Thanks for reading and follow us on Instagram above or below. Note: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial and tax advisor for any investment decisions and decisions that affect tax returns. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “10 Things To Know About Canadian Dividend Tax in 2021” serves as educational content, not investing or tax advice.
Canadian dividend tax really is no joke.
You’re likely wondering how are dividends taxed in Canada and Canadian dividends tax treatment.
Those questions will be answered.
But know while the thought of earning money just by holding a stock or ETF is pleasant, there truly is even a consequence to holding.
If you have an RRSP or a non-registered account with a broker and are focusing on a dividend investing approach to your portfolio, then the tax can affect your reported income.
In fact, it can make a difference in your marginal tax rate and income tax.
Even a TFSA won’t save you from this tax either (check section 10!).
Yet, many investors still don’t understand the Canadian dividend tax rates and how much they pay Canada Revenue Agency.
So, through this article, you’ll learn pretty much all there is to Canadian dividend taxes:
- What are dividends? Canadian dividends?
- What date are dividends taxable?
- Eligible vs. non-eligible dividends
- Canadian dividend tax rate in 2021
- Are dividends tax deductible?
- How the Canadian dividend tax credit works
- How Dividends are Taxed in Canada/How is Dividend Income Taxed?
- Are there dividends without tax?
- Are dividends similar to interest?
- How can I avoid paying dividend tax?
What are Dividends? Canadian Dividends?
If you are familiar with investing, you’ve heard of dividends before and likely have been receiving them.
Instead, if you are new to investing, you may have only heard the word dividends through its everyday use.
Helpful article: How to Start Investing in Canada: Everything You Need (2021)
For example, “Having that robot vacuum sure does pay dividends to own.”
Robot vacuum? Why a robot vacuum?
I don’t really know. It was the first thing that came to my mind.
Who pays the dividend?
A dividend is a cash payment from public companies (companies with shares, ETFs, or other securities on a stock exchange) for holding their stock.
So, the company that offers the securities will pay out the stock.
Who gets dividends?
Anyone who holds a stock of companies that pay dividends is eligible to receive that dividend.
Amounts for dividends differ. For some stocks, companies may pay you a dividend of $2.00 per share.
For other dividend stocks, the company may only pay you $0.50 per share.
ETFs also pay dividends because the companies that are held in the ETF may payout dividends.
The company or firm that offers the ETF will collect the dividend and pay it out to you.
One of my favourite ETFs that pay dividends is the iShares S&P TSX Composite High Dividend Index ETF (ticker: XEI.TO).
The ETF pays out a dividend of $0.08 per month. It’s not nearly as much as you can earn from stocks, but nonetheless, it can be a great addition to a portfolio.
Helpful article: 4 Canadian Dividend ETFs That You Can Buy For $20
Here’s how paying out a dividend works:
In the example above (oh, hey Serge), this is how much net income (or profit) a company has made. They now have the choice to pay out dividends between $0 and $100,000 in profit.
Could they pay more?
Sure, they definitely could; however, it is typical for companies to base their dividend payout on net income.
Sometimes, a company will report a loss instead of a profit and continue paying a dividend.
Why is that?
It’s because they are trying to keep investors to purchase and hold their stock.
A dividend doesn’t necessarily depend on a company’s net income. It really depends on its cash flow.
Even if a company has a negative cash flow, they can borrow money through a loan, for example, to continue to pay dividends.
It isn’t necessarily healthy because the company could be in trouble financially, and to keep investors happy, they will continue to borrow money at an unhealthy rate.
Another way to calculate dividends is through the payout ratio.
- A payout ratio is a rate that determines dividends the company will payout based on net income.
- The retention ratio is the amount of income the company will retain and use for the business instead of paying out dividends.
If we are looking at the $100,000 net income again, you’ll notice that Serge Inc. has a payout ratio of 60%.
You’ll notice I included the formula in the picture of payout ratio and retention ratio.
Therefore, by taking the payout ratio and multiplying it by the net income earned from Serge Inc., you’ll see that they will pay out $60,000 in dividends.
It’s pretty simple. Well, most times it is.
How are dividends paid in Canada?
The first way that dividends are paid is with cash. Typically, if you hold a stock that pays a dividend, it’ll most likely be with cash.
The cash from dividends paid out will be added to your account, and therefore whenever you receive them, you can withdraw, hold, or spend it. It’s your choice.
Another way a dividend is paid is through a stock dividend.
If you hold a stock and pay out a stock dividend, you will earn a stock instead of cash.
There are a couple catches, though:
- If a company pays out a stock dividend, you will likely earn a fraction of a share. Meaning you won’t receive a total share, just a partial one.
- It is an easy way for companies to dilute their shares. Through the dilution of shares, it can decrease their share price as more shares (as more shares are issued than originally).
If a company pays a stock dividend, understand that it isn’t necessarily beneficial, because your shares could be worthless.
Companies may do this because they do not have the adequate cash to pay out a cash dividend but want to keep their investors happy with a dividend.
Can Dividends be Negative?
Uh, no. Not that I’m aware of.
Can you imagine that a company claims a negative dividend and instead of paying out anything, they require the investor to pay them a dividend?
That company is going to tank in their share price.
What Date are Dividends Taxable?
Let’s start out by talking about whenever dividends are paid out because basically, whenever they are paid out, they can be considered taxable.
There are a couple of dates to consider:
- Declaration date: This date is when the board of directors in a public company announces and declares the dividends to be paid.
- Ex-dividend date: This date is announced to inform new investors that the stock will not pay a dividend on the particular date (or the next day).
- Record date: As the name implies, this date is where the board of directors will analyze their records to determine which investors are owed a dividend.
- Payment date: The date where the dividend is paid.
Now those are quite a few dates to remember.
Lucky for us investors, there are calendars you can check to determine each of these dates for a particular company.
You can look up the stock exchange the specific company is listed on, and it should list the dates for you when looking at the dividend calendar listed.
Or a company may announce these dates through its public filings.
To check a company’s public filings, you will want to visit a particular website:
As for when dividends are taxable, it is at the time you file for your taxes.
Like your capital gains or employment income, you are not taxed immediately, but instead, you are taxed whenever you have filed your reports.
Eligible and Non-Eligible Dividends:
Now that we have looked at what dividends are, two crucial dividends make all the difference in calculating the dividend tax.
There are two types of dividends in Canada:
- An eligible dividend is a dividend that is paid out by a Canadian public company.
- A non eligible dividend is a dividend that is paid out by a Canadian private company.
If you look at a company such as Emera, they are obviously a public company, and therefore pay eligible dividends.
Most public companies pay out eligible dividends, while only shareholders of a private company will earn a non-eligible dividend.
In some cases, dividends that are paid by Canadian public companies may not be designated as eligible. As well, some dividends paid by Canadian private companies may be designated as eligible.
Generally, those cases are rare, and therefore we will not worry about them.
But what does this mean for the tax rate for the two types of dividends?
Canadian dividend Tax Rate in 2021:
There are some concepts you will need to understand, and I will explain each in detail.
The first concept is dividend gross-ups.
What’s that, you ask?
Well, when someone receives a dividend, the amount received is increased by a certain percent.
It sounds good initially, but you are not earning any additional dividend. Instead, it’s to calculate your tax (see How Dividend Income is Taxed section).
The rates are:
- 38% for eligible dividends
- 15% for non-eligible dividends
You might hear rates called gross-up rates. These are the rates mentioned above.
Therefore, the eligible dividend gross up rate is 38% and the non-eligible dividend gross up rate is 15%. Just as we would say the eligible dividend tax rate is 38% and the non-eligible dividend tax rate is 15%.
Both rates are important to know if you are looking to potentially determine how much tax do you pay on dividends in Canada.
Don’t worry. If you are a little confused by all this, it will become clearer whenever we finally look at the example.
Are Dividends Tax-Deductible?
If we are looking at an investor’s standpoint, no. It’s very likely that in most cases, dividend investors who have an unregistered account, will pay tax on their dividends.
You can’t just earn a dividend for it to be fully tax-deductible. If this were the case, there would be no gross upon dividends.
If you look at a corporation standpoint, dividends aren’t necessarily deductible.
When a company pays a dividend, it usually comes out of their cash flow, and that’s it.
If you remember from my example illustrated at the beginning with Serge Inc., dividends are typically representative of their net income.
As we know, net income is after taxes. So no, dividends really aren’t tax-deductible.
How the Canadian Dividend Tax Credit Works:
Instead of dividends being tax-deductible, individuals can receive a dividend tax credit.
This dividend tax credit, when used, reduces an individual’s tax payable, but is dependent on the amount of dividends received.
Dividend tax credits, whether eligible or non-eligible, do not cover the entire dividend. Instead, it can negate a portion of the dividends’ gross-up, depending on the federal and provincial rates.
The federal rates for eligible and non-eligible dividends in 2021 are:
- Eligible dividends: 6/11 for the dividend gross-up.
- Non-eligible dividends: 9/13 for the dividend gross-up.
- Eligible dividends: 15.0198% of grossed-up dividends.
- Non-eligible dividends: 9.0301% of grossed-up dividends.
- Eligible dividends: 20.7273% of the dividends that are received.
- Non-eligible dividends: 10.3846% of the dividends that are received.
Yes, there are a couple different ways to calculate the federal dividend tax credit, and they will result in the same amount of credit regardless of the method.
There is also a provincial dividend tax credit, and it obviously depends on the province or territory. Provincial/territorial dividend tax credit rates in 2021 are:
For eligible dividends as a percentage of actual dividends:
|Prince Edward Island||14.49%|
|Newfoundland & Labrador||7.45%|
There is a provincial rate for non-eligible dividends; however, I could not find them upon trying to locate the exact percentages. I apologize in advance for that. For the example below, the provincial rate on non-eligible dividends be an example rate.
The dividend tax credit you receive from your dividends is composed of a provincial and federal rate to recap.
Next, we’ll put everything discussed together in an example.
How Dividends are Taxed in Canada/How is Dividend Income Taxed?:
First, we’ll look at an example focused on eligible dividends.
As you can see, with the application of a dividend tax credit, Serge can receive a portion of the 15% of his dividends deducted. Yes, Serge still pays taxes on the dividend technically.
Now for an example focused on non-eligible dividends.
Both tax credits are calculated similarly, as you will notice.
With non-eligible dividends, Serge has to pay less in taxes, even though it’s by a very minimal amount, which we will attribute to the differences in the gross-up percentages.
Therefore, should someone look to earn non-eligible dividends than eligible dividends?
In some cases, I suppose. However, when looking back on how to earn a non-eligible dividend, it’s through a private Canadian corporation.
To earn a non-eligible dividend, someone may need to invest a large amount of money in becoming a private investor in these types of corporations or be employed by that corporation.
Many Canadian public companies pay out eligible dividends, which is much easier for the average investor.
Are There Dividends Without Tax?
Not that I have ever known of.
There are obviously ways to avoid paying tax on dividends (see section 10).
However, I haven’t found any dividends where you can avoid paying taxes.
Are Dividends Similar to Interest?
I suppose you can say that dividends are similar to interest because they both provide you income.
But I’ll do a brief analysis of the differences in taxes between dividends and interest.
As you can see illustrated, in some cases, interest income can result in an individual paying fewer taxes than if they received the same amount in dividends.
Obviously, we can attribute that reason due to the gross-up that is placed on dividends.
So no, interest isn’t necessarily the same as dividends tax-wise.
It might be much more challenging to find investments that pay a lot of interest. Bonds could fill that void.
How Can I Avoid Paying Dividend Tax?
When writing this guide, I looked at if any investments are tax-free, not just offering tax-free dividends.
I did not find any tax-free investments after some initial research.
But there are some ways you can avoid paying dividend taxes.
The first one is by opening a TFSA (tax free savings account) and purchasing securities that pay dividends.
If you did not know, a TFSA allows an individual to invest in securities and other investments tax-free up to a stated amount. I discussed this in more detail in my guide to investing for beginners article.
Another option is an RRSP. This type of account allows individuals to invest in securities and avoid paying taxes until withdrawn from the account. Although you will only defer the dividend tax and eventually pay it. However, the purpose of holding an RRSP is to withdraw from the account whenever an individual is in a lower tax bracket.
Opening such accounts like these is the easiest way to defer and avoid paying any taxes on dividends or interest and capital gains.
As well, the lower-income that you earn, the lower you will be taxed. Ideally, if someone only has an income source from dividends, it will result in a lower tax than having employment income solely.
I want to make mention that you pay dividend tax on stocks held on U.S. exchanges.
While that isn’t new news, you also are taxed on 15% of these dividends in your TFSA, which is a Canadian withholding tax on dividends.
A TFSA is designed to hold Canadian securities, although it doesn’t deny you from holding foreign securities in this account.
Whether it’s ETFs or stocks, be wary of this tax as it is sneaky and could represent as a significant amount of tax.
So, if you retain nothing else, you should be able to answer: Are dividends taxable in Canada?
I don’t expect everyone who is reading this to answer: How are Canadian dividends taxed? It may take a couple of times to read over until you fully get the concept.
Instead, I hope you can takeaway something from Canadian dividend tax that may help your investment strategies or personal finance journey.
Did you know of grossed-up dividends? If not, what is your reaction to it? Leave your answers below in the comments or any comments you want to add about dividend tax in Canada.
Thanks for reading and follow us on Instagram above or below. Check out our other articles as well!
Note: I am not a financial or tax advisor. You are trading at your own risk and should consult a financial and tax advisor for any investment decisions and decisions that affect tax returns. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “10 Things To Know About Canadian Dividend Tax in 2021” serves as educational content, not investing or tax advice.