Page 184 - A Canuck's Guide to Financial Literacy 2020

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▪ On top of the federal tax credits, provinces also have their own
additional tax credit that they provide. In Ontario, this amount is
10%. However, this varies from province to province.

Example of an individual in Ontario earning $100,000 in Eligible Non-
gross income and receiving dividends in 2020 Eligible
Dividend Issued $100 $100
Grossed-Up Dividend (%) $138 (38%) $115
(15%)
Marginal Tax Rate Ontario ($100,000 Income) 43.41% 43.41%
Tax Owed on Dividend $59.90 $49.92
Federal Dividend Tax Credit (%) $20.73 $10.38
(15.02%) (9.03%)
Provincial Dividend Tax Credit (ON) (%) $13.80 $3.43
(10%) (2.98%)
Combined Federal/Provincial (ON) Tax Credit $34.53 $13.81
(25.02%) (12.01%)
Final Tax Owing $25.37 $36.11

Capital Dividends

Capital dividends are considered “return of capital” and paid out of a corporation’s capital
dividend account (CDA). The capital dividend account is a special corporate tax account
under the Income Tax Act, designated to allow tax-free amounts received by a private
corporation to be distributed tax free to shareholders of the corporation. All private
corporations in Canada including, non-Canadian controlled are eligible to have a capital
dividend account. The capital dividend account is to be monitored and reported on a
corporation’s T2 corporate income tax return.

Corporate life insurance policies typically get deposited in a corporation’s capital dividend
account.

▪ Example: If the corporation were to receive a death benefit of $1,000,000 and the
adjusted cost base of the policy at the time of the insured holder’s death is $100,000,
there will be $900,000 credited to the corporation’s Capital Dividend Account. The
$900,000 would be paid tax-free to the share holders while the $100,000 would be
paid to shareholders as a taxable dividend.