Dividend Tax Credit
The Dividend Tax Credit (DTC) is a mechanism to reduce the double taxation that occurs when a corporation pays tax on its profits and then distributes those after-tax profits as dividends to shareholders, who would otherwise pay personal tax on the full amount.
The system works through "gross-up and credit": the actual dividend is grossed up (increased by a set percentage to approximate the pre-tax corporate income), then a federal and provincial dividend tax credit is applied to offset the estimated corporate tax already paid. Eligible dividends (from large public corporations paying higher corporate tax) receive a larger gross-up (38%) and credit than non-eligible dividends (from small businesses paying lower corporate tax, grossed up by 15%).
Due to the dividend tax credit, Canadian dividends are taxed at significantly lower effective rates than other income types. At lower income levels, eligible dividends can even result in negative tax (a refund). This makes dividend-paying Canadian stocks tax-efficient in non-registered accounts.
Related Terms
Capital Gains
A capital gain arises when you sell a capital property — such as stocks, mutual funds, ETFs, real estate (other than your principal residence), or cryptocurrency — for more than its adjusted cost base (ACB).
Inclusion Rate
The inclusion rate determines what portion of a capital gain is included in your taxable income.
Marginal Tax Rate
The marginal tax rate is the rate of tax applied to your last (or next) dollar of income.