How Canadian Dividends Are Taxed: Negative Tax Rates Are Possible!

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Dividends from Canadian corporations receive some special tax treatment that can make them an attractive investment in non-registered accounts. This special treatment means that they can help lower your average tax rate, especially in retirement.

But this special tax treatment makes it a bit confusing to understand how dividends are taxed. To calculate tax on Canadian dividends there are things like “gross ups” and "dividend tax credits" to consider.

In this video we take a closer look at how Canadian eligible dividends can lead to NEGATIVE tax rates at certain income levels in certain provinces.

Disclaimer: This video is for educational purposes only and does not constitute investment advice or financial advice. All information provided is for illustrative purposes only and you should not rely on such information as the primary basis of your investment, financial, or tax planning decisions. Every effort has been made to ensure the accuracy of its contents. No representations, warranties or guarantees are made as to the accuracy of any estimates or calculations provided. Nothing in this material should be construed as investment or tax advice, or a solicitation or offer, or recommendation, to buy or sell any financial product or securities. Before making any financial decision, you should review your situation with a financial planner.

[ashihtaka]

One thing to note is the examples you shared only apply to scenarios with Fully dividend income.

For example if we use any tax calculator, earning $110k in Ontario:
if you plug 100k employment income + 10k capital gains, then total tax is $28, 056
if you plug 100k employment income + 10k eligible dividends, then total tax is $28, 294

You are actually paying more tax on dividend income than regular capital gains.

[saccharide]

I think it's problematic to think of it as a negative tax rate. That's like saying that getting an income tax return in April means that you paid no/negative income taxes in the year before.

The apparently negative tax rate comes from overpaying of tax before the money got to you. From your share of the company's profits, you were only paid ~72.5% of it (from 1/1.38). The remaining ~27.5% acts as if it was a payroll withholding tax. But it's worse, the tax rules only credit you for the combined dividend tax credit (~25% Ontario) rather than the full 27.5%. So 2.52% is just lost to double taxation with nothing to show. The split between the ~25% combined dividend tax credit and your marginal tax rate determines if you get a refund or have to pay more taxes. If 25% was an overpayment (you get a tax credit) or an underpayment (you need to pay more taxes). Only in the lowest brackets is the marginal rate such that it was an overpayment.

[jasonz.]

I think it's wrong in the video - the tax before credit should be $100 instead of $138 with gross up amount....

[roseb]

shouldnt the percentange of gross up be 76m ( 38 x 2) which combines the federal and ontario ?( 100 x 76+100)

[bradv.]

Thank you for the informative video. If you make $350, 000 in a professional corporation in B.C., then pay your corporate tax, then use $45, 000.00 on your T1 as a dividend rather than salary, does that mean that you pay zero personal tax ? Thank you.

[Lord.Kiltridge]

My question related to a DRIP account comprised to entirely Canadian eligible dividends. Let's say I have $100, 000 earning dividends at an annual average of 5%. Come tax year, will I have to sell some of those shares, potentially triggering a capital gains/loss calculation in order to pay my taxes or is there a provision to avoid that?

[LiveLifeLori]

When you say lowest tax bracket - do you mean how much income (job salary) someone has, and which tax bracket they're in? or, nothing to do with their own personal income? So if someone makes 50K, they get the same low tax bracket for the canadian dividend stocks as someone who's making 150K/year?

[martik]

Could you do an analysis of accelerated RRIF meltdown into dividend paying ETF's to determine tax saving over a period of time. Let say a couple with 35k CPP/OAS income and 1M RRIF age 65. Model min withdrawals vs accelerated withdrawals and depositing the proceeds into dividend stocks. My estimate is there won't be enough years to come out ahead.

[linlsunrise]

Thank you so much for the video. on top of the given example in the video, if I have T4 income of 100K, can the negative dividend tax credit (-$6.86) deduct the tax on T4 income?

[parkerbohnn]

I'll stick to long term corporate bonds, GIC's and precious metals. Like 1929 and 1873 the stock market is far too risky for me and the chances of a 80+ percent meltdown or implosion are very real if the markets correct to fair market value.

[mymglpn]

Thanks for the video! I have income from employment and am worry dividends will push me to a much higher tax bracket. Is there any tax advantages to holding dividend paying stocks in a corporation? Thanks

[renzenker]

I believe what you have done here is incorrect as I just attempted to do what you said this tax year 2022 and it did not work! The federal and provincial amounts ARE NOT combined into a percentage. The federal portion of taxes is about 15%, and the dividend tax credit is the same, so the taxes are negated. On the provincial side here in BC the provincial taxes are 5.06% and the provincial dividend tax credit is 12% so you are left with a negative tax here. But if you do what you said, pull RRSP money out, you will be taxed at the Federal level on it because there is no negative tax on that side of the equation!!!!