Yes, dividends are taxable in Canada, but Canadian dividends do not necessarily receive the same tax treatment as employment income or interest income. The amount of tax you ultimately pay can depend on the type of dividend, your total income, your province of residence, and whether the investment is held in a registered or non-registered account.
So, how are dividends taxed in Canada? For Canadian dividends received outside a registered account, eligible and other-than-eligible dividends are reported using different gross-up rules and can qualify for dividend tax credits. Foreign dividends are treated differently and do not qualify for the Canadian dividend tax credit.
This distinction matters because the cash you receive is not always the same as the taxable amount reported on your return.
Understanding dividend taxation can help you make better investment decisions, evaluate after-tax returns and identify opportunities for tax planning in Canada.
Are Dividends Taxable in Canada?
Yes. Dividends are generally taxable when they are earned in a taxable, non-registered investment account.
However, Canada provides special tax treatment for dividends paid by taxable Canadian corporations. The system uses a dividend gross-up and dividend tax credit mechanism.
The purpose is to recognize that the corporation paying the dividend has already paid corporate income tax on its profits.
For Canadian-source dividends, the CRA distinguishes between:
- Eligible dividends
- Other-than-eligible dividends
The taxable amount of each type is calculated differently.
Foreign dividends do not qualify for the Canadian federal dividend tax credit.
How Are Dividends Taxed in Canada?
The Canadian dividend tax system can look confusing at first, but the basic process is straightforward.
For a Canadian dividend received in a non-registered account:
Actual dividend received → gross-up → taxable dividend amount → tax calculation → dividend tax credit
The gross-up increases the amount included in taxable income, while the applicable dividend tax credit reduces the tax calculated on that income.
Your final tax depends on your complete tax situation, not simply the amount of dividend you received.
What Are the Different Types of Dividends in Canada?
The two major categories of taxable Canadian dividends are eligible dividends and other-than-eligible dividends.
Eligible Dividends
Eligible dividends generally receive more favourable gross-up and dividend tax-credit treatment than other-than-eligible dividends.
For current CRA reporting, eligible dividends are grossed up by 38% when the information slip requires the taxpayer to calculate the taxable amount. That means a $1,000 actual eligible dividend corresponds to a taxable amount of $1,380.
The corporation paying the dividend designates the dividend as eligible where the requirements are met. Therefore, you should not determine dividend classification solely by looking at whether the payer is a public company or a private corporation.
Other-Than-Eligible Dividends
Other-than-eligible dividends are subject to a different gross-up.
For dividends paid in 2019 or later, the CRA’s T5 instructions use a 15% gross-up. Therefore, a $1,000 actual other-than-eligible dividend produces a taxable amount of $1,150.
These dividends can also qualify for a dividend tax credit when the applicable conditions are met.
Foreign Dividends
Foreign dividends, such as dividends from U.S. corporations, are not Canadian taxable dividends for purposes of the Canadian dividend tax credit.
The CRA specifically states that foreign dividends do not qualify for the federal dividend tax credit.
Foreign tax paid on qualifying foreign investment income may, in appropriate circumstances, be relevant to Canada’s foreign tax credit system.
What Is the Dividend Gross-Up in Canada?
The dividend gross-up is an adjustment that increases the taxable amount of a Canadian dividend for reporting purposes.
It does not mean the corporation actually paid you additional cash.
For example, assume you received:
$1,000 eligible dividend
The taxable amount can be:
$1,000 × 138% = $1,380
For an other-than-eligible dividend:
$1,000 × 115% = $1,150
These are simplified illustrations of the gross-up mechanism; your actual tax payable also depends on the applicable dividend tax credit and your overall tax position.
Why Does Canada Have a Dividend Gross-Up?
The gross-up and dividend tax credit system is intended to recognize corporate taxes that have already been paid on corporate profits.
Without special treatment, corporate profits distributed as dividends could effectively face corporate tax and then personal tax without any mechanism recognizing the corporate tax already paid.
The dividend tax credit helps address this integration between corporate and personal taxation.
That does not mean every dividend is tax-free or that every investor pays a low tax rate.
Your final outcome depends on the dividend type and your broader income situation.
What Is the Dividend Tax Credit in Canada?
The dividend tax credit reduces the amount of federal income tax payable on qualifying Canadian dividend income.
Generally, you may claim the federal dividend tax credit when you report dividends from taxable Canadian corporations and meet the applicable requirements. The CRA says foreign dividends do not qualify for this federal credit.
The amount of credit depends on:
- The type of dividend
- The taxable amount reported
- The information provided on your tax slip
- Your province or territory for the applicable provincial credit
The CRA identifies the federal dividend tax credit on line 40425, with provincial or territorial amounts handled separately.
How Does the Dividend Tax Credit Work?
Here’s a simplified example.
Suppose you receive $1,000 of eligible Canadian dividends.
You do not simply take $1,000 and apply your marginal tax rate.
Instead:
Actual dividend: $1,000
Gross-up: 38%
Taxable amount: $1,380
The applicable dividend tax credit is then considered in the tax calculation.
The credit helps reduce the tax associated with the taxable dividend amount.
This is why saying that “dividends are taxed at the same rate as salary” is incorrect.
At the same time, saying “Canadian dividends are tax-free” is also incorrect.
Both statements oversimplify the Canadian tax system.
Eligible vs Other-Than-Eligible Dividends
| Feature | Eligible Dividends | Other-Than-Eligible Dividends |
|---|---|---|
| Actual dividend | Cash received | Cash received |
| Gross-up | 38% | 15% |
| Taxable amount on $1,000 | $1,380 | $1,150 |
| Dividend tax credit | Available when conditions are met | Available when conditions are met |
| Reporting | Generally line 12000 | Lines 12000 and 12010 |
| Tax treatment | More favourable dividend-credit treatment | Different, generally less favourable treatment |
CRA reporting instructions confirm the 138% taxable amount for eligible dividends and 115% for other-than-eligible dividends where a taxpayer must calculate the amount without an information slip.
How Are Dividends Taxed in Ontario?
For someone living in Toronto or elsewhere in Ontario, the Ontario tax treatment matters in addition to federal taxation.
There is no single “Ontario dividend tax rate” that applies to everyone.
Your effective tax result can depend on:
- Total taxable income
- Eligible versus other-than-eligible dividends
- Other sources of income
- Federal dividend tax credit
- Ontario dividend tax credit
- Available deductions and credits
- Your overall tax position
The CRA notes that the provincial or territorial dividend tax credit can vary depending on the province or territory where you lived at the end of the tax year.
Therefore, someone earning $20,000 of dividend income can have a very different result from someone earning $200,000 of dividends alongside substantial employment income.
For Ontario investors, looking only at the headline dividend amount is not enough.
How Much Tax Do You Pay on Dividends in Canada?
There is no single dividend tax rate for all Canadians.
Your actual tax can vary considerably depending on your income and dividend type.
For example, a taxpayer with relatively low total income may have little or no additional federal tax on certain dividend income after applying applicable credits, while a higher-income taxpayer can face a substantially higher effective tax burden.
This is why online statements such as “Canadian dividends are taxed at X%” should be treated carefully.
The more useful question is:
What is my after-tax income from these dividends based on my total income and province?
The answer requires looking at the complete tax return rather than applying a single percentage.
Are Canadian Dividends Taxed Differently From Interest Income?
Yes.
Interest income generally does not receive the Canadian dividend tax credit.
Canadian-source dividends can receive special tax treatment through the gross-up and dividend tax credit system.
Consider two investors who each receive $10,000.
One receives $10,000 of interest.
The other receives $10,000 of qualifying Canadian dividends.
Their tax results can be different because the income types are treated differently.
This is one reason investors should compare after-tax returns, rather than simply comparing the investment’s advertised yield.
How Are Dividends Taxed in a Non-Registered Account?
A non-registered investment account does not provide the same tax sheltering as accounts such as a TFSA.
Canadian dividends received in a non-registered account generally have to be reported on your tax return.
You may receive a T5, T3, T4PS or T5013 slip depending on the investment and how the income is distributed. The CRA provides specific reporting lines for taxable Canadian dividends.
If you receive a T5, for example, the relevant boxes can show:
- Actual dividends
- Taxable amount
- Dividend tax credit
CRA’s T5 guidance confirms that eligible and other-than-eligible dividends are reported using different boxes and calculations.
Are Dividends Taxable in a TFSA?
Generally, qualifying investment income earned inside a TFSA is not subject to Canadian income tax.
That means Canadian dividends earned inside a TFSA are generally not taxed as ordinary taxable income when earned inside the account.
However, foreign withholding taxes can create different results depending on the investment and country involved.
A TFSA also has contribution limits and other rules, so it should not be treated as an unlimited tax-free investment account.
Are Dividends Taxable in an RRSP?
An RRSP works differently from a TFSA.
Investment income earned inside an RRSP is generally tax-deferred rather than permanently tax-free.
The tax treatment applies when money is withdrawn according to the RRSP rules.
Therefore:
TFSA: qualifying investment growth is generally tax-free.
RRSP: investment growth is generally tax-deferred until withdrawal.
Non-registered account: taxable investment income is generally reported as it is earned or realized according to the applicable rules.
Choosing between these accounts requires looking at your current income, expected future income, contribution room and financial goals.
How Are U.S. Dividends Taxed in Canada?
U.S. dividends are generally taxable to Canadian residents.
However, they are treated differently from Canadian dividends.
One of the biggest differences is that foreign dividends do not qualify for Canada’s federal dividend tax credit.
Foreign-source investment income is generally reported in Canadian dollars, and foreign tax paid may potentially be relevant to the foreign tax credit depending on the circumstances.
For investors with significant U.S. holdings, the investment account being used can also matter.
This makes foreign dividend taxation an important part of investment tax planning.
Can Foreign Withholding Tax Be Recovered?
Potentially.
If foreign tax has been paid on qualifying foreign investment income, you may be able to claim a foreign tax credit against Canadian tax, subject to the applicable rules and limitations.
This is designed in part to reduce the possibility of the same income being taxed twice.
The CRA has specific requirements for claiming the federal foreign tax credit, so simply having foreign withholding tax on a statement does not mean you should automatically assume the entire amount will be recovered.
How Does Dividend Income Affect Your Overall Tax Return?
Dividend income does not exist in isolation.
Your final tax position may also include:
- Employment income
- Self-employment income
- Rental income
- Interest
- Capital gains
- Pension income
- Other investment income
Adding a substantial amount of dividend income can therefore change your overall tax calculation.
This is particularly important for higher-income taxpayers.
For example, receiving dividends while already earning a high employment income can produce a very different result from receiving the same dividends as your only significant source of income.
How Are Dividends Taxed for Business Owners?
Business owners often face a separate dividend-planning question:
Should money be paid from the corporation as salary, dividends, or a combination?
There is no universal answer.
The right choice can depend on:
- Corporate income
- Personal income
- Corporate tax already paid
- CPP considerations
- RRSP contribution room
- Corporate account balances
- Cash-flow requirements
- Family circumstances
- Timing
- Other tax-planning factors
A corporation may also have different types of dividends available depending on its circumstances and tax pools.
Therefore, business owners should not assume that dividends are automatically better than salary simply because dividends can receive preferential personal tax treatment.
For incorporated professionals and other business owners, this should be reviewed as part of broader corporate tax planning.
What Are Eligible Dividends?
Eligible dividends are taxable Canadian dividends that meet the applicable requirements and have been designated as eligible by the payer.
The CRA’s T5 instructions state that a taxable dividend must be designated as an eligible dividend by the corporation paying it to qualify as an eligible dividend.
Eligible dividends generally receive a 38% gross-up and corresponding dividend tax-credit treatment.
Do not automatically assume that every dividend from a Canadian corporation is eligible.
The information slip or payer’s documentation should be used to determine the correct classification.
What Are Other-Than-Eligible Dividends?
Other-than-eligible dividends are Canadian taxable dividends that are not designated as eligible dividends.
For current CRA reporting, the taxable amount is calculated using a 15% gross-up for dividends paid in 2019 and later.
For example:
$2,000 actual dividend × 115% = $2,300 taxable amount
The dividend tax credit is then applied according to the applicable rules.
How Can You Reduce Tax on Dividend Income in Canada?
The goal should not be to eliminate tax at all costs.
Instead, effective planning focuses on reducing unnecessary tax while keeping your investment strategy intact.
Potential areas to review include:
Use registered accounts appropriately
Consider whether a TFSA, RRSP or other registered account fits your financial circumstances.
Understand dividend classification
Know whether your Canadian dividends are eligible or other-than-eligible.
Consider foreign tax implications
Foreign dividends can have withholding-tax and foreign-tax-credit considerations.
Review your overall income
Dividend taxation depends partly on your total income and applicable credits.
Plan large transactions
If you’re expecting significant dividend income or planning a major corporate distribution, review the tax consequences before the transaction.
Compare after-tax returns
A higher dividend yield isn’t automatically a better investment if the additional taxable income creates an unfavourable after-tax result.
These decisions are best considered as part of a broader tax planning strategy.
Dividend Tax Planning Mistakes to Avoid
Assuming All Dividends Are Taxed the Same
Eligible, other-than-eligible and foreign dividends can have different tax treatment.
Confusing the Gross-Up With Extra Cash
The gross-up increases the taxable amount. It does not mean your brokerage deposited additional cash into your account.
Assuming Foreign Dividends Receive the Canadian Dividend Tax Credit
They generally do not.
Treating RRSP Growth as Tax-Free
RRSP taxation is generally deferred until withdrawal rather than eliminated.
Ignoring Your Province
Federal and provincial dividend credits both affect the final result.
Choosing Dividends Instead of Salary Automatically
For business owners, the correct choice depends on the broader corporate and personal tax picture.
Focusing Only on Tax
An investment decision should not be driven entirely by tax savings. A poor investment is still a poor investment even if it creates a deduction or tax advantage.
A Simple Example: $10,000 of Canadian Dividends
Suppose a Canadian resident receives $10,000 in eligible dividends in a non-registered account.
Under the gross-up mechanism:
Actual dividend: $10,000
Gross-up: 38%
Taxable dividend amount: $13,800
The taxpayer’s return then considers the applicable dividend tax credits and the person’s entire income situation.
This does not mean the taxpayer simply owes tax on $13,800 at their ordinary marginal tax rate.
The dividend tax credit is part of the calculation.
The actual result depends on the taxpayer’s province, other income, deductions, credits and applicable tax-year rules.
This is why an online “dividend tax calculator” can produce an incomplete answer when it does not account for the taxpayer’s full financial circumstances.
Dividend Tax Planning for Investors
Investors should review dividend taxation alongside their broader portfolio strategy.
Before purchasing a dividend-paying investment, ask:
Where will I hold it?
Is it a Canadian or foreign investment?
Will it generate dividends, interest or capital gains?
What will the after-tax return look like?
Will I have foreign withholding tax?
Could the additional income affect my broader tax position?
For an investor with a large taxable portfolio, these questions can become increasingly important.
Our guide on how to minimize investment taxes in Canada covers the broader strategies investors can consider.
Dividend Tax Planning for Higher-Income Canadians
Dividend income can become more complicated as total income increases.
Someone with:
- Employment income
- Large investment income
- Capital gains
- Dividend income
- Business income
may need a coordinated tax strategy rather than simply focusing on one type of investment income.
Large investment transactions can also interact with other tax rules, including Canada’s Alternative Minimum Tax system.
Read our guide to Alternative Minimum Tax in Canada for more information.
Frequently Asked Questions About Dividend Tax in Canada
How are dividends taxed in Canada?
Canadian dividends received in a taxable account are generally reported as taxable income, but eligible and other-than-eligible dividends receive special treatment through the gross-up and dividend tax credit system. Foreign dividends do not qualify for the Canadian federal dividend tax credit.
Are dividends taxable in Canada?
Yes. Dividends are generally taxable outside registered accounts, although Canadian dividends receive preferential tax treatment through the dividend tax-credit system.
What is the dividend tax credit?
The dividend tax credit is a federal and provincial/territorial tax credit that can reduce tax payable on qualifying dividends from taxable Canadian corporations. The federal credit is claimed through the applicable tax-return process.
What is the gross-up on Canadian dividends?
The gross-up increases the taxable amount of Canadian dividends. The current CRA calculation uses 38% for eligible dividends and 15% for other-than-eligible dividends.
Are eligible dividends taxed differently from other-than-eligible dividends?
Yes. They have different gross-up and dividend tax-credit treatment. Eligible dividends use a 38% gross-up, while other-than-eligible dividends use a 15% gross-up under the current CRA rules.
Are U.S. dividends taxable in Canada?
Generally, yes. Foreign dividends are taxable to Canadian residents, but they do not qualify for Canada’s federal dividend tax credit. Foreign tax paid may potentially be relevant to a foreign tax credit.
Are dividends in a TFSA taxable?
Qualifying investment income earned inside a TFSA is generally not subject to Canadian income tax, subject to the TFSA rules.
Are dividends in an RRSP taxable?
Investment income earned inside an RRSP is generally tax-deferred while it remains in the plan. Withdrawals are generally taxable according to the applicable RRSP rules.
How are dividends taxed in Ontario?
Ontario residents are subject to federal and Ontario tax rules. The final amount depends on dividend type, total income, applicable dividend tax credits and other deductions and credits. There is no single Ontario dividend tax rate that applies to everyone.
Do all Canadian corporations pay eligible dividends?
No. Dividend classification depends on the applicable rules and whether the dividend is designated as eligible by the payer. The CRA recommends checking the information provided by the payer when determining the type of dividend received.
Can a tax accountant help with dividend tax planning?
Yes. A tax professional can review your overall income, investments, registered accounts, dividend types and planned transactions to identify legitimate tax-planning opportunities.
Plan Your Dividend Taxes Before You Invest
Understanding how dividends are taxed in Canada is important, but knowing the rules after receiving the dividend is only half the job.
The better approach is to consider taxation before you purchase an investment, choose an account, receive a significant corporate distribution or sell another investment.
At Filing Taxes, we help individuals, investors and business owners review their broader tax position and identify practical, compliant planning opportunities.
Whether you receive Canadian dividends, U.S. dividends, investment income or business distributions, the right strategy depends on your complete financial situation.
Need help with dividend tax planning?
Book a consultation with Filing Taxes →
You can also learn more about our tax planning services in Toronto.
Final Takeaway
The answer to how are dividends taxed in Canada depends on several factors.
Canadian dividends are generally taxable, but eligible and other-than-eligible dividends receive special treatment through the gross-up and dividend tax credit system. Foreign dividends are treated differently and do not qualify for the Canadian federal dividend tax credit.
The account you use also matters. A TFSA generally provides tax-free treatment for qualifying investment income, while an RRSP generally provides tax deferral. Non-registered investments are generally subject to the applicable annual tax-reporting rules.
Most importantly, there is no universal dividend tax rate.
Your province, total income, dividend type, account structure and other tax factors all matter.
For significant investment income or large planned transactions, tax planning before the transaction can be far more useful than trying to fix the tax result afterward.
