The Dividend Tax Credit in Canada reduces the tax citizens pay on dividends from Canadian businesses. There are two types of dividends, eligible and ineligible, and the tax credit varies for each. The credit helps avoid double taxation and is non-refundable. The effective tax rate on dividends has decreased, making investing in Canadian companies more attractive.
The Dividend Tax Credit is a provision in the Canadian tax code that reduces the amount of tax citizens have to pay on dividends they receive from Canadian businesses. Typically, taxpayers receive either an eligible dividend or an ineligible dividend, depending on the type of company issuing the dividend. The dividend tax credit is slightly different for each type of dividend, but is usually equal to the amount of the dividend. Tax credits were set up by the Canadian government to help avoid double taxation.
Dividends are payments made by a company to its shareholders. Payments are a portion of the earnings made by the company. This is usually a cash payment, but in some circumstances, dividends may include stock or property.
Most companies offer dividends to their shareholders as compensation for stock prices that are stagnant. Usually, the dividend is quoted in dollars per share. The dividend can also be a percentage of the current market price, commonly called a dividend yield.
In Canada, there are two types of dividends. Canadian public companies, which are companies that offer shares on the Canadian stock exchange, pay out eligible dividends to their shareholders. Canadian-controlled private companies, companies that do not offer shares, give ineligible dividends to their investors.
Both eligible and ineligible dividends are taxed by the government. In most cases the dividend tax levied on individuals is actually a second tax on the same money earned by the business. The first tax is levied on the company’s income, before any dividends are paid. We are talking about double taxation.
To eliminate double taxation, a dividend tax credit was established. The dividend tax credit is a dollar amount given to taxpayers when they receive a dividend payment from a Canadian company. The dividend tax credit will offset the tax the government will collect on dividend payments.
The dividend tax credit is non-refundable, which means the government won’t issue a check if there is no tax liability. In other words, if the amount of taxes owed by a person is less than zero due to the dividend tax credit, the government will not send the balance. Instead, the person will pay no taxes that year.
As a result of the dividend tax credit, the effective tax rate on dividends has decreased. This increases the number of investors willing to invest in a Canadian company. The rate varies from 30% to 30%, depending on your income and tax bracket.
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