Eligible dividend net of tax.
Net of tax
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Grossed-up income
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Effective tax on dividend
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Your breakdown
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The gross-up that confuses everyone
Eligible dividends, the kind paid by public companies and by private corporations distributing income already taxed at the general corporate rate, get unusually favourable personal tax treatment in Canada. The mechanism looks strange at first. You take the cash dividend and gross it up by 38 percent, so a $10,000 dividend becomes $13,800 of taxable income. You are taxed on that inflated figure, then you receive a dividend tax credit, 15.0198 percent federally plus a provincial credit, calculated on the same grossed-up amount. The gross-up and credit together are designed to undo the corporate tax the company already paid, so you are not taxed twice on the same profit. The net result is a personal rate well below what ordinary income would face.
Tracing a $10,000 eligible dividend at a 43 percent rate
Start with $10,000 of eligible dividends and a 43 percent marginal rate. Grossing up by 38 percent gives $13,800. Tax before credits at 43 percent is $5,934. The federal credit of 15.0198 percent and an approximate provincial credit of 10 percent are both applied to the $13,800, wiping out a large slice of that tax. What is left is the actual tax, and the effective rate on the original $10,000 works out to about 24.8 percent, noticeably lower than 43 percent.
The bar below shows the gap the credit creates: the tall column is the tax you would owe on the grossed-up amount before credits, and the short column is what you actually pay once the dividend tax credit is applied.
Eligible versus non-eligible, and why it is worth checking your slip
Not all dividends are equal. Eligible dividends come from corporate income taxed at the higher general rate, so they get the large 38 percent gross-up and the generous credit modelled here. Non-eligible dividends, typically paid out of a small business’s income that enjoyed the lower small-business rate, get a smaller 15 percent gross-up and a smaller credit, which leaves you paying more personal tax. Your T5 slip tells you which is which, with eligible and non-eligible amounts reported in separate boxes. This calculator handles the eligible case, so if your slip shows non-eligible dividends the tax will be higher than the figure here.
Who this serves and a clawback warning
This tool is for investors holding Canadian eligible dividend payers in a non-registered account who want to know the after-tax value of their income, and for retirees comparing dividend income against other sources. One genuine trap deserves a flag: the gross-up inflates your reported net income, and that grossed-up figure, not the cash you received, is what income-tested benefits look at. For a senior, $10,000 of eligible dividends adds $13,800 to net income, which can accelerate the OAS recovery tax that begins around $93,000 and reduce age-tested credits. The headline rate is friendly, but the gross-up has a sting for anyone near a benefit threshold. A practical note: dividends earned inside a TFSA or RRSP skip all of this, no gross-up, no credit, no tax, so high-yield Canadian holdings often sit better in registered accounts for benefit-sensitive investors.
Why does the gross-up make my income look bigger than my cash?
The gross-up is meant to approximate the pre-tax corporate profit behind your dividend, so the system can give you credit for the corporate tax already paid. It is an accounting step, not extra money, but the CRA uses the grossed-up number for income tests, which is why your reported income can exceed the cash you actually banked.
Can the dividend tax credit ever be wasted?
Yes. The credit is non-refundable, so if your other income is so low that you owe little or no tax, part of the credit can go unused because there is no tax left to offset. This is why very low-income Canadians can sometimes receive eligible dividends almost tax-free, but cannot turn an excess credit into a refund. The unused portion cannot be carried forward to a future year either, so it simply disappears, which is one reason a couple may choose to have the lower-income spouse hold dividend-paying shares only up to the point where the credit is fully usable.