Eligible dividend is any dividend you receive as an individual, which the paying Canadian corporation has designated as eligible. The paying corporation should designate dividends as eligible in writing. The corporation may notify you in the form of a letter or cheque stub. If you own stock of a public corporation, check out the dividend announcement or press release, which may include information on the dividend type. This information may also be available in the corporation's website, in its annual or quarterly reports, or other publications.
When do eligible dividends pay out?
Typically, this dividend is paid out of income for which the corporation had to pay tax at full corporate tax rates. Also, dividends received by shareholders are taxable. Here, an enhanced dividend tax credit for eligible dividends comes into the picture. This credit aims to offset the effect of double taxation and make it fair for all. The tax credit is available from both the federal as well as provincial governments.
Let's look at the taxation of eligible dividends, and the working of tax credits.
Taxation for eligible dividends
Eligible dividends had a gross-up rate of 38% in 2013. So if you have received an eligible dividend of $500, the grossed up amount will be $500 x 138% = $690. You need to add $690 to your taxable income.
Federal tax credit on eligible dividends
For eligible dividends received after the year 2005 from certain corporations, 6/11 or more than half of the gross-up amount can be claimed as a non-refundable tax credit. CRA allows two ways of calculating the amount of federal tax credit. As per method one, the tax credit can be calculated as 15.0198% of the grossed up amount of eligible dividends. So for a grossed up amount of $690, the tax credit is $103.64 (15.0198% of $690). Another way is to calculate it as 6/11 of the grossed-up portion of the eligible dividend. In this case, the grossed up portion is $190. So the tax credit amount will be $190 x 6/11 = $103.64.
Provincial tax credit on eligible dividends
Depending on the province, provincial tax credit is available in the range of 5.4% (Newfoundland) to 15.08% (Yukon). This amount is calculated on the grossed up amount of taxable dividends. So if you live in Newfoundland, the provincial tax credit on a dividend of $690 will be $37.26 (5.4% of $690).
Tax calculation after combining both tax credits
You can get significant tax savings by combining two tax credits. To continue from the above example, suppose you fall under the marginal tax rate of 25%. Your approximate tax on this dividend will be $172.5 ($690 x 25%). And you have received total dividend tax credits of $140.9 (both federal and provincial combined). So in this case your tax liability will be only $31.6 ($172.5-140.9). Note the tax credits are non-refundable. So if, in any case, the tax credit amount is more than the tax paid, there will be no refund.
How do Eligible Dividends affect your Tax?
Eligible Dividends are calculated as part of your income and subject to tax rules and deductions as outlined above. You can calculate the Eligible Dividends tax and income uplift of Eligible Dividends on the Tax Calculator (select advanced for Eligible Dividends).
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