Dividend Taxation

The system in place to tax Canadian dividend income is designed to achieve “integration.” The intent of integration is to ensure that the combined total personal and corporate tax imposed on different types of income received directly or from a corporation is roughly equal. In other words, integration tries to ensure that there is no tax advantage to be gained by having income earned through a corporation.

There are two types of dividends: eligible and ineligible. Eligible dividends are those paid from public companies, along with dividends paid by private companies where the dividend arises from income taxed at regular rates (i.e., without any tax preferences). Ineligible dividends are dividends paid by a private company that arose from income that received some type of special tax preference (such as the small business deduction).

Eligible dividends are grossed up to 138% of actual value, and ineligible dividends are grossed up to 118%, and tax is calculated on these grossed-up amounts.

Dividends also generate a dividend tax credit. The dividend tax credit is intended to approximate the corporation’s income tax paid. The dividend tax credit reduces the shareholder’s income taxes otherwise payable and leaves the shareholder with a net effective income tax liability on dividends received.

The following table shows the dividend tax credit for the federal and each provincial government for eligible and ineligible dividends.

The table in Figure 1 highlights the significant variations in rates across the provinces. Some of the variation reflects the different corporate tax rates and some of the variation is about each province’s need for tax revenue.

Let’s look at two examples that compare the tax consequences of dividend income, assuming the dividend is taxed at the top marginal rate.

2014

Dividend Gross-Up 38%   18%
Tax credit on taxable eligible dividend
(%)
Top Effective tax rate on eligible dividends
(%)
Tax credit on taxable ineligible dividend
(%)
Top Effective tax rate on ineligible dividends
(%)
Federal 15.02 11.02
Alberta 10.00 19.29 3.10 29.36
British Columbia 10.00 28.68 2.59 37.99
Manitoba 8.00 32.26 .83 40.77
New Brunswick 12.00 27.35 5.30 36.02
Newfoundland and Labrador 5.40 30.20 4.10 32.08
Nova Scotia 8.85 36.06 5.87 39.07
Ontario 10.00 33.82 4.50 40.13
Prince Edward Island 10.50 28.71 3.20 38.74
Quebec 11.90 35.22 7.05 39.78
Saskatchewan 11.00 24.81 3.40 34.91

 

Figure 2 starts with a $10,000 eligible dividend received by two individuals – one in Alberta and one in Manitoba. The net combined federal and provincial tax payable differs significantly – $1,929 paid in Alberta on the receipt of the $10,000 dividend, whereas the liability increases to $3,226 in Manitoba. This differential is highlighted through the calculation of the effective tax rate. The individual living in Alberta pays an effective tax rate of 19.29% compared with the individual living in Manitoba where the rate jumps to 32.26%.

Figure 2 – Eligible Dividend Comparison

Alberta Manitoba
Eligible Dividend $10,000 $10,000
Gross Up 38% 38%
Taxable Dividend $13,800 $13,800
Top Marginal Tax Rate 39.00% 46.40%
Taxes Payable $5,382 $6,403
Federal Dividend Tax Credit Rate 15.02% 15.02%
Provincial Dividend Tax Credit Rate 10.00% 8.00%
Provincial Dividend Tax Credit Rate 10.00% 8.00%
Total Dividend Tax Credit $3,453 $3,177
Net Taxes Payable $1,929 $3,226
Effective Tax Rate 19.29% 32.26%

 

Figure 3 depicts the outcome of a $10,000 ineligible dividend received by individuals in British Columbia and Prince Edward Island. The total taxes payable on the divi- dend are quite comparable at $3,798 in B.C. and $3,912 in PEI. As you might expect, the effective tax rate is also quite similar at 37.98% in B.C. and 38.74 in PEI.

Figure 3 – Ineligible Dividend Comparison

B.C. PIE
Ineligible Dividend $10,000 $10,000
Gross Up 18% 18%
Taxable Dividend $11,800 $11,800
Top Marginal Tax Rate 45.80% 47.37%
Taxes Payable $5,404 $5,590
Federal Dividend Tax Credit Rate 11.02% 11.02%
Provincial Dividend Tax Credit Rate 2.59% 3.52%*
Total Dividend Tax Credit $1,606 $1,716
Net Taxes Payable $3,798 $3,874
Effective Tax Rate 37.98% 38.74%

* PEI has a surtax that increases the value of their dividend tax credit.

The federal and provincial governments are constantly tinkering with their dividend tax credit rates. In some situations, a taxpayer may be in a position to delay or accelerate dividends depending on which direction the change is heading.

Disclaimer:

This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.

The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.

Advocis*, the Institute for advanced financial education.

(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).

The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.

Copywrite  ISSN 0382-7038

Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

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