normally return to investors to expand and grow. Before you even invest in a company, you want to know their future plans.

Why is Dividend Investing a Good Move?

The positive benefits of investing in dividends includes:

• A continuous income stream. This income can be reinvested to grow your portfolio through future shares or a dividend reinvestment plans.
• You can use dividend investing for when you retire or if there are emergencies.

• You get tax credit on the dividend income you make from dividend paying stocks. This means you’ll be paying less taxes.

About the Dividend Retirement Plan (DRIP)

If you are a DRIP investor, you can take the dividends made from stocks and turn them into extra shares. You can take the money for the stock or you can use it to buy future shares. This particular plan can save you money as you don’t have to pay a commission. In general, most companies paying out dividends have a good cash balance so they’re often considered stronger businesses. This makes it a low-risk investment.

How to Choose Dividend Stocks

If you’re looking to add dividend stocks to your current investment portfolio, make sure to invest in reputable company that have proven to pay out dividends consistently. Even if a company has a good track record, it doesn’t mean they’ll continue to pay out in the future. Do your due diligence and really look at the company stats.

Check out the yield or annual dividend per annual share price so you can see what your potential return will be on every dollar you’re planning to invest. You also need to check out the fluctuations in the price of the stock. This is a direct reflection of how the company is performing. When the value of a stock grows, the dividends value will usually increase and if demand increases so does the price of the stock. A dividend is not directly associated with the stock price and the dividend yield could fall if the price per share increases. The dividend yield is determined through dividing annual dividends paid per share by the price of the stock’s share.

Look to Past Trends on Dividend Stocks

As you do your research with dividend stocks you’re interested in, it’s good to look at the dividend payouts they’ve made over the past few years. If you notice that the dividends are slowly declining, it’s a likely sign that investing is a bad idea. You may see fluctuations, which can be explained in the annual report of the company. If they are looking to grow, this could mean that you won’t see dividend payouts for some time. Dividends fluctuate and there are risks even if a company shows to have strong financial health. The economy can change quickly, causing a company to stop paying dividends to it can survive.

Dividend Yield

This calculation represents the percentage of a return the company pays out yearly in dividends relative to the price per share. Not every company that sells shares are able to pay out dividends. If you see the dividend yield on a stock quote, consider it to be positive. To figure out what the dividend yield is on a stock, you take the annual dividend per share and divide it by the current price of the stock.

Dividend yield = annual dividend by stock price x 100

Example

1. A company pays an annual dividend of $1.44
2. The stock’s price is $53.00
3. $1.44 divided by $53 x 100 = 2.7%

It’s important to note that the dividend yield isn’t guaranteed and can fluctuate based on changes in the market. Companies have the right to choose whether to pay out the money or not.

What You Can Do to Pay Less Tax With Dividends

While it’s not always possible, there are some ways you can avoid paying a high amount of taxes on dividends. You can try to stay in a lower tax bracket or invest in accounts that are tax exempt. When you invest in accounts that are driven by education, you may avoid paying taxes. You can also invest in companies that don’t pay dividends.

Dividends make up one element of the total return you’ll get when investing in a stock. The other element is the price of the share over time. If your stock price should increase 4% throughout the year, you’ll get a 2% dividend yield with a total return of 6%. This is based on you holding the stock for the whole year. If you have a dividend-paying stock and there’s a decrease in the share price by 3% but you get 1% in dividends, the total decline goes to 2% for the total return. Planning for the long term is where you can really take advantage of dividend stocks.

Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs)

When we talk about the dividend tax credit, this is based on stocks that are owned outside of your TSFA and RRSP investments. The credit won’t be applicable for these types of accounts because dividends aren’t taxed on these investment types. RRSPs are tax deductible with any contribution you make reducing the tax amount you’ll owe. TFSAs work a little bit differently. Withdrawals you make from a TFSA aren’t taxed but RRSP withdrawals are. You can use RRSPs to buy a home before you retire, which can help with gaining mortgages you require.

Dividend paying stocks are great for long term investors because you also reduce the amount of taxes you pay. Dividend stock investing gives you leverage that will help you to see big returns with very little risk for the sake of gaining wealth.

Investing in a dividend stock can be a great way to set yourself up for the future. It’s one of the ways to gain financial wealth along with healthy decisions with things like personal loans to improve your home. If you’re not feeling confident in your ability to decide on what stocks to buy, there are companies out there that can help you build your portfolio. You are investing while also being able to take advantage of a tax break in Canada. It’s a great addition to your other investments for the future.

Frequently Asked Questions About The Dividend Tax Rate in Canada: What You Need to Know Now

What exactly are dividends?

This is the payment a company will make based on the profits it has made. The dividends are paid out to shareholders. This earns the shareholders a return on their investment. Dividends are paid out based on the amount of shares that each shareholder owns. Often, the dividend is paid at a time the company has extra money that it doesn’t need to reinvest into the company.

The corporation will decide the eligibility of a stock’s dividend based on how much it earned. Earnings don’t have to be massive, and the company doesn’t have to be private.

Is it better to take dividends or salary in Canada?

Dividends can potentially reduce taxes when compared to wages. Paying dividends takes away the need to contribute to CPP. This can lower your personal costs. CPP costs you 5.7% on the first $64,900 earned.

What is the frequency of dividend payouts?

Monthly, quarterly, twice per year, or yearly.

What makes a dividend eligible?

Dividends are received from public and private corporations who haven’t received small business deductions. They have to have high earnings (over CAD $500,000).

What’s the Canadian dividend tax rate?

This is the tax rate that will be applied to dividend income. It’s not what you’ll pay however. The federal government will add 38% to eligible dividends and 15% on non-eligible dividends. This gives the gross-up total. The federal government has a fixed tax credit of 15.0198% on eligible dividends. For non-eligible dividends, there’s a rate of 9.031%.

How do I invest in dividend stocks?

You first need to decide what stock you want to invest in. You can choose from a few different trading platforms or choose a brokerage. You then want to choose an investment style. Maybe you’re looking for individual stocks that pay dividends. Know the health of the company that is paying dividends and find out where you can buy their shares. Do be sure to look at what dividend payments have looked like over recent years as well as the financial health of the company currently.

How does the dividend yield help me choose a stock?

When you research the dividend yield, this will help you decide if a company stock is worth your investment. The dividend yield will show you how much the company has been paying out dividends yearly and the company’s market price per share. Of there are high dividend yield, it can mean higher dividends for you.

What is the income tax rate on dividends in Canada?

This will depend on your calculated nominal tax rate as it’s based on the individual.

How much tax is paid on a dividend?

The dividend tax rates 7.5% (basic), 32.5% (higher) and 38.1% (additional).

Are dividends and stocks taxed similarly in Canada?

How dividends and stocks are taxed are totally different. With capital gains of stocks, half of it is taxable at your current tax rate. So say you have $1,000 in capital gains, you’ll pay tax on $500. If your tax rate is 30%, you pay $150 in taxes on your capital gains.

When you get dividends as a shareholder, you have to declare it on your income tax. With the breakdown provided, you pay $214.07 for a $1,000 dividend.