Page 183 - A Canuck's Guide to Financial Literacy 2020

183

taxation, dividends are grossed up and offset by a dividend tax credit. Adding
the gross up amount to the dividend is as if the corporation had not pay
corporate income tax. The grossed-up amount of dividend is added to your
income but keep in mind that the Enhanced Dividend Tax Credit gives you
credit for the amount of tax that the corporation has already paid. This would
prevent double taxation.
▪ Gross Up Amount of Eligible Dividends: 38% (2020)

Ineligible Dividends
▪ Ineligible Dividends – Non eligible dividends are regular dividends paid out by
Canadian corporations, public or private. These dividends are taxed at a lower
corporate income rate and not eligible for the enhanced dividend tax credit.
▪ Gross Up: Non-eligible dividends are grossed up as well but at a lower rate to
reflect for the lower tax paid. The grossed up amount must be included in your
income which will be offset by a dividend tax credit. The dividend tax credit
percentage for ineligible dividends is lower than eligible dividends to reflect for
the lower tax rate the corporation paid.
▪ Gross Up Amount of Ineligible Dividends: 15% (2020)

Dividend Tax Credit

When dividends are paid by a corporation, they’re either coded as eligible or ineligible.
Depending on the type, these dividends are grossed up and included in a taxpayer’s
income. However, they’re offset by a Dividend Tax Credit. This dividend tax credit prevents
double-taxation of dividend income since the corporation already paid tax on the dividends.
Below is an example of the taxation of a eligible dividend.

▪ Example of Gross Up of Eligible Dividends: James received $1,000 of eligible
dividends from a Canadian corporation in 2019. He received this dividend amount out
in his non registered account. Keep in mind that you can’t gross up dividends in a
registered account. On his T5 tax slip, James would see three amounts regarding this
dividend.
▪
▪ Eligible Dividend Amount: $1,000
▪ This amount of $1,000, is paid to you with company’s after tax
profits.
▪ Grossed Up of Eligible Dividend Amount: $1380
▪ The $1,000 dividend is grossed up by 38%. This is approximately
how much pre-tax profit the corporation would have had to earn in
order to pay you the $1,000 in dividends. This assumes a tax rate of
38%. The amount of $1380 is added to your income.
▪ Federal Dividend Tax Credit: $1380 x 15.02% = $207.28
▪ The dividend tax credit helps offset the gross up amount for the
eligible dividend and gives you credit for approximate amount of tax
that the corporation has already paid. The Federal Dividend Tax
Credit on eligible dividend rate is 15.02%.

▪ Provincial Dividend Tax Credit: $1380 X 10% (ON) = $138.0