The dividend tax credit is one of the most misunderstood aspects of Canadian taxation. This guide explains how eligible and non-eligible dividends are taxed, how the gross-up works, and what you’ll actually pay by province.
How the dividend tax credit works
When you receive dividends from a Canadian corporation, you don’t simply pay tax on the amount you received. Instead, Canada uses a gross-up and credit system designed to account for the fact that the corporation already paid tax on its profits before distributing them to you.
The process:
- Gross-up — You add a percentage to the dividend you received to determine your “taxable dividend”
- Calculate tax — You calculate tax on the grossed-up amount at your marginal rate
- Apply credit — You deduct the federal and provincial dividend tax credits to reduce your tax payable
The net effect is that Canadian dividends are taxed at lower effective rates than regular income, especially eligible dividends from large corporations.
Eligible vs non-eligible dividends
| Feature | Eligible Dividends | Non-Eligible Dividends |
|---|---|---|
| Source | Large Canadian corporations (CCPCs earning active income over $500,000, public corporations) | Canadian-controlled private corporations (CCPCs) taxed at the small business rate |
| Gross-up rate | 38% | 15% |
| Federal DTC rate | 15.0198% of grossed-up dividend | 9.0301% of grossed-up dividend |
| Effective federal credit | ~20.7% of actual dividend | ~10.4% of actual dividend |
| Typical sources | Bank stocks, most TSX-listed dividend stocks, large company dividends | Small business dividends, some CCPC dividends |
How to tell the difference: Your T5 slip will report eligible dividends in Box 24 and non-eligible dividends in Box 10. Box 25 and Box 11 show the respective taxable (grossed-up) amounts.
Dividend gross-up calculation example
Let’s say you receive $1,000 in eligible dividends from a Canadian bank stock:
| Step | Eligible Dividend |
|---|---|
| Actual dividend received | $1,000 |
| Gross-up (38%) | +$380 |
| Taxable dividend | $1,380 |
| Federal tax at 29% bracket | $400.20 |
| Federal DTC (15.0198% of $1,380) | −$207.27 |
| Net federal tax | $192.93 |
You’d also receive provincial dividend tax credits, which vary by province.
Dividend tax rates by province (2026)
This table shows the approximate combined federal + provincial marginal tax rate on eligible and non-eligible dividends at the top income bracket.
| Province | Top Rate on Eligible Dividends | Top Rate on Non-Eligible Dividends |
|---|---|---|
| Alberta | 34.31% | 42.31% |
| British Columbia | 36.54% | 48.89% |
| Manitoba | 37.78% | 46.67% |
| New Brunswick | 32.40% | 46.83% |
| Newfoundland & Labrador | 46.20% | 48.96% |
| Northwest Territories | 28.33% | 36.82% |
| Nova Scotia | 41.58% | 48.28% |
| Nunavut | 33.08% | 37.79% |
| Ontario | 39.34% | 47.74% |
| Prince Edward Island | 34.22% | 47.02% |
| Quebec | 40.11% | 48.70% |
| Saskatchewan | 29.64% | 41.72% |
| Yukon | 28.92% | 44.04% |
Key insight: Eligible dividends are taxed ~10-15% lower than non-eligible dividends at top brackets. Saskatchewan, Yukon, and Northwest Territories have the lowest rates on eligible dividends.
Dividend tax rates at different income levels
The tax rate on dividends varies dramatically based on your income. At low incomes, eligible dividends can be received with zero or even negative effective tax due to the dividend tax credit exceeding your tax liability.
Ontario dividend tax rates (2026)
| Taxable Income | Marginal Rate on Eligible Dividends | Marginal Rate on Non-Eligible Dividends |
|---|---|---|
| Up to $52,886 | −6.86% | 9.24% |
| $52,886 - $57,375 | 0.00% | 16.12% |
| $57,375 - $105,775 | 6.39% | 24.77% |
| $105,775 - $114,750 | 12.24% | 31.23% |
| $114,750 - $150,000 | 19.29% | 38.63% |
| $150,000 - $177,882 | 25.38% | 42.93% |
| $177,882 - $220,000 | 29.52% | 46.05% |
| $220,000 - $253,414 | 31.97% | 47.40% |
| Over $253,414 | 39.34% | 47.74% |
The negative tax rate explained: At low income levels, the dividend tax credit exceeds the tax generated by the grossed-up dividend. This means in Ontario, someone with only $50,000 of eligible dividend income would pay less tax than someone with $50,000 of employment income — substantially less.
Dividends vs salary: which is better?
For business owners who can choose to take compensation as salary or dividends, the decision involves trade-offs:
| Factor | Salary | Dividends |
|---|---|---|
| Creates RRSP room | ✅ Yes | ❌ No |
| CPP contributions | ✅ Yes (builds CPP benefit) | ❌ No |
| EI premiums | Depends on ownership | ❌ No |
| Requires T4 payroll | ✅ Yes | ❌ No |
| Integration | Reasonably integrated | Reasonably integrated |
| TFSA/FHSA room | No impact | No impact |
Integration: Canada’s tax system aims for “integration” — meaning the total tax paid (corporate + personal) should be roughly the same whether income is paid as salary (deductible to corporation) or dividend (non-deductible). In practice, small differences exist by province.
Use our Dividend vs Salary Calculator to compare for your specific situation.
Holding Canadian dividend stocks: TFSA vs RRSP vs non-registered
Where you hold dividend-paying stocks affects your after-tax returns:
| Account Type | Tax Treatment | Best For |
|---|---|---|
| TFSA | Tax-free | All dividends, no Canadian DTC needed |
| RRSP | Tax-deferred, no DTC on withdrawal | US dividend stocks (no withholding), less optimal for Canadian dividends |
| Non-registered | Taxable, but benefits from DTC | Canadian dividend stocks if TFSA/RRSP full |
Key insight: Canadian dividends lose the dividend tax credit inside an RRSP. When you withdraw from an RRSP, everything is taxed as ordinary income. This makes TFSA or non-registered accounts relatively better for Canadian dividend stocks compared to RRSP.
US dividends vs Canadian dividends
US dividends paid to Canadian residents do not qualify for the Canadian dividend tax credit. Instead:
- US dividends are taxed as regular foreign income
- 15% US withholding tax is deducted at source
- You may claim a foreign tax credit to offset the withholding
In a RRSP, US dividends are not subject to the 15% withholding tax due to the Canada-US tax treaty. This makes RRSPs the most efficient place to hold US dividend-paying stocks.
Dividend tax credit claiming on your tax return
The dividend tax credit is automatically calculated when you report your T5 dividend income. You don’t need to claim it separately.
T5 slip boxes for your tax return:
- Box 24: Actual amount of eligible dividends
- Box 25: Taxable amount of eligible dividends (grossed-up)
- Box 26: Federal dividend tax credit on eligible dividends
- Box 10: Actual amount of other than eligible dividends
- Box 11: Taxable amount (grossed-up)
- Box 12: Federal dividend tax credit on non-eligible dividends
Report the taxable amounts (Box 25 and Box 11) on Line 12000 of your T1 return. The dividend tax credits are claimed on Schedule 1.