Is There Tax on Dividend Income?

Short answer, yes: dividend income in Canada is taxable. How much you pay depends on the type of dividend, your total income, and your province of residence. Dividend income receives more favourable tax treatment than employment or interest income because of the gross-up and credit system used by the Canada Revenue Agency (CRA).

This article explains how dividend income is taxed, how the Federal Dividend Tax Credit works, and what to know if you earn dividends from Canadian or foreign investments.

Understanding Dividend Income

A dividend is money paid to you by a corporation as a return on your investment, whether you own shares in a private company or dividend-paying stocks in public markets.

For a small business owner, dividends are often paid from a Canadian corporation’s retained earnings after paying corporate tax. For investors, dividends are payments from companies or mutual funds they hold.

There are two main categories of dividends in Canada:

1. Eligible dividends: Paid from income taxed at the general corporate rate.
2. Noneligible dividends: Paid from income taxed at the small business rate, typically by Canadian-controlled private corporations (CCPCs).

Some corporations may also pay capital dividends or special dividends, which have separate tax treatments under specific CRA rules.

How Dividend Taxation Works in Canada

Dividend income is taxed through a gross-up and tax credit mechanism to prevent double taxation of corporate profits.

1. The corporation pays corporate tax on its profits.
2. The shareholder receives a dividend from after-tax profits.
3. The CRA grosses up the dividend, increasing the amount reported on your tax return.
4. You claim a Federal Dividend Tax Credit and a provincial tax credit (via Form 428) to reduce your total tax liability.

This ensures the total tax paid between the corporation and the shareholder is roughly equal to what would have been paid if the income had been earned personally.

Eligible vs Ineligible Dividends

The type of dividend affects how much tax you pay:

• Eligible dividends: These are grossed up by 38 percent and benefit from a higher Federal Dividend Tax Credit.
• Non Eligible dividends: These are grossed up by 15 percent and receive a smaller credit.

Because of this difference, eligible dividends generally result in lower taxable dividend income and smaller overall tax liabilities.

 Comparison of Eligible vs Ineligible Dividends

(Rates vary by province and taxation year. Quebec applies its own dividend tax credit structure under Revenu Québec.)

Federal and Provincial Tax on Dividends

Your total tax rate depends on your income level, your province, and whether your dividends are eligible or ineligible.

For example:

• In Ontario, eligible dividends are taxed around 25 percent at higher income brackets, while noneligible dividends approach 45 percent.
• Quebec applies its own provincial tax credit, with comparable overall rates but different income thresholds.
• British Columbia provides slightly lower effective rates due to higher provincial credits.

These calculations are reflected on Schedule 1 (Federal Tax) and Form 428 (Provincial Tax) of your personal income tax return.

Reporting Dividend Income on Your Tax Return

You’ll usually receive a T5 slip (Statement of Investment Income) from your corporation, brokerage, or financial institution. If you operate a CCPC, your accountant will issue this slip when dividends are declared.

Your return must include:

1. The actual dividends received
2. The grossed-up taxable dividends
3. The dividend tax credits claimed

Tools like TurboTax Canada or professional accounting software can help ensure these amounts are entered correctly for the appropriate taxation year.

Dividends vs Salary vs Interest Income

Business owners often use a mix of salary and dividends to balance personal tax, corporate deductions, and long-term financial goals.

Example: Tax on $50,000 in Dividends

Suppose you receive $50,000 in eligible dividends in Ontario. The CRA grosses up that amount to roughly $69,000 for reporting purposes. You then claim both the Federal and provincial dividend tax credits, reducing your payable tax significantly. 

If the same $50,000 were paid as noneligible dividends, your gross-up would be smaller, but so would your credits, resulting in a higher net tax.

Foreign Dividends and Other Investment Income

If you earn dividends from foreign investments, such as U.S. dividend-paying stocks, these are treated as foreign dividends and don’t qualify for the Canadian dividend tax credit. They are included in full as taxable income, often with foreign withholding tax applied.

You must also report interest income separately. Unlike dividends, interest income doesn’t receive any preferential tax credit and is taxed at your full marginal rate.

Key Takeaways

• Dividend income is taxable but benefits from credits that lower your effective tax rate.
• Eligible dividends receive higher credits than non eligible ones.
• Foreign dividends are fully taxable without access to Canadian credits.
• Dividend income doesn’t contribute to the Canada Pension Plan.
• Mixing dividends and salary can improve both personal and corporate tax outcomes.
• Alternative Minimum Tax may apply for very high-income earners with large dividend allowances.
• Always ensure taxable dividends are properly reported on the correct T5 slip and matched on Schedule 1 and Form 428.

Final Thoughts: Plan Your Dividend Strategy

Dividends can be one of the most tax-efficient ways to pay yourself or earn income from investments, but strategy matters. Poor timing or misclassification can increase your personal tax burden and reduce corporate flexibility.

At Mesa CPA, we help business owners and investors structure their income mix, manage business taxes, and comply with CRA and provincial requirements.

Book a consultation to understand how to manage your dividend and investment income efficiently this taxation year.