Dividend Tax Credit in Canada 2025

Updated March 2025 • bremo.io

The dividend tax credit (DTC) is one of the most tax-efficient features of investing in Canadian stocks. It exists to prevent double taxation: corporations pay corporate income tax on their profits before distributing dividends, so shareholders receive a credit to offset the tax already paid at the corporate level.

Two Types of Canadian Dividends

1. Eligible Dividends

Paid by public corporations or private Canadian-controlled corporations (CCPCs) taxed at the general corporate rate (not the small business rate). These receive a more generous gross-up and credit.

2. Non-Eligible Dividends (Ordinary Dividends)

Paid by CCPCs taxed at the small business rate, or other non-eligible sources. These receive a smaller gross-up and credit.

2025 Dividend Gross-Up and Credit Rates

How the Dividend Tax Credit Works — Step by Step

Using a $1,000 eligible dividend as an example:

1. Gross up the dividend: $1,000 × 138% = $1,380 (this is added to income)
2. Calculate tax on grossed-up amount: At 26% marginal rate: $1,380 × 26% = $358.80
3. Calculate the federal DTC: $1,380 × 15.0198% = $207.27
4. Net federal tax on dividend: $358.80 − $207.27 = $151.53
5. Effective rate on original $1,000: 15.15% (vs. 26% on equivalent employment income)

Provincial Dividend Tax Credits

Each province also has a dividend tax credit that further reduces provincial tax. The combined federal and provincial DTC makes eligible dividends particularly tax-efficient. In Ontario, for example, the combined top marginal rate on eligible dividends is approximately 39.34%, versus 53.53% on regular income.

Dividend Tax Credit at Low Income Levels

One of the most striking features of the DTC is that at low income levels, eligible dividends can be received at a negative effective tax rate — meaning the tax credits more than offset the tax owing. This is because the gross-up inflates income, triggering refundable credits like the GST/HST credit, which can exceed the tax on the dividend.

This makes dividend income from a CCPC particularly attractive for income splitting with lower-income family members, subject to the TOSI (Tax on Split Income) rules.

Tax on Split Income (TOSI) Rules

Since 2018, Canada's TOSI rules restrict income splitting through private corporations. Dividends paid to family members who are not actively involved in the business are subject to tax at the top marginal rate, eliminating the dividend tax credit benefit. Specialist advice is essential for family business structures.

Foreign Dividends — Different Rules

Dividends from foreign corporations (e.g., U.S. stocks) do not qualify for the Canadian dividend tax credit. They are taxed as regular income. However, a foreign tax credit may be available for withholding taxes paid to the foreign jurisdiction. U.S. dividends are subject to 15% withholding tax (0% in registered accounts under the Canada-U.S. tax treaty for RRSPs).

T5 Slip and Reporting

Canadian dividends are reported on a T5 slip from your broker or corporation. The slip shows both the actual dividend received and the taxable (grossed-up) amount to report on your return. Ensure both the income and the dividend tax credit are captured correctly in your tax software.