Question of the Week: What is the dividend tax credit?

We’ve got another tax question this week regarding the taxing of dividends. Last week we looked at capital gains tax. Some investors believe capital gains and dividends are taxed the same. They are not. Typically, dividends are taxed higher than capital gains, but lower than interest.

In Canada dividends from taxable Canadian corporations can be eligible for the dividend tax credit. Corporations designate their dividends as eligible or other than eligible. There is a difference in the tax rate for eligible and other than eligible dividends. The designation of your dividends can be found on your tax slips.

When you do your income taxes annually you declare the grossed-up amount of your dividend income as part of your annual income. To offset the higher amount, you can receive a bit of a tax break on your dividend income through the dividend tax credit.  The tax credit is determined by federal and provincial rates depending on the province or territory in which you reside.

If you receive dividends from Canadian corporations and have questions about your taxes, be sure to bring up specific questions with your adviser and a tax expert to make sure you are using the dividend tax credit properly.