A dividend from a Canadian corporation is taxed in two steps. The cash received is increased (grossed up) to approximate the corporation's pre-tax profit, and that larger amount is taxed as income. A dividend tax credit then gives back most of the corporate tax already paid. Which gross-up and credit apply depends on whether the dividend is eligible (from a public corporation or other general-rate income) or non-eligible (mostly from small-business income).
The rules
| Eligible | Non-eligible | |
|---|---|---|
| Gross-up on the cash dividend | 38% | 15% |
| Federal credit, on the grossed-up amount | 15.0198% | 9.0301% |
| Ontario credit, on the grossed-up amount | 10% | 2.9863% |
The gross-ups are 38% for eligible and 15% for non-eligible dividends.[1][2] The federal credits are 15.0198% and 9.0301% of the grossed-up amount.[3][4] The Ontario credit is 10% on eligible dividends and 2.9863% on non-eligible ones.[5][6] The Ontario credit on non-eligible dividends falls to 1.9863% from 2027.[6]
- Only the grossed-up amount is added to taxable income, so it also counts toward income tests such as the OAS recovery tax.
- Dividends from a foreign corporation get neither a gross-up nor a credit. They are taxed as ordinary income; see foreign withholding tax.
- Dividends inside a TFSA are not taxed. Inside an RRSP they are not taxed as dividends: the withdrawal is ordinary income.
The formula
taxable amount = cash dividend × (1 + gross-up)
credit = taxable amount × (federal rate + Ontario rate)
tax = taxable amount × marginal rate − credit
What the engine does
- Accepts a dividend as eligible or non-eligible on a non-registered account, grosses it up, adds it to taxable income and subtracts both credits on the person's own return; see taxes are per person. The tax settles with the following April's return.
- Also accepts a fund or trust distribution split by slip character: eligible, other, interest, capital gains, foreign income and return of capital.[7]
- Does not gross up dividends for the alternative minimum tax; see alternative minimum tax.
- Taxes the grossed-up amount at the person's marginal rate.
What it deliberately does not
- All the Numbers' own accounts earn one annual return, treated as growth in price for a non-registered account. It does not split that return into dividends, so a plan built in All the Numbers shows no dividend tax unless a dividend is entered. See expected returns and fees.
- It does not model the ex-dividend date, or a drop in price when a dividend is paid.
- It does not model the corporate tax that the credits stand in for.