Canada’s Dividend Tax Credit (DTC) is a significant money saver for many people, so it’s important to inform your clients about their eligibility for this credit. Here’s a refresher on the dividend tax credit, who’s eligible to receive it, and how it can benefit them.
Purpose of the Dividend Tax Credit
Shareholders in Canadian corporations are eligible to take the DTC. The credit is applied against taxes that would otherwise be owed on dividends paid by Canadian companies to the client. (The tax credit doesn’t apply to dividends paid by foreign corporations.) The purpose of the DTC is to avoid double taxation, since dividends are paid to shareholders from profits that a company paid taxes on. Basically, the dividend tax credit gives your client “”credit”” for the taxes the company already paid.
Eligible and Ineligible Dividends
Only dividends paid by Canadian-controlled taxable corporations are candidates for the DTC. Beyond that, the Canada Revenue Agency (CRA) has rules that determine whether specific companies have paid eligible dividends or ineligible dividends. For example, a Canadian-controlled private corporation can only pay eligible dividends up to the total amount in its general rate income pool at the end of the tax year. The company paying the dividends is responsible for notifying shareholders about the type of dividends paid. Private corporations can provide the designation in the form of a letter to dividend recipients or with a notation on dividend cheque stubs. Public corporations can designate dividends as eligible by simply putting a statement in writing that all dividends are eligible dividends unless specifically stated otherwise. You can usually find a public corporation’s statement of dividend eligibility published on their website. The bottom line is that each company has the legal responsibility to notify shareholders how their dividends are classified.
How to Calculate the Dividend Tax Credit
Dvidends are part of taxable income, and but thanks to the DTC, eligible dividends aren’t usually taxed at a person’s regular income tax rate. Tax rates on ineligible dividends are higher. To calculate the federal DTC, investors first have to “”gross up”” the total eligible dividends they receive, multiplying them by a percentage specified by the CRA. The required gross up percentage may change yearly, so be sure to check the current rate. The DTC is then calculated by taking a different percentage or fraction of the grossed up amount.
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