Dividend income on a Canadian personal tax return is “grossed-up” and then reduced by a dividend tax credit. Here’s how it works, and why eligible dividends and non-eligible dividends can produce very different personal tax results.
If you’re an incorporated business owner, dividends are a common way to pay yourself. Then tax time hits and you notice something odd:
That’s the dividend gross-up and dividend tax credit system at work.
The dividend tax credit is a non-refundable tax credit that reduces personal tax on certain dividends you receive from taxable Canadian corporations. The goal is “integration” - recognizing that corporate income was already taxed before it was paid out as a dividend.
Important: This credit does not apply to foreign dividends.
On your tax return, Canadian dividends don’t show up as just the cash you received. The rules require a “gross-up” to calculate a taxable amount:
That gross-up is why your net income can increase more than the cash you received - important for income-tested items (like certain credits/benefits), even if your final tax bill is reduced by the dividend tax credit.
In simple terms:
Because the underlying corporate tax is different, the personal tax system uses two different gross-up and credit calculations.
(Those 138% and 115% factors are from CRA’s guidance for reporting dividends when you don’t have an information slip.)
Most individuals see dividends on a T5 slip:
If you received dividends directly from your own corporation, you may have a T5 (or T4PS in some situations). Your accountant/bookkeeper typically prepares this.
CRA’s filing instructions:
If you don’t have slips showing the credit amount, CRA provides calculation factors:
These are federal credit calculation factors. Your province/territory has its own dividend tax credit calculation on Form 428.
Here’s a clean illustration using $10,000 cash paid to you as a dividend.
The gross-up factors and federal DTC factors above come directly from CRA’s filing guidance.
Even when your tax is reduced by the dividend tax credit, the grossed-up taxable dividend increases your reported income. That can affect income-tested items.
The federal credit is only one part. Provinces/territories calculate their own dividend tax credits on Form 428, and the results vary by jurisdiction.
Foreign dividends don’t qualify for the federal dividend tax credit.
If you’re paying yourself from a CCPC, whether a dividend can be “eligible” depends on corporate tax attributes and proper designation (for example, GRIP concepts).
If you’re not sure what kind of dividend your corporation should be paying, that’s usually a corporate tax planning question (not a personal return question).
Not always. Eligible dividends usually get a larger credit than non-eligible dividends, but your best choice depends on your overall income level, province/territory, and planning goals.
The taxable amount goes on line 12000.
Non-eligible (other-than-eligible) dividends are reported on line 12010 and also included on line 12000.
On line 40425 of your return.
Yes. CRA provides calculation steps for the taxable amounts (gross-up) and the federal dividend tax credit factors if you don’t have an information slip.
No - foreign dividends do not qualify for the federal dividend tax credit.
On your personal return, Canadian dividends are taxed using a two-step system: gross-up (to a taxable amount) and then a dividend tax credit (to reduce tax). Eligible dividends and non-eligible dividends use different gross-ups and credits, which is why two dividends with the same cash amount can produce different personal tax outcomes.
If you’re paying yourself from your corporation and you’re unsure whether your dividends should be eligible or non-eligible - or you’re trying to reduce personal tax without creating future problems - Coral CPA can help you set a clean, tax-smart owner-manager pay strategy that aligns your corporate and personal tax returns.
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