How are dividends taxed in Canada?
Canadian dividends are taxed through a gross-up and credit system. You add a gross-up to the actual dividend (38% for eligible, 15% for non-eligible) to approximate pre-tax corporate income, apply your marginal rate to the grossed-up amount, then subtract a dividend tax credit. This integration prevents double taxation of corporate profits.
What is the difference between eligible and non-eligible dividends?
Eligible dividends are paid from corporate income taxed at the general rate (typically large public companies); they carry a 38% gross-up and a larger tax credit, so they are taxed more favourably. Non-eligible dividends come from income taxed at the small business rate; they have a 15% gross-up and a smaller credit.
Are dividends taxed less than employment income?
Often yes, especially eligible dividends at lower and middle incomes, because the dividend tax credit reflects tax the corporation already paid. At the top marginal rate the advantage narrows. Dividends are also not subject to CPP or EI.
Do US dividends qualify for the dividend tax credit?
No. The Canadian dividend tax credit applies only to dividends from taxable Canadian corporations. Foreign dividends, including US dividends, are taxed as ordinary income and may also have foreign withholding tax, for which you may claim a foreign tax credit.