Those owning shares in a Canadian corporation and earning dividend income, may be eligible to receive the dividend tax credit. Qualifying dividend income eligible for the dividend tax credit, results in you paying less personal tax than you would on interest income or non-qualifying dividends paid out by foreign corporations.
For dividends paid in 2014 and beyond, the following changes have been made by the Canada Revenue Agency to the factors used to calculate ‘other than eligible dividends‘:
- The gross-up factor for other than eligible dividends has been changed from 25% to 18%
- The corresponding dividend tax credit has been changed from 2/3 of the gross-up amount to 13/18 (or 11.0169% of the grossed-up dividends).
No changes were made to the gross-up factor or dividend tax credit for ‘eligible dividends’.
When an individual receives dividends, the dividend amount paid is calculated by the corporation paying the dividend using the gross-up amount. For ‘other than eligible dividends’, this means that the ‘gross-up’ amount adds an additional 18% over the amount you received (ex: $100 is reported as $118). This amount is then shown on the income slip (such as the T5, Statement of Investment Income) you receive for dividends paid to you. For ‘other than eligible dividends’ paid in 2013 the gross-up amount was 25%.
These changes were made to the tax credit and gross-up factor to correct what Canada Revenue Agency believed was an overcompensation of individuals for income taxes presumed to have been paid at the corporate tax level on active business income, according to TaxTips.ca.
The other than eligible tax credit is for dividends paid out by Canadian-controlled private corporations considered to be regular or small businesses, “to the extent that their business is subject to tax at the small business rate.” These types of ‘other than eligible’ dividends receive a dividend tax credit that is lower than dividends under the ‘eligible’ category, but more beneficial treatment over interest income or non-qualifying dividends paid out by foreign corporations.