The Dividend Tax Credit: Canada's Weapon against Double Taxation

The dividend tax credit is a credit the Canadian government issues to its taxpayers. This type of tax credit is very desirable, as it helps to prevent double taxation. Here are the basics of the dividend tax credit.

Dividend Tax Credit

The dividend tax credit in Canada is a credit received in conjunction with receiving corporate dividends. Whenever an individual investor receives dividends from a Canadian corporation, she will also receive a tax credit in the same amount. When she files her taxes at the end of the year, she will be able to apply this credit to offset the gains that she received from the dividend. In this way, individual investors can lower the amount of money that they have to pay in taxes on dividends. The government will not be taxing the same money twice.

Double Taxation

Without the dividend tax credit, double taxation would occur. This is a scenario that is played out in the United States on a regular basis. To understand double taxation, you have to look at how corporations are taxed. Whenever a company brings in revenue, it is going to be taxed on the profit at the corporate level. When it disperses some of the profit to investors, it is issuing what are called dividends. When investors receive dividends, they are also taxed on the amount that they receive. In the United States, dividends are taxed at regular marginal tax rates instead of at the capital gains tax rate. This means that the money that was generated by the company is effectively being taxed two times by the government. With Canada's dividend tax credit, you can completely avoid this scenario. The money is going to be taxed one time, and the investor gets the major benefit of this.

Non-Refundable

This tax credit is considered non-refundable. This means that if you offset your taxes so much that you have a negative balance, the government is not going to write you a check for the difference. You would simply not owe any taxes for that particular year.

Effective Tax Rates

With the new dividend tax credit law implemented in Canada, effective tax rates on dividends have been lowered significantly. The amount of money that you have to pay the government in dividend taxes will vary depending on your income and which bracket you are in. The smallest effective tax rate on dividends is going to be 3 percent. The largest effective tax rate on dividends is 30 percent.

Eligible vs. Non-eligible

In Canada, there are two different types of dividends that you could potentially receive. You could get eligible or non-eligible dividends. Eligible dividends come from Canadian public corporations, while non-eligible dividends come from Canadian-controlled private corporations. Depending on which type of dividend you are receiving, you are going to get a different type of dividend tax credit.

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