Page 182 - A Canuck's Guide to Financial Literacy 2020

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Dividends

As a shareholder of a public company, you’re eligible to participate in the sharing of profits
in the form of dividends. A company will pay out dividends when there is growth in the
business and a strong likelihood of long stream of cash flows. Any profits are either
reinvested back into the company or paid out to shareholders in a form of a dividend.

Types of Dividends

There are three types of dividends, eligible, ineligible and capital dividends, each discussed
below. The type of dividends you receive impacts your tax return.

Eligible Dividends

▪ Eligible Dividends – Eligible dividends are paid out by public corporations that reside
in Canada or Canadian Controlled Private Corporations. When a dividend is paid out
by a corporation, they have to designate each eligible dividend that they pay, as
required by the Income Tax Act. These types of dividends are taxed at lower tax rate
due to “dividend gross up” and eligibility for the Enhanced Dividend Tax Credit. The
gross up amount for eligible dividends is 38%. Canadians prefer to receive eligible
dividends from Canadian corporations as they’re treated more favorably during tax
time.
▪ Gross Up: Dividends are “grossed up” because they’re paid from a
corporation’s after-tax profits. Tax has already been paid. To prevent double