Dividend Tax in Canada: How It Works and Effective Tax Reduction Strategies

When investing in dividend stocks or funds, your returns don’t just come from stock price appreciation but also from dividends – regular payments companies distribute to shareholders. However, just like other forms of income, dividends are subject to tax. Understanding how dividend tax works can help you invest smarter and reduce your tax burden.

What Are Dividends and What Types Exist?

In Canada, dividends are classified into two main types:

• Eligible Dividends – usually paid by Canadian corporations that have paid the full corporate tax rate.

• Non-Eligible Dividends – often from small businesses or corporations that pay a lower corporate tax rate.

This distinction is important because it directly affects the tax rate you’ll pay.

How Dividend Tax Works in Canada

Canada’s dividend tax system uses a gross-up and dividend tax credit mechanism to reduce the tax burden compared to employment income.

• Gross-up: Increases the value of the dividend before calculating tax (15% or 38% depending on the type).

• Dividend Tax Credit: A credit that helps lower the amount of tax payable.

This means the effective tax rate on dividends is generally lower than on regular income.

Dividend Tax by Income Level

Dividend tax rates vary by province and income bracket. For example:

• Low-income earners may pay no dividend tax or even receive a refund.

• High-income earners pay more tax, but still less than on regular personal income.

💡 Note: Each province has its own tax rates – check the rates for your place of residence.

Strategies to Reduce Dividend Tax

• Invest through tax-advantaged accounts such as TFSA or RRSP to avoid or defer taxes.

• Allocate assets wisely – hold dividend stocks in tax-advantaged accounts and bonds in RRSPs.

• Leverage family income-splitting – transfer shares to a lower-income family member.

• Combine dividends with capital gains to optimize overall tax payable.

Dividends and Retirement Planning

Dividends can be an ideal source of passive income in retirement. However, you should anticipate tax impacts to avoid moving into a higher tax bracket. A smart retirement plan can combine:

• Withdrawals from RRSP/RRIF

• Using TFSA for tax-free income

• Holding part of your portfolio in dividend-paying stocks

Conclusion & Expert Advice

Dividends are a sustainable income source, but without proper tax knowledge, you could lose a significant portion of your returns.

📌 Let TikiTax help you:

• Identify your dividend type and applicable tax rate

• Optimize your portfolio to reduce taxes

• Plan withdrawals strategically in retirement

Contact TikiTax today for expert tax and investment advice designed to maximize your after-tax dividend income – and keep more money in your pocket.