Dividend taxation treatment in Canada motivates investors to buy shares from dividend paying companies. Canadian law offers a system called Dividend Tax Credit, designed to eliminate the inconvenient of double taxation. Each investor that gets dividends from a Canadian corporation also receives, from a government, the so-called dividend tax credit. In the end, when you are investing in a non-registered account, dividend payouts are less taxed than interest earned from a bond or a certificate of deposit.
How dividend taxes are calculated in Canada
Both federal and provincial governments from Canada offer to the individual investors tax credits, which are a percentage from the grossed up amount of the dividend income. There are two types of dividends: eligible dividends and non-eligible dividends.
Eligible dividends are paid by public corporations from Canada, while non-eligible dividends come from private Canadian companies.
The dividend tax credit is different for the two types of companies, but it’s always a percentage of the grossed up amount of dividends income. Other then eligible dividends are grossed up by 25 percent, while eligible ones are grossed up by approximately 41%. The sum you obtain this way is used to calculate the actual amount of the tax credit, applying a percentage that varies from province to province.
However, the amount of the tax credit generally covers the taxes already paid by the corporation for those dividends. The tax credit is deducted from the total amount of taxes that the investor has to pay.
Dividend Tax Treatment Calculation
To make things clearer, let’s take an example, based on dividend taxation treatment from British Columbia. If you have shares to a public Canadian corporation, and those shares bring you $1000 in dividends, the corporation has to pay taxes of approximately $310. This means that you actually cash $690, and, as individual, you still have to pay taxes on that income.
Grossing up your dividend income by a 1.45 rate takes you back to $1000. Then, you apply to this sum the 31 percent tax credit that works in British Columbia – $310. From the $690 dividend income, you deduct the $310 tax credit. You obtain $380, and you only have to pay taxes on that money.
Why Dividend Payout Are Grossed Up:
As demonstrated in the tax treatment calculation example, the tax system makes sure that you don’t pay taxes on the money already collected by the government directly from the corporation. This is why it is grossed up and then they apply a tax credit.
Benefits from such dividend tax treatment
The real amount of taxes paid for Canadian dividends income drops dramatically, thanks to this system. From that point of view, dividend taxation treatment in Canada is a lot friendlier to investors then the US taxation system for dividends income. The lowest tax rate on dividends, in Canada, is 3 percent, while the highest is 30 percent. As a rule of thumb, you can always consider the following tax treatment according to which type of income you are earning (tax percentages are actually lower but this quick rule helps you understand the difference between each type of tax treatment) :
Interest & revenue income: 50%
Dividend income: 30%
Capital gains income: 25%
Advantages of Canadian dividend taxation treatment
There are obvious advantages of dividend taxation treatment from Canada. While US corporations and investors complain about double taxation, Canada law pretty much solves the problem.
The amount of taxes you pay on dividend income is low – thus your profits are higher. When buying shares to Canadian companies, you should find out if the dividends paid by those companies are eligible or non eligible.
You should aim for eligible dividends, which get higher tax credit. Dividends paid by most of the public corporations from Canada are considered eligible for enhanced tax dividend credit.
Before investing your money, you should obtain all the relevant information about dividend taxation. If applied correctly, the Canadian dividend taxation treatment can save you a lot of money.
Professional help is advised in regard to Canadian Dividend Tax Treatment
However, the taxation system from Canada is quite complex. There are taxes to be paid to the federal government, and also provincial taxes. Filling the tax forms is complicated. This is why, if you decided to invest in dividend paying Canadian companies, you need to hire a Canadian accountant.
A good accountant will be able to tell you everything about dividend taxation treatment from different provinces of Canada. You can also ask for advice from Canada Revenue Agency or the International Tax Services Office.
Whether you are a resident or a non-resident in Canada, investing in dividend paying Canadian companies is a huge opportunity. To make the most of this opportunity, you should find a reliable stockbroker to help you build a solid investments portfolio.
As we stated before, getting an accountant is also important. Make sure you hire only reliable, trustworthy professionals. A short online search will help you determine if you contacted the right accounting and trading firms.